As filed with the Securities and Exchange Commission on June 7, 1996.
Registration No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ZYTEC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1465891
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7575 MARKET PLACE DRIVE
EDEN PRAIRIE, MINNESOTA 55344
TELEPHONE: (612) 941-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD D. SCHMIDT
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
ZYTEC CORPORATION
7575 MARKET PLACE DRIVE
EDEN PRAIRIE, MINNESOTA 55344
TELEPHONE: (612) 941-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
ERIC O. MADSON, ESQ. THOMAS C. THOMAS, ESQ.
WINTHROP & WEINSTINE, P.A. OPPENHEIMER WOLFF & DONNELLY
3000 DAIN BOSWORTH PLAZA 3400 PLAZA VII BUILDING
60 SOUTH SIXTH STREET 45 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 347-0700 TELEPHONE: (612) 344-9300
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being offered on this Form are to be offered pursuant to
dividend or interest reinvestment plans, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, no par value 2,572,000 shares $20.00 $51,440,000 $17,738
</TABLE>
(1) Includes 300,000 shares subject to the Underwriters' over-allotment
option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c), based upon the average of the high and low prices for the
Common Stock on June 6, 1996, as reported on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
PROSPECTUS
2,272,000 Shares
[ZYTEC LOGO]
Common Stock
Of the 2,272,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by Zytec Corporation (the "Company" or "Zytec"), and 272,000 shares
are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "ZTEC." On June 6, 1996, the last
reported sale price for the Company's Common Stock as reported on the Nasdaq
National Market was $19.00 per share. See "Price Range of Common Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $275,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $
, respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by them, and subject to the right of the Underwriters to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about , 1996.
Needham & Company, Inc. Nesbitt Burns Securities Inc.
The date of this Prospectus is , 1996.
[Inside front cover: Schematic representation of the internet]
[Gatefold: Photos of five customers' products overlaid on schematic
representation of the internet]
Caption: Cabletron MMAC-WordPlus
Caption: Digital Equipment Corporation AlphaServer 8400
Caption: Hewlett-Packard Company HP 9000 K-Class
Caption: Cisco Systems 7010 Router
Caption: Bay Networks, Inc. BCN Router
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
THIS PROSPECTUS CONTAINS OR INCORPORATES CERTAIN FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED OR INCORPORATED IN THIS PROSPECTUS THAT
ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR
OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED UNDER THE CAPTION "RISK FACTORS."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO,
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND HAS BEEN ADJUSTED TO
REFLECT A TWO-FOR-ONE STOCK SPLIT OF THE COMMON STOCK OF THE COMPANY EFFECTED AS
A 100% STOCK DIVIDEND ON JUNE 3, 1996.
THE COMPANY
Zytec Corporation ("Zytec" or the "Company") is a leading designer and
manufacturer of custom electronic power supplies for original equipment
manufacturers ("OEMs") in the communications, networking, computer and other
electronic equipment marketplaces. Recently, the Company has experienced
significant sales growth because it has been the sole-source provider of power
supplies to many of the OEMs that provide hardware for the internet. The Company
also repairs power supplies and related products, and provides dedicated repair
and logistics services for a major customer. The Company's power supply
components are sold in North America and Europe, and its products are used
worldwide. Zytec's principal OEM customers include Digital Equipment,
Hewlett-Packard, IBM, Cabletron, Cisco Systems, Sun Microsystems, Bay Networks
and Silicon Graphics. In 1995, the Company manufactured and delivered over
700,000 power supplies representing over 141 different products. The Company's
dedication to quality resulted in its winning the Malcolm Baldrige National
Quality Award in 1991.
Power supplies perform many essential functions relating to the supply,
regulation, and distribution of electrical power in electronic equipment. Basic
power supplies convert alternating current ("AC") from a primary power source
into the direct current ("DC") required to power an electronic system. As
electronic equipment has become more complex, power supplies and their
underlying technology have become more advanced. The dominant technology now
used in power supplies is switching technology. Electronic systems typically
have a number of subsystems, each of which may require a unique operating
voltage or level of power. To better address this need, a newer and more
flexible switching technology is emerging, referred to by the Company as
"distributed power architecture" ("DPA"). Using DPA, power may be distributed to
DC/DC converters located on or near the subsystem being powered.
According to Micro-Tech Consultants, the worldwide market for power supplies
exceeded $19.6 billion in 1995 and is projected to grow to $32.7 billion by the
year 2000. The United States' portion of this market exceeded $4.3 billion in
1995. The mid-range segment of the power supply market, which is the Company's
primary target market, comprised 65% of the total United States market in 1995.
Mid-range power supplies tend to be moderate to high volume, highly
sophisticated and used in complex products such as hubs, routers, file servers,
workstations and communications systems.
Zytec believes that a number of important trends affecting its customers will
continue to shape the power supply marketplace. OEMs are continually faced with
pressures from end-users to improve the price, performance and other
characteristics of their products, and therefore require that their power
systems suppliers maintain both rapid product design and rapid market
introduction of products. To meet these demands, the design and manufacture of
power supplies have become more complex and specialized, leading OEMs to migrate
from captive suppliers to merchant power supply engineering and manufacturing
specialists such as Zytec who custom-design power systems. In addition, rapidly
growing applications market segments, such as workstations and data
communications hardware, increasingly use mid-range power.
According to Micro-Tech Consultants, in 1995 Zytec was the 3rd largest power
supply company in the United States and the 9th largest in the world. The
Company's objective is to become the supplier of choice to a targeted group of
multinational OEMs requiring sophisticated custom power supply solutions and
having substantial volume requirements. To achieve this objective, Zytec's
strategy is to differentiate itself through advanced technology and design,
shorter product development cycles and superior product performance, quality,
service and value. The Company implements this strategy by delivering
high-quality products and services; providing leading-edge engineering and time
to market; developing and expanding collaborative relationships; leveraging
advanced manufacturing and management techniques; and expanding complementary
businesses.
The Company was incorporated under Minnesota law in August 1983 and commenced
operations in January 1984. Its executive and administrative offices are located
at 7575 Market Place Drive, Eden Prairie, Minnesota 55344, and its telephone
number is (612) 941-1100.
THE OFFERING
Common Stock offered by the Company 2,000,000 shares
Common Stock offered by the Selling
Shareholders 272,000 shares
Common Stock to be
outstanding after the offering 10,996,472 shares (1)
Use of proceeds To repay all outstanding indebtedness
under the Company's revolving credit
agreement, and for capital equipment and
leasehold improvements in connection
with expansion of manufacturing
technology and capacity, potential
acquisitions, and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol ZTEC
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, ------------------
---------------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $79,393 $89,639 $90,614 $128,141 $170,518 $32,881 $61,087
Gross profit 11,888 11,000 13,992 18,294 20,596 3,648 7,946
Other revenue 791 1,520 3,624 2,462 1,559 384 353
Operating expenses 10,934 14,413 12,245 14,534 15,726 3,766 4,850
Operating income (loss) 1,745 (1,893) 5,371 6,222 6,429 266 3,449
Net income (loss) $ 551 $(3,287) $ 2,671 $ 3,364 $ 3,878 $ 120 $ 2,108
Net income (loss) per share
(fully diluted) (2) $ 0.09 $ (0.55) $ 0.35 $ 0.36 $ 0.41 $ 0.01 $ 0.21
Common and common equivalent shares
outstanding (fully diluted) (2) 6,136 6,011 7,555 9,324 9,389 9,249 9,812
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
AS
ACTUAL ADJUSTED (3)
------ ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 2 $ 22,873
Working capital 14,473 49,918
Total assets 86,012 108,883
Short-term debt, including current portion of long-term debt and
capital lease obligations (4) 20,874 8,300
Long-term debt and capital lease obligations, less current
portion 6,916 6,916
Stockholders' equity 23,550 58,995
</TABLE>
(1) Based on 8,996,472 shares outstanding at June 4, 1996; does not reflect
outstanding stock options and warrants, as of June 4, 1996, to purchase
1,826,132 shares of Common Stock (of which options and warrants for 385,772
shares are presently exercisable).
(2) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
(3) Adjusted to give effect to the application of the estimated net proceeds
of this offering based on an assumed public offering price of $19.00 per
share. See "Use of Proceeds."
(4) Includes indebtedness of $12.6 million under the Company's revolving
credit agreement, all of which will be repaid with the net proceeds of
this offering. See "Use of Proceeds."
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS OR INCORPORATED HEREIN
BY REFERENCE, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OFFERED IN
THIS PROSPECTUS..
FLUCTUATIONS IN FINANCIAL RESULTS
Zytec's financial results are subject to fluctuation due to various factors,
including the mix of products between custom-designed and customer-designed
power supplies; the stage of each product in its life cycle; component and
materials cost and availability; the rate of addition and magnitude of new
projects; the timing of orders from and shipments of products to customers; and
exchange rate fluctuations. Of these factors, the timing of orders from and the
shipment of product to customers is particularly significant. The Company is in
production on a limited number of projects at any given time, so when an OEM
customer cancels or curtails a project, the operating impact to Zytec may be
significant. This significance is a function of the relative percentage of
Zytec's production and revenues which are represented by the specific project.
Because of these factors, quarterly comparisons of financial results may not be
indicative of future results. Net sales in the first quarter of 1996 increased
as component availability allowed delivery schedules to improve, enabling the
Company to deliver products for which it had not made delivery in 1995. As a
result, the Company expects that first quarter consolidated net sales will
represent a larger percentage of annual net sales for 1996 than has historically
been the case. In addition, in May 1996 the Austrian government suspended the
use of net operating loss carryforwards ("NOLs") in 1996 and 1997 and removed
the time limitation on the use of such NOLs. As a result of this change, the
Company's income taxes in the second quarter of 1996 will be reduced by
approximately $2.6 million, comprised of a tax benefit of $2.9 million relating
to recognition of the deferred tax benefit related to such NOLs offset by the
realization of income tax expense of $280,000 resulting from retroactive
application of this tax law change to first quarter Austrian operations. The
Company expects that its consolidated effective tax rate will increase to and
stabilize at levels of approximately 38%. See "Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES;
CUSTOMERS' PRODUCT ACCEPTANCE AND LIFE CYCLE
Substantially all of Zytec's existing customers are in the computer, networking,
communications and other electronic equipment industries, and produce products
which are subject to rapid technological change, obsolescence and large
fluctuations in product demand. These industries are characterized by intense
competition and demands from end users for increased product performance and
lower product prices. Given this industry environment, similar demands are made
on the OEMs' component suppliers such as Zytec. Thus, in order to be successful,
the Company must properly assess developments in the computer and other
electronic equipment industries and identify product groups and customers with
the potential for continued and future growth. Factors affecting the computer
and other electronic equipment industries, in general, or any of the Company's
major customers or their products, in particular, could have a material adverse
effect on the Company's results of operations. The Company's success is also
dependent on the market acceptance and life cycle of its customers' products for
which the Company provides power supplies. If such products do not achieve
market acceptance or become obsolete, the Company's results of operations could
be adversely affected even though the industry in general is experiencing
growth. See "Business -- Sales, Marketing and Customers."
VOLATILITY OF STOCK PRICE
The Company's Common Stock is traded on the Nasdaq National Market. The market
price for the Common Stock has been and following this offering may continue to
be highly volatile depending on various factors including, among others, the
Company's consolidated operating results, expectations of analysts and other
investment groups, general conditions in the computer and other electronic
equipment industries, announcements of technological innovations or new products
by the Company, its competitors or its customers, and the market for similar
securities, which market is subject to various pressures. In addition, the stock
market is subject to price and volume fluctuations unrelated to operating
performance of the Company. See "Price Range of Common Stock" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SUPPLIERS
The Company is dependent on its suppliers for timely shipments of components and
typically uses a primary source of supply for each component. While the
Company's products are generally not dependent on unique components which
cannot be duplicated or replaced with components from other suppliers,
establishing alternate sources of supply may require a period of time which
could result in supply shortages. In the short term, any shortages of particular
components may adversely affect the Company's business by increasing product
delivery times, increasing costs associated with manufacturing, including
increased labor and component prices, and reducing gross margins. In 1995, the
Company experienced shortages of certain semiconductor components, which reduced
the Company's gross margin. While Zytec works closely with its suppliers to
anticipate and respond to any component price increases or supply shortages, any
significant unanticipated shortages of components or price increases could have
a material adverse effect on Zytec's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTERNATIONAL OPERATIONS
Shipments to international customers have, and are expected to continue, to
account for a material portion of the Company's net sales. Sales and operations
outside of the United States are subject to certain inherent risks, including
fluctuations in the value of the U.S. dollar relative to foreign currencies,
tariffs, quotas, taxes and other market barriers, political and economic
instability, restrictions on the export or import of technology, potentially
limited intellectual property protection, difficulties in staffing and managing
international operations, difficulties in collecting receivables and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's financial condition or
results of operations. In particular, because the Company's international sales
are denominated primarily in U.S. dollars, currency fluctuations in countries
where the Company does business may render the Company's products less price
competitive than those of foreign manufacturers. In addition, because the
Company purchases certain of its supplies of components and labor in foreign
currencies, fluctuations in such foreign currencies could result in exchange
rate gains and losses not directly related to operations. See "Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
TECHNOLOGICAL CHANGE; UNCERTAINTY REGARDING COMPLEX TECHNOLOGY
While the basic technology in the power supply industry has not changed rapidly,
some risk of technological change exists, and technological issues also arise
from the current level of complexity of power supply designs. The Company has
developed an affiliation with Virginia Polytechnic Institute's Power Electronics
Center in order to anticipate technological changes. However, if the Company
does not adequately anticipate significant technological advances or develop and
market product enhancements or new products that respond to any significant
technological change, the Company's results of operations could be materially
adversely affected. In 1995, the Company experienced significant delays in
completing development of a custom-designed complex power supply, due to
unforeseen technological difficulties. The customer required such product to be
placed in production while such product was still undergoing development, which
resulted in additional costs to the Company. There can be no assurance that
unforeseen technological difficulties will not arise in the future. Any such
difficulties could have a material adverse effect on the Company and its
operating results. See "Business -- Research and Development."
CUSTOMER CONCENTRATION
Zytec focuses its resources on developing long-term collaborative relationships
with its OEM customers, and its revenues are dependent on a relatively limited
number of customers. During 1995, revenue growth came solely from existing
customers and four customers each accounted for more than 10% of Zytec's net
sales. The Company's customers are not contractually obligated to utilize the
Company's products or services at current levels, if at all. However, because of
the "designed-in" nature of custom power supplies, it is Zytec's experience that
existing projects are rarely transferred to other companies or facilities after
the commencement of production, although the risk of transfer or cancellation of
a power supply project by an OEM is somewhat greater in the project's design and
preproduction phases. There can, however, be no assurance that a customer will
not transfer, reduce the volume of, or cancel a power supply project, which
could adversely affect the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales, Marketing and Customers."
COMPETITION
The design, manufacture and sale of power supplies is a highly competitive
industry. Zytec's competition includes companies located throughout the world,
some of which have advantages over the Company in terms of labor and component
costs, and which may offer products comparable in quality to those
of the Company. Certain of the Company's competitors have substantially greater
resources and geographic presence than the Company. Zytec also faces competition
from current and prospective customers, which may decide to design and
manufacture the power supplies needed for their products internally. To remain
competitive, management believes that Zytec must continue to compete favorably
on the basis of value by providing advanced manufacturing technology, offering
superior customer service and design engineering services, continuously
improving quality and reliability levels, and offering flexible and reliable
delivery schedules. There can be no assurance that the Company will be able to
continue to compete successfully in this market. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The development of the Company's business and operations is dependent to a
significant extent upon the efforts and talents of its executive officers. The
loss of these officers could adversely affect Zytec's operations. The Company's
continued success also will depend on its ability to continue to attract, train,
motivate, and retain qualified employees. The Company does not have employment
or noncompete agreements with its key employees. As the Company continues to
grow its revenue base through product acquisition and development, the Company's
ability to continue to meet increasing production requirements and manage future
growth will depend in part on its success in attracting and retaining additional
management and technical personnel. Industry growth and the low unemployment
rate in the Minneapolis, Minnesota and Redwood Falls, Minnesota areas, which
include the Company's principal facilities, has increased the competition for
such personnel. See "Management."
FUTURE ACQUISITIONS
The Company may pursue acquisitions of technologies, product lines or
businesses. Future acquisitions by the Company could result in the use of a
portion of the proceeds from this offering, dilutive issuances of equity
securities and the incurrence of additional debt and amortization expenses
related to goodwill and intangible assets, which could adversely affect the
Company's operating results. In addition, gross margins of any acquired
products, technologies or businesses, expenditures for necessary product or
technology development and other factors related to any such acquisitions could
result in dilution to the Company's earnings. Acquisitions also may involve
numerous other risks, including difficulties in the assimilation of the
operations and products of the acquired business, dependence on new products and
processes, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience, the potential loss of key employees of the acquired business and
difficulties in attracting additional key employees necessary to absorb added
management responsibilities. If the Company is unable to manage growth
effectively and meet increasing production requirements, customer confidence
could erode and demand for the Company's products could deteriorate, which could
materially and adversely affect the Company's business and operating results.
INTELLECTUAL PROPERTY
Certain equipment, processes, information and knowledge developed by Zytec and
used in the design and manufacture of its products are regarded as proprietary
by the Company. Zytec relies on a combination of trade secret and other
intellectual property law, non-disclosure agreements with employees, and other
measures to protect its proprietary rights, including holding patents and
evaluating the benefits of obtaining patents. Such protection, however, may not
preclude competitors from developing products similar to the Company's products.
In addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. Although the Company continues to evaluate and implement protective
measures, there can be no assurance that these efforts will be successful or
that third parties will not assert intellectual property infringement claims
against the Company. No such claims or litigation related to any such matter are
currently pending against Zytec. However, there can be no assurance that none
will be initiated, that the Company would prevail in any such litigation seeking
damages or an injunction against the sale of the Company's products, or that
Zytec would be able to obtain any necessary licenses on reasonable terms or at
all. See "Business -Intellectual Property Matters."
CONTROL OF THE COMPANY BY DIRECTORS AND EXECUTIVE OFFICERS
At June 4, 1996, the directors and executive officers of the Company
beneficially owned in the aggregate 3,480,226 shares of Common Stock,
representing 38.0% of Zytec's outstanding Common Stock, including shares which
may be acquired within 60 days of June 4, 1996, pursuant to the exercise of
stock options. Upon completion of this offering, the directors and executive
officers would own in the aggregate 3,208,226 shares of Common Stock,
representing 28.8% of Zytec's outstanding Common Stock, including shares which
may be acquired within 60 days of June 4, 1996, pursuant to the exercise of
stock options. As a result, such directors and executive officers are, and
subsequent to this offering will be, able to exercise substantial control over
the Company's affairs. See "Principal and Selling Shareholders" and "Description
of Common Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately $35.4
million ($40.8 million if the Underwriters' over-allotment option is exercised
in full), assuming a public offering price of $19.00 per share (the closing
price of the Common Stock on June 6, 1996) and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. A portion of the net proceeds will be used to repay all advances
made under the Company's revolving credit facility with Harris Trust and Savings
Bank (the "Bank"), which advances were incurred for working capital purposes. At
May 31, 1996, advances under the revolving credit facility totalled
approximately $12.6 million. In addition, approximately $14.0 million of the net
proceeds will be used for capital equipment and leasehold improvements in
connection with expansion of manufacturing technology and capacity. The balance
of the net proceeds may be used to fund collaborative arrangements or
acquisitions of or investments in complementary businesses, products or
technologies (although the Company currently has no commitments for any such
arrangements or acquisitions) and for general corporate purposes, including
working capital.
Although a portion of the net proceeds will be used to repay all advances under
the Company's revolving credit facility with the Bank, the Company intends to
maintain a revolving credit facility and to incur indebtedness thereunder from
time to time. The Company's revolving credit facility with the Bank bears
interest at the bank's prime rate (8.25% per annum at May 31, 1996) or, at the
Company's option, at a LIBOR rate, and is unsecured. This revolving credit
facility provides for borrowings of up to $23 million through August 31, 1996,
and of up to $10 million thereafter, and expires in May 1999. See Notes to
Unaudited Consolidated Financial Statements, Note 7.
The foregoing represents Zytec's best estimate, at this time, of its use of the
net proceeds of this offering, based on its present plans and forecasts
regarding its future revenues and expenditures and general economic and industry
conditions. Pending application of the proceeds of the offering, the Company may
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. The Company will not receive any proceeds from the sale of shares by
the Selling Shareholders.
RECENT DEVELOPMENTS
Zytec's consolidated effective tax rate has fluctuated historically as a result
of the use of NOL carryforwards against profits in Austria. In May 1996, the
Austrian government changed the treatment of NOL carryforwards by (1) suspending
the use of NOL carryforwards during the years 1996 and 1997 (retroactive to
January 1, 1996) and (2) removing the time limitations on the use of the NOLs.
In light of this new statute, and based on its current assessment of the
financial results at its Austrian operations, the Company has concluded that it
should recognize the deferred income tax benefit related to the Austrian NOL
carryforwards. This change will reduce taxes in the second quarter of 1996 and
increase taxes in subsequent quarters. The amount of the reduction in the second
quarter of 1996 will be approximately $2.6 million, comprised of a tax benefit
of $2.9 million relating to recognition of the deferred income tax benefit,
which will be offset by the realization of income tax expense of $280,000
resulting from the retroactive application of this tax law change to first
quarter Austrian operations. Due to these recent tax changes, the Company
expects that its consolidated effective tax rate will increase to and stabilize
at statutory levels of approximately 38%.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is reported on the Nasdaq National Market under the
symbol "ZTEC." The following table sets forth, for the periods indicated, the
high and low closing prices for the Common Stock, as reported by the Nasdaq
National Market and adjusted to reflect a two-for-one stock split effected as a
100% stock dividend on June 3, 1996.
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter $ 5-1/8 $4
Second Quarter 5-1/8 4-1/4
Third Quarter 5-7/8 4-5/8
Fourth Quarter 6 3-1/4
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter 4-3/8 2-3/4
Second Quarter 4-1/16 3
Third Quarter 4-5/8 3
Fourth Quarter 6-1/8 4-3/16
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter 9-3/4 5-1/4
Second Quarter (through June 6, 1996) 23-1/2 9-1/2
The last reported sale price of the Common Stock on the Nasdaq National Market
on June 6, 1996 was $19.00 per share. As of June 4, 1996, there were
approximately 290 record holders of the Common Stock and approximately 2,000
additional beneficial holders whose shares were held in street name.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock and
does not expect to pay any cash dividends in the foreseeable future. The Company
intends to reinvest its net income in the continued operation, development and
expansion of its business. A financial covenant in the Company's current
revolving credit facility prevents payment of dividends without the lender's
consent, and financial covenants in another financing agreement prevent the
payment of dividends if the Company is not meeting certain ratios. See Notes to
Audited Consolidated Financial Statements, Note 4.
CAPITALIZATION
The following table sets forth the short-term indebtedness and capitalization of
the Company at March 31, 1996, and as adjusted to give effect to the issuance
and sale of 2,000,000 shares of Common Stock offered by the Company in this
offering at an assumed public offering price of $19.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company:
MARCH 31, 1996
--------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
Short-term debt, including current portion of
long-term debt and capitalized leases (1)(2) $20,874 $ 8,300
Long-term debt and capitalized leases, less
current portion (2) 6,916 6,916
Stockholders' equity:
Common stock, no par value; 25,000,000 shares
authorized; 8,811,156 shares issued and
outstanding; 10,811,156 shares issued and
outstanding, as adjusted (3)(4) 11,919 47,364
Retained earnings 11,793 11,793
Foreign currency translation adjustments (162) (162)
Total stockholders' equity 23,550 58,995
Total capitalization $30,466 $65,911
(1) Includes indebtedness of $12.6 million under the Company's revolving
credit agreement, all of which will be repaid with the net proceeds of
this offering. See "Use of Proceeds."
(2) For information regarding the Company's lease obligations, see Notes to
Audited Consolidated Financial Statements, Note 5.
(3) Does not include 1,753,022 shares issuable upon exercise of stock options
and warrants outstanding at March 31, 1996 (of which options and warrants
for 534,462 shares were exercisable). See Notes to Audited Consolidated
Financial Statements, Note 7.
(4) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data of
the Company and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data for the fiscal years ended December
31, 1993, 1994 and 1995 and the consolidated balance sheet data as of December
31, 1994 and 1995 have been derived from the Consolidated Financial Statements,
which statements have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1991 and 1992 and
the consolidated balance sheet data as of December 31, 1991, 1992 and 1993 have
been derived from the Company's consolidated financial statements, which
statements have been audited by Coopers & Lybrand L.L.P. and are not included in
this Prospectus. The consolidated statements of operations data set forth below
for the three months ended April 2, 1995 and March 31, 1996 and the consolidated
balance sheet data set forth below at April 2, 1995 and March 31, 1996 are
derived from unaudited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results of operations for the three months ended March 31, 1996, are not
necessarily indicative of results to be expected for the full year or any other
period. The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, -------------------
----------------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $79,393 $89,639 $90,614 $128,141 $170,518 $32,881 $61,087
Cost of goods sold 67,505 78,639 76,622 109,847 149,922 29,233 53,141
------- ------- ------- -------- -------- ------- -------
Gross profit 11,888 11,000 13,992 18,294 20,596 3,648 7,946
Other revenue 791 1,520 3,624 2,462 1,559 384 353
Selling, general and administrative (5,293) (6,945) (5,309) (6,390) (7,139) (1,605) (2,460)
Research and development (5,641) (7,468) (6,936) (8,144) (8,587) (2,161) (2,390)
------- ------- ------- -------- -------- ------- -------
Operating income (loss) 1,745 (1,893) 5,371 6,222 6,429 266 3,449
Other income (expense):
Interest expense (956) (1,131) (1,173) (766) (1,053) (224) (381)
Other, net 219 363 191 (38) 703 149 (129)
------- ------- ------- -------- -------- ------- -------
Income (loss) before income taxes 1,008 (2,661) 4,389 5,418 6,079 191 2,939
Income taxes 457 626 1,718 2,054 2,201 71 831
------- ------- ------- -------- -------- ------- -------
Net income (loss) $ 551 $(3,287) $ 2,671 $ 3,364 $ 3,878 $ 120 $2,108
======= ======= ======= ======== ======== ======= ======
Net income (loss) per share
(fully diluted) (1) $ 0.09 $ (0.55) $ 0.35 $ 0.36 $ 0.41 $ 0.01 $ 0.21
======= ======= ======= ======== ======== ======= ======
Common and common equivalent shares
outstanding (fully diluted) (1) 6,136 6,011 7,555 9,324 9,389 9,249 9,812
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,018 $ 2 $ 4,271 $ 2 $ 2 $ 2 $ 2
Working capital 3,125 (927) 10,475 14,180 14,457 12,112 14,473
Total assets 27,419 24,793 32,867 45,475 66,637 46,170 86,012
Short-term debt, including current
portion of long-term debt and
capital lease obligations 6,835 8,159 4,833 7,280 13,942 7,397 20,874
Long-term debt and capital lease
obligations, less current portion 6,293 5,262 3,902 4,764 4,050 3,227 6,916
Stockholders' equity 4,461 1,148 13,331 17,113 21,367 17,276 23,550
</TABLE>
(1) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains or incorporates certain forward-looking statements. For
this purpose, any statements contained or incorporated in this Prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those described under the caption "Risk Factors."
INTRODUCTION
The first quarter of 1996 represented the continuation of a period of sustained
growth for Zytec dating back to 1993. As a designer and manufacturer of custom
power supplies to OEMs, Zytec's growth has been driven by the acceptance and
growth of its customers' products during this period. During the latter part of
this period, the Company was faced with various challenges and constraints
related to (1) the capacity of its manufacturing facilities, (2) the
availability of certain raw materials and electronic components, particularly
power semiconductors, and (3) margin pressure related to the relatively early
stage of manufacturing and production of several large programs. Each of these
challenges has had an impact on the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
The following table sets forth certain information derived from the Company's
Consolidated Statements of Operations for the periods indicated, expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, ---------------------
------------------------------ APRIL 2, MARCH 31,
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 84.6 85.7 87.9 88.9 87.0
----- ----- ----- ----- -----
Gross profit 15.4 14.3 12.1 11.1 13.0
Other revenue 4.0 1.9 0.9 1.2 0.5
Selling, general and
administrative (5.9) (5.0) (4.2) (4.9) (4.0)
Research and development (7.6) (6.4) (5.0) (6.6) (3.9)
----- ----- ----- ----- -----
Operating income 5.9 4.8 3.8 0.8 5.6
Other income (expense):
Interest expense (1.3) (0.6) (0.6) (0.7) (0.6)
Other, net 0.2 -- 0.4 0.5 (0.2)
----- ----- ----- ----- -----
Income before income taxes 4.8 4.2 3.6 0.6 4.8
Income taxes 1.9 1.6 1.3 0.2 1.3
----- ----- ----- ----- -----
Net income 2.9% 2.6% 2.3% 0.4% 3.5%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND APRIL 2, 1995
NET SALES. Net sales increased 86% to $61.1 million in the first quarter of 1996
from $32.9 million in the first quarter of 1995. This increase in net sales was
due in part to a broadening of the customer base. Historically, the first
quarter has represented seasonally low net sales due to the purchasing patterns
of one large customer. As sales of new products to a broader customer base have
increased, sales to that customer have become a lower percentage of net sales,
and were 10% of net sales in the first quarter of 1996 compared to 22% in the
first quarter of 1995. Net sales also increased as component availability,
specifically power semiconductors, allowed delivery schedules to improve,
enabling the Company to deliver products for which it had not made delivery in
1995. As a result of these factors, the Company expects that first quarter
consolidated net sales will represent a larger percentage of annual net sales
for 1996 than has historically been the case. Both USA and Austria power supply
sales, as well as the Company's California service and logistics business, grew
at similar rates during this period.
GROSS MARGIN. Gross margin was 13.0% in the first quarter of 1996, up from 11.1%
in the first quarter of 1995. Gross margin on USA power supply manufacturing
operations improved due to cost reductions associated with full volume
production of several large programs. Manufacturing overhead costs fell relative
to net sales because of greater leveraging of fixed costs from the higher sales
level. Offsetting these gross margin improvements were the startup costs of the
new Colorado facility, which were expensed. Although there was no significant
production activity at this new facility in the quarter, the facility was
outfitted, equipment was purchased and installed and staff was hired. The net
effect was that USA gross margin improved only slightly from the first quarter
1995 to the first quarter 1996. Zytec Austria's gross margin improved as a
result of the Austrian operation's ability to leverage fixed costs and labor
costs from the higher sales level.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased 11.8% to $2.5 million in the first quarter of 1996,
from $1.6 million in the first quarter of 1995, due to relocation expenses and
establishment of administrative functions at the Company's California and
Colorado facilities. Expenses were 4.0% of net sales in the first quarter of
1996 compared with 4.9% of net sales in the first quarter of 1995. This decrease
as a percentage of net sales continues a trend of leveraging these costs with
higher sales, although there can be no assurance that this trend will continue.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses increased
10.6% to $2.4 million in the first quarter of 1996 from $2.2 million in the
first quarter of 1995. This increase was due to an overall increase in the
number of new programs. The dollar amount of R&D expenses typically varies based
on the number of new programs.
OTHER REVENUE. Other revenue, which consists of customer payments to fund
development of custom power supplies, decreased 8.1% to $353,000 in the first
quarter of 1996, from $384,000 in the first quarter of 1995. Other revenue has
been, and will continue to be, affected by the number and timing of development
programs, and variations in levels of funding among programs.
INTEREST EXPENSE. Interest expense increased 70.1% to $381,000 in the first
quarter of 1996 from $224,000 in the first quarter of 1995, as the Company
increased borrowing to support sales and working capital growth. Interest rates
improved slightly as the Company switched from the prime rate to a LIBOR-based
rate for its USA revolving credit facility. The Company believes that interest
expense for the remainder of fiscal year 1996 will decrease due to repayment of
borrowings with the net proceeds of this offering.
INCOME TAXES. Zytec's consolidated effective tax rate was 28.3% in the first
quarter of 1996 compared with 37.1% in the first quarter of 1995 resulting from
a 40% effective tax rate on domestic operations offset by the use of NOL
carryforwards against profits in Austria. In May 1996, the Austrian government
changed the treatment of NOL carryforwards by (1) suspending the use of NOL
carryforwards during the years 1996 and 1997 (retroactive to January 1, 1996)
and (2) removing the time limitations on the use of the NOLs. In light of this
new statute, and based on its current assessment of the financial results of its
Austrian operations, the Company has concluded that it should recognize the
deferred income tax benefit related to the Austrian NOL carryforwards. This
change will reduce taxes in the second quarter of 1996 and increase taxes in
subsequent quarters. The amount of the reduction in the second quarter of 1996
will be approximately $2.6 million, comprised of a tax benefit of $2.9 million
relating to recognition of the deferred tax benefit, which will be offset by the
realization of income tax expense of $280,000 resulting from the retroactive
application of this tax law change to first quarter Austrian operations. Due to
these recent tax changes, the Company expects that its consolidated effective
tax rate will increase to and stabilize at statutory levels of approximately
38%.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET SALES. Net sales increased 33% to $170.5 million in 1995 from $128.1 million
in 1994, and increased 41% from net sales of $90.6 million in 1993. In 1995, net
sales from USA and Austrian operations increased 34% and 30%, respectively.
Compound average growth of sales for the five-year period 1991-95 was 21%. Sales
growth in the power supply business was due to the addition of a number of new
power supply programs and to generally strong demand from existing power supply
programs, particularly in the internetworking market. Growth in the number of
new power supply programs reduced the Company's reliance on its previously
largest customer to 15% of consolidated net sales in 1995, a continued decrease
from 29% in 1994 and 36% in 1993. In addition, the Company's service and
logistics business in California grew 84% in 1995 and 85% in 1994.
GROSS MARGIN. Zytec's consolidated gross margin was 12.1% in 1995, 14.3% in 1994
and 15.4% in 1993. The decline of 2.2 percentage points in 1995 was due to
component shortages and their effect on efficiency and capacity, new product
start-ups, and the effect of a weak dollar.
In 1995, the Company experienced market shortages in certain semiconductor
components. To secure sufficient parts, the Company purchased from more
expensive alternate sources and maintained higher levels of inventories. Most of
the price premiums were passed on to Zytec's customers. Nonetheless, the
shortages and related delays in securing components reduced gross margins
indirectly by consuming limited production capacity and forcing outsourcing to
expensive external manufacturing resources. In addition, the delays resulted in
increased labor and freight costs and reduced plant overhead efficiencies.
The addition of several new products in early production reduced margins because
new products generally have higher material content. In addition, high initial
volumes of these complex units multiplied the effect on profits. Also, the
precipitous decline of strength in the dollar early in 1995 adversely affected
the Company's Austria operation, which sells over one-half of its product in
dollars and buys most of its parts in other currencies. This reduced Austria's
gross margin, particularly in the early part of 1995. Austria was able to reduce
product costs in the latter part of the year to offset a substantial portion of
the initial exposure, and the Company has established financial hedges to help
stabilize currency exposures.
The strong electronics market of 1995 resulted in many near-term schedule
increases and forced the Company to operate above efficient capacity in Redwood
Falls. During the year, employment increased in the Company's Redwood Falls
location from 616 to 921 (of which 343 were temporary employees). An expansion
of the Redwood Falls plant was completed in March 1996. This addition will allow
reorganization of manufacturing lines to improve productivity, but will not add
substantially to Zytec's overall capacity. In January 1996, Zytec leased a
manufacturing facility in Broomfield, Colorado, which began operations in the
first quarter of 1996, with initial employment of approximately 80 employees.
The Company expects that the addition of the Broomfield plant will allow the
Redwood Falls plant to return to its normal capacity by the end of the second
quarter of 1996.
Gross margins were also affected by charges related to inventory obsolescence of
$645,000 in 1995, $991,000 in 1994 and $515,000 in 1993. These amounts represent
2.7%, 5.7% and 5.6% of year-end inventories, respectively. The Company believes
these obsolescence charges are low for its industry.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased 11.7% to $7.1
million in 1995 from $6.4 million in 1994 and increased 20.4% from $5.3 million
in 1993, primarily due to increased travel costs and salary increases. SG&A
expenses decreased to 4.2% of net sales in 1995 compared with 5.0% in 1994 and
5.9% in 1993. SG&A expenses continued to decline as a percentage of net sales as
the Company leveraged these costs with higher sales levels.
RESEARCH AND DEVELOPMENT. R&D expenses increased 5.4% in 1995 to $8.6 million,
or 5.0% of sales. R&D expenses were $8.1 million, or 6.4% of sales in 1994 and
$6.9 million, or 7.6% of sales in 1993. While the Company continues to increase
R&D expenses for development of new products, these expenses have continued a
downward trend as a percentage of net sales. The number of products in design
declined somewhat in the USA from their historically high 1994 levels and
increased in Austria. The research portion of R&D grew rapidly from a small base
in 1995 as the Company continued to develop new distributed power architecture
products and began a project to accelerate development cycle time through
computer-based simulation.
OTHER REVENUE. Other revenue decreased 36.7% to $1.6 million in 1995 from $2.5
million in 1994, and decreased 32.1% from $3.6 million in 1993. Other revenue
consists principally of reimbursement of R&D expenses from the Company's
customers, and represented 18% of R&D expenses in 1995, 30% of R&D expense in
1994 and 52% of R&D expense in 1993. In 1993, the Company received an unusual
reimbursement of $900,000 for work performed in prior periods. The decline of
Other revenue as a percentage of R&D is due in part to higher levels of research
(which are not reimbursed by customers) and partly due to the trend toward lower
funding per project.
INTEREST EXPENSE. Interest expense increased 37.5% in 1995 to $1.1 million, or
0.6% of net sales. Interest expense was $766,000, or 0.6% of net sales in 1994,
and $1.2 million, or 1.3% of net sales in 1993. The increase in interest expense
in 1995 was generally due to higher debt to support sales and working capital
growth.
OTHER INCOME. Other income (expense), net increased to $703,000 income in 1995
from $38,000 expense in 1994 and $191,000 income in 1993. The increase in 1995
is made up of an exchange gain of $202,000 as compared to an exchange loss in
1994 of $229,000. Also in 1995, the Company received an export duty refund of
approximately $124,000.
INCOME TAXES. Zytec's consolidated effective tax rate was 36.2% in 1995 compared
with 37.9% in 1994 and 39.1% in 1993. In 1995, 1994 and 1993, profits from
Austria permitted use of small amounts of its net operating loss carryforwards
and resulted in a reduction of Zytec's consolidated tax rate. At December 31,
1995, the Company continued to maintain a valuation allowance which offset the
entire tax benefit of remaining loss carryforwards in Austria. As discussed
above, the Company expects that the entire valuation allowance will be
eliminated in the second quarter of 1996.
QUARTERLY INFORMATION (UNAUDITED)
The following tables present selected quarterly consolidated financial
information for the periods indicated in both dollars and as a percentage of net
sales. This information was derived from unaudited consolidated financial
statements which have been prepared on a basis consistent with the Company's
audited consolidated financial statements and notes thereto included elsewhere
in this Prospectus and, in the opinion of management, reflects all normal
recurring adjustments necessary to fairly present the information. The Company
has experienced and expects to continue to experience significant fluctuations
in its quarterly financial results due to a variety of factors, including the
mix of products between custom-designed and customer-designed power supplies;
the stage of each product in its life cycle; component and material cost and
availability; the rate of addition and magnitude of new projects; the timing of
orders from and shipments of products to customers; foreign currency
fluctuations; and general economic conditions. The operating results for any
quarter do not necessarily indicate the results to be expected for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
1994 1995 1996
---------------------------------- ---------------------------------- --------
APRIL 3 JULY 3 OCT. 2 DEC. 31 APRIL 2 JULY 2 OCT. 1 DEC. 31 MARCH 31
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $23,148 $32,432 $36,769 $35,792 $32,881 $40,544 $44,589 $52,504 $61,087
Cost of goods sold 19,876 27,254 30,971 31,746 29,233 36,171 38,726 45,792 53,141
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit 3,272 5,178 5,798 4,046 3,648 4,373 5,863 6,712 7,946
Other revenue 654 546 572 690 384 411 399 365 353
Selling, general and administrative (1,549) (1,602) (1,576) (1,663) (1,605) (1,854) (1,740) (1,940) (2,460)
Research and development (1,845) (2,063) (2,078) (2,158) (2,161) (2,157) (2,063) (2,206) (2,390)
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income 532 2,059 2,716 915 266 773 2,459 2,931 3,449
Other income (expense):
Interest expense (166) (183) (201) (216) (224) (223) (300) (306) (381)
Other, net 49 (96) (143) 152 149 16 162 376 (129)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 415 1,780 2,372 851 191 566 2,321 3,001 2,939
Income taxes 133 599 998 324 71 211 873 1,046 831
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income $ 282 $ 1,181 $ 1,374 $ 527 $ 120 $ 355 $ 1,448 $ 1,955 $ 2,108
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share (fully diluted)(1) $ 0.03 $ 0.13 $ 0.15 $ 0.06 $ 0.01 $ 0.04 $ 0.16 $ 0.21 $ 0.21
======= ======= ======= ======= ======= ======= ======= ======= =======
Common and common equivalent
shares outstanding (fully diluted)(1) 9,286 9,315 9,357 9,292 9,233 9,259 9,287 9,420 9,812
</TABLE>
(1) Restated to reflect a two-for-one stock split effected as a 100% stock
dividend on June 3, 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
1994 1995 1996
---------------------------------------- --------------------------------------- -------
APRIL 3 JULY 3 OCT. 2 DEC. 31 APRIL 2 JULY 2 OCT. 1 DEC. 31 MARCH 31
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 85.9 84.0 84.2 88.7 88.9 89.2 86.9 87.2 87.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit 14.1 16.0 15.8 11.3 11.1 10.8 13.1 12.8 13.0
Other revenue 2.8 1.6 1.6 1.9 1.2 1.0 0.9 0.7 0.5
Selling, general and administrative (6.7) (4.9) (4.3) (4.6) (4.9) (4.6) (3.9) (3.7) (4.0)
Research and development (7.9) (6.4) (5.7) (6.0) (6.6) (5.3) (4.6) (4.2) (3.9)
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income 2.3 6.3 7.4 2.6 0.8 1.9 5.5 5.6 5.6
Other income (expense):
Interest expense (0.7) (0.5) (0.5) (0.6) (0.7) (0.5) (0.7) (0.6) (0.6)
Other, net 0.2 (0.3) (0.4) 0.4 0.5 0.0 0.4 0.7 (0.2)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 1.8 5.5 6.5 2.4 0.6 1.4 5.2 5.7 4.8
Income taxes 0.6 1.9 2.8 0.9 0.2 0.5 2.0 2.0 1.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income 1.2% 3.6% 3.7% 1.5% 0.4% 0.9% 3.2% 3.7% 3.5%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's operating results over the nine quarters ended March 31, 1996
reflect increasing net sales, with the exception of the fourth quarter of 1994
and the first quarter of 1995. Net sales in both of these quarters reflect
adjustments in production schedules by two customers. Net sales in the first
quarter of 1995 also reflect a rapid decrease in the exchange rate of the U.S.
dollar relative to the Austrian schilling, which had the effect of reducing
Austrian net sales. Net sales increased in the first quarter of 1996 due in part
to component availability which allowed delivery schedules to improve, enabling
the Company to deliver products for which it had not made delivery in 1995.
Gross margin varied from quarter to quarter due to the timing of the addition of
new products, exchange rate fluctuations and, in the second through fourth
quarters of 1995, market shortages in certain semiconductor components.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1996, the Company's operating activities used cash of
$5.8 million. Net income and depreciation and amortization provided cash of $2.9
million; however, changes in operating assets and liabilities used cash of $8.7
million. For the year 1995, the Company's operating activities provided cash of
$820,000. Net income and depreciation and amortization provided $6.6 million,
while changes in operating assets and liabilities used $5.9 million.
Cash and cash equivalents were $2,000 at March 31, 1996 and at year-end 1995 and
1994, and were $4.3 million at year-end 1993. When the Company is borrowing
against its revolving credit facilities, as it was in 1994, 1995 and the first
quarter of 1996, cash balances are minimal.
Working capital was $14.5 million at March 31, 1996 and December 31, 1995 and
$14.2 million at December 31, 1994. The growth in the first quarter of 1996 was
slower than sales increases. The apparent slow growth of working capital in 1995
and in the first quarter of 1996 was due primarily to timing of receipts of
materials and the level of accounts payable that resulted from these receipts.
Accounts receivable increased $7.4 million during the first quarter of 1996, and
increased $10.3 million from 1994 to 1995, resulting in an average days
sales outstanding (DSO) of 50.9 in the first quarter of 1996, 43.5 in 1995, 42.1
in 1994 and 38.1 in 1993. The trend of increased DSO has been caused primarily
by the reduction of a very large program which includes faster-than-average
payment of receivables. As this program has become a relatively smaller part of
net sales, DSO has increased. As of March 31, 1996, fewer than 3.4% of accounts
receivable were 60 days or more beyond terms, and the Company does not believe
this increase in DSO poses an increased risk to collection of accounts
receivable.
Inventory turnover averaged 6.8 times (annualized) in the first quarter of 1996,
7.4 times in 1995, 7.9 times in 1994 and 9.0 times in 1993. Zytec's decision to
increase stocks of certain semiconductors and other components due to limited
capacity in the industry to support the Company's growth rate has resulted in
some reduction in inventory turnover. In addition, the inefficiencies caused by
over-capacity operations and the shorter production runs caused by parts
shortages have increased work-in-process inventory to levels above Zytec's
historical expectations. While the addition of a new facility in Colorado will
cause duplication of some inventory levels, it is expected that overall
inventory turnover will improve as the Company works out of the capacity and
component shortage it experienced in 1995 and early 1996.
Investing activities required cash of $2.2 million in the first quarter of 1996,
$3.3 million in 1995, $3.2 million in 1994, and $673,000 in 1993. Capital
expenditures, including new capital lease obligations and additional debt, were
$5.0 million in the first quarter of 1996, $5.8 million in 1995 and $3.5 million
in 1994. In all periods, these expenditures were used to purchase surface mount
technology, other automated insertion equipment, test equipment, computer
equipment and to expand physical capacity. The relatively heavy capital
expenditures in the first quarter of 1996 were to equip the Broomfield, Colorado
facility. In the first quarter of 1996, the Company entered into approximately
$2.9 million of capital lease obligations and an operating lease for production
facilities in Colorado which will result in additional annual rent expense of
approximately $329,000 for 10 years. In 1995, the majority of these expenditures
were financed through capital leases as well as increases in short-term
borrowings. In 1994, most expenditures were financed through internally
generated funds and the proceeds of the Company's initial public offering in
November 1993.
Cash provided by financing activities was $7.9 million in the first quarter of
1996, $2.7 million in 1995, $4.7 million in 1994 and $3.2 million in 1993. These
increases were primarily from increases in the revolving credit loans.
The Company has two bank lines of credit which are described in Note 4 to
Audited Consolidated Financial Statements and Note 7 to Unaudited Consolidated
Financial Statements. The USA facility provides up to $23 million in borrowings
through August 1996, and $10 million thereafter, and expires in May 1999. This
credit facility is unsecured. Credit availability under this facility is based
on accounts receivable, inventories and plant and equipment of the USA
operations and is used primarily to finance working capital. The Company's other
line of credit is guaranteed by the Austrian National Bank and issued to finance
Austrian export sales. This line was $3.5 million as of December 31, 1995. The
Company will use a portion of the net proceeds of this offering to repay
outstanding advances under the Company's USA facility.
BUSINESS
Zytec Corporation ("Zytec" or the "Company") is a leading designer and
manufacturer of custom electronic power supplies for original equipment
manufacturers ("OEMs") in the communications, networking, computer and other
electronic equipment marketplaces. Recently, the Company has experienced
significant sales growth because it has been the sole-source provider of power
supplies to many of the OEMs that provide hardware for the internet. The Company
also repairs power supplies and related products, and provides dedicated repair
and logistics services for a major customer. The Company's power supply
components are sold in North America and Europe, and its products are used
worldwide. Zytec's principal OEM customers include Digital Equipment,
Hewlett-Packard, IBM, Cabletron, Cisco Systems, Sun Microsystems, Bay Networks
and Silicon Graphics. In 1995, the Company manufactured and delivered over
600,000 power supplies representing over 141 different products. The Company's
dedication to quality resulted in its winning the Malcolm Baldrige National
Quality Award in 1991.
INDUSTRY BACKGROUND
Power supplies perform many essential functions relating to the supply,
regulation, and distribution of electrical power within electronic equipment.
Electronic systems require a steady supply of electrical power at one or more
voltage levels. Power supplies convert alternating current ("AC") from a primary
power source into the direct current ("DC") required to power the electronic
system. In addition, power supplies provide different DC voltage levels required
by the different subsystems and components in the system and monitor and
regulate those voltages to protect the product and its components from power
surges. Power supplies can also be designed to perform diagnostic functions that
prevent electronic equipment from being damaged by its own malfunction, as well
as provide power through use of a short-term battery back-up system when the
primary power source fails.
The dominant technology now used in power supplies is switching technology.
Before the development of switching power supplies, power supply technology was
fairly simple, and power supplies consisted of a transformer and some related
components to rectify and control power surges. As the complexity of electronic
equipment has increased, power supplies and their underlying technology have
become more advanced. Switching power supplies such as those manufactured by
Zytec have hundreds of components, provide advanced diagnostic and power
management functions, can be designed to provide battery back-up power, and are
smaller and more efficient than power supplies using simpler technology.
SWITCHING POWER SUPPLIES
[GRAPHIC SHOWING FROM AC WALL POWER IN TO AC TO DC POWER SUPPLY TO A
DISK DRIVE OR MEMORY OR INTEGRATED CIRCUITS OR MOTORS OR MONITORS]
As a further enhancement of AC/DC power supplies utilizing switching technology,
a newer, more flexible technology is emerging which the Company refers to as
"distributed power architecture" ("DPA"). Most electronic systems have a number
of subsystems, each of which may require a different operating voltage or level
of power. As a result, power supplies often have multiple outputs that can
provide all required system voltage levels. In such power supplies, power is
"distributed" throughout the system so that in addition to the main AC/DC power
supply, DC/DC converters located on or near the subsystem or component being
powered change the voltage of the DC to the specific level of voltage needed.
Distributed power permits greater flexibility to meet the power supply
requirements if components or subsystems are added or upgraded. The Darnell
Group forecasts that the high density DC/DC converter power supply market will
grow from $257 million in 1995 to $823 million in the year 2000, representing a
projected average annual growth rate of approximately 26%, which significantly
exceeds the projected growth rate of other portions of the power supply market.
DISTRIBUTED POWER ARCHITECTURE
[GRAPHIC SHOWING FROM INPUT TO AC TO DC FRONT END
TO OUTPUT TO VARIOUS SUB SYSTEMS]
MARKET OVERVIEW
Over 90% of the Company's business is the manufacture of custom power supplies.
According to a market report from Micro-Tech Consultants, the worldwide market
for power supplies was estimated to be over $19.6 billion in 1995. The overall
market for power supplies can be defined several ways, as follows:
MERCHANT/CAPTIVE. Merchant power supply manufacturers design and manufacture
power supplies for others. Captive power supply manufacturers design and
manufacture power supplies for use within their own products. According to
Micro-Tech Consultants, the merchant segment of the market accounted for 50% of
the power supply units shipped in the United States in 1995 and is projected to
grow to 63% in the year 2000 as OEMs demand product options and features and
high quality levels that make power supplies increasingly difficult to design
and manufacture in-house.
POWER RANGE. The market is also segmented by power supply output range, as
follows:
<TABLE>
<CAPTION>
TYPICAL % OF REPRESENTATIVE
POWER RANGE CHARACTERISTICS MARKET* END USERS APPLICATIONS
<S> <C> <C> <C> <C>
Low * Less than 150 Watts 22% * PC Companies * Personal Computers
* Lower Technology * Consumer Electronics * Consumer Electronics
* Higher Volume * Desk Top Printers
* Lower Margin
Mid * 150-750 Watts 65% * Internetwork Companies * Routers, Hubs
* High Technology * Computer Companies * Workstations, Fault
* Moderate Volume Tolerant Computers
* Higher Margin * Medical Companies * Blood Analyzers
High * More than 750 Watts 13% * Computer Companies * Main-frame Computers
* High Technology * Industrial Companies * Industrial Process Control
* Lower Volume * Internetworking Companies * High-end Routers/Switches
* Higher Unit Margin
</TABLE>
*Based on a market report from Micro-Tech Consultants.
APPLICATION. The United States power supply market also is segmented into
different applications. Set forth below are the principal segments and the
corresponding compound annual revenue growth rate as forecasted by Micro-Tech
Consultants:
GROWTH RATE
APPLICATIONS 1995-2000
- ------------ ---------
Computers, Peripherals and Office
Equipment* 14.2%
Communications* 18.0%
Military/Aerospace 0.0%
Industrial* 10.9%
*Zytec actively participates in the computers, peripherals and office
equipment; communications; and industrial market segments.
CUSTOM/STANDARD. Custom power supplies are designed and packaged to meet the
form, fit, and functional requirements of an OEM's unique and specific
application. They are attractive to OEMs because they present maximum design
flexibility, provide the lowest cost, and allow the use of special features.
Standard, "off-the-shelf" power supplies are not design-specific but also do not
require substantial up-front engineering design costs. Once a product has
reached the stage of development where the OEM is confident that there will be a
market demand for the product, it is typically cost-effective to custom design a
unique power supply to meet that product's specific requirements. The OEM is
then able to utilize a moderately high-volume, customized solution at the lowest
cost per watt of power without paying for unnecessary features or capabilities.
Custom power supplies represented 78.0% of the United States market in 1995,
according to Micro-Tech Consultants.
Zytec pursues the custom power supply business because it capitalizes on its
strengths in the area of sophisticated design, volume manufacturing, and
customer service. The effect, though, is that competition among qualified design
and manufacturing outsourcing companies providing these customized solutions is
keen. The competition causes downward pressure on gross margins, which is only
partially offset by lower selling and distribution costs.
Zytec believes a number of important trends affecting its customers will
continue to shape the power supply marketplace. The applications segments which
are growing rapidly, such as workstations and data communications hardware
(e.g., hubs, routers and file servers), need mid-range power. In addition, OEMs
face pressure from end users to improve the price and performance of products,
bring new products to market quickly, provide more product options and features,
reduce product size, and meet increasingly complex safety and regulatory agency
standards. The Company believes that these pressures will support the need for
and encourage a modest migration from captive manufacturers to
merchant-provided, custom-designed power supply manufacturers such as Zytec and
that market dynamics will maintain the vitality of the mid-range segment of the
market.
STRATEGY
Zytec's objective is to be the supplier of choice to a targeted group of
multinational OEM customers who require sophisticated power supply solutions and
who are likely to have substantial volume requirements. To achieve this
objective, Zytec's strategy is to differentiate itself through advanced
technology and design, shorter product development cycles and superior product
performance, quality, service and value. The Company's primary target market for
the last several years has been OEMs in the communications, networking, computer
and other electronic equipment marketplaces. These OEMs manufacture hubs,
routers, high availability file servers and disk arrays which typically have
complex technical needs, high product reliability standards, short product
development cycles and variable production needs. The Company implements this
strategy by combining the following key elements:
DELIVER HIGH-QUALITY PRODUCTS AND SERVICES. Zytec believes that quality and
responsiveness to the customer's needs are of critical importance in its efforts
to compete successfully. Zytec's Minnesota and Austrian operations are certified
to ISO 9001, and the Company plans to qualify each of its other locations to
applicable ISO 9000 standards as necessary to meet customer requirements. Zytec
actively involves all employees in implementing techniques to measure, monitor
and improve performance and provides all employees with education and training,
including courses in statistical process control and related techniques. Also,
employees actively participate in Zytec's planning sessions and monitor
adherence to their annual plans on a monthly basis. Through its commitment to
customer service and quality, the Company believes it is able to provide
superior value to its customers.
PROVIDE LEADING-EDGE ENGINEERING AND TIME TO MARKET. Zytec's target markets and
customers are characterized by high growth rates and continually evolving
technology. As a result, Zytec's customers typically require leading-edge
technology designed in a relatively short period. Zytec's initiatives to
maintain leading-edge technology and reduce time to market include collaborative
research with the Power Electronics Center at Virginia Polytechnic Institute; a
series of in-house technical training symposia; increased use of standard
circuits; sharing of engineering concepts between Austria and USA; and
simulation of analog design characteristics (begun in 1995). These initiatives
have contributed to a reduction of time to market of about 20% per year in 1994
and 1995.
DEVELOP AND EXPAND COLLABORATIVE RELATIONSHIPS. Through the development and
expansion of collaborative relationships with its customers, Zytec attempts to
satisfy their needs by offering a full range of value added services, including
design expertise, process development and control, testing, inventory
management, and rapid response to volume and design changes. Some
custom-designed projects are priced based on agreed-to gross margins and allow
for a sharing of the costs, risks and rewards of the manufacturing process with
the customer. These relationships also provide the Company with valuable
knowledge regarding the customer's products. The Company focuses its efforts on
customers with which it believes the opportunity exists to further develop
long-term business collaborations.
LEVERAGE ADVANCED MANUFACTURING AND MANAGEMENT TECHNIQUES. Zytec's strategy
focuses on the quality of all elements of the production process, rather than
merely the quality of the end product. To implement this strategy, Zytec uses
sophisticated design and manufacturing techniques (such as computer integrated
design and manufacture, computer aided design, and automated testing and
assembly of printed circuit boards), combined with advanced management
techniques, including just-in-time manufacturing, statistical process control
and total quality commitment. These techniques allow the Company to decrease
production costs by improving the efficiency of production processes.
EXPAND COMPLEMENTARY BUSINESSES. The Company believes that providing a wide
range of services affords the Company a competitive advantage, as it further
addresses customer needs and therefore increases the likelihood that the Company
will make continuing sales to its customers. For example, at a customer's
request, the Company may build assemblies by adding cables, harnesses, frames,
and other components to its power supply unit. In addition, Zytec offers power
supply repair services for Zytec-manufactured power supplies as well as power
supplies manufactured by others.
PRODUCTS AND SERVICES
In 1995, the Company manufactured and delivered over 700,000 power supplies
representing over 141 different products, including 31 customer-designed power
supplies and 110 products designed by Zytec. Zytec also provides related repair
and support services to customers.
POWER SUPPLY PRODUCTS. A Zytec-designed power supply progresses through a
five-phase cycle of development that may last from 12 to 18 months, depending on
the customer's product introduction schedule. In the first phase of the
development, a team is assembled, the product specifications are refined with
varying degrees of customer involvement, and the product design is planned. In
the second phase, the product's electrical circuits and physical structure are
designed and documented and the Company begins to track the product's actual
cost against its targeted cost. In the third phase, prototypes are built and
tested extensively by Zytec and the customer, design documentation is finalized,
and plans for limited production are completed. In the fourth phase, production
plans, processes, and capabilities are established to support volume production.
In the fifth phase, product evaluation by safety and quality agencies is
completed and customer service standards are implemented as volume production
begins. The following table summarizes Zytec's product development cycle.
THE PRODUCT DEVELOPMENT CYCLE
TYPICAL TIME LINE ACTIVITIES
Phase 1 Week 1-2 * Design Team and Customer Team
* Specification Review
Phase 2 Week 2-4 * Electrical and Mechanical Design
* Cost Targets Compared to Quote
Phase 3 Month 2-4 * Build Prototypes
* Testing
* Documentation
* Production Startup Plans
Phase 4 Month 3-18 * Production Plans
* Manufacturing Processes Developed
* Factory, Equipment Sizing
Phase 5 Month 12-18 * Approvals by Safety Agencies
* Full Production Commenced
As customers demand shorter development times, the risk that all five phases of
development will not be completed successfully on schedule rises. Early life
project profitability can be reduced substantially if the Company has not
completed all phases of development before manufacturing start-up.
Zytec also manufactures power supplies based on designs supplied by the
customer. In customer-designed projects, Zytec manufactures a power supply that
the customer has designed, using suppliers that the customer specifies.
In 1995, Zytec introduced and shipped the first substantial quantities of its
DPA converters. This technology, licensed from Digital Equipment Corporation and
subsequently Galaxy Power, Inc., offers higher efficiency in smaller size than
traditional switching power supplies. In early 1996, the Company established a
subsidiary in Dallas, Texas to lead the Company's design and marketing efforts
for this new technology.
REPAIR OF POWER SUPPLIES. In 1995 Zytec repaired over 1,000 different power
supply models originally manufactured by over 200 different companies in its
Redwood Falls, Minnesota location. Repair activities are also carried out in
Kindberg, Austria. Many of the Company's power supply customers use Zytec's
repair services for power supplies manufactured by the Company and by others.
SERVICE AND LOGISTICS. In 1992, Zytec began to provide materials management and
electronic product repair services for Hewlett-Packard in California. Zytec
continues this activity, repairing a variety of products and managing
disposition of repairable units. In 1995, the Company began repair of laser
printers, ink jet printers and fax machines.
OPERATIONS
QUALITY MANAGEMENT TECHNIQUES. A key element of Zytec's competitive strategy is
delivering high-quality products and services. Zytec's focus on this strategy
led to its receipt of one of three Malcolm Baldrige National Quality Awards
given in 1991. The Company also won the first Minnesota Quality Award in 1991,
and has received over 30 superior service and quality awards from its customers,
including IBM, Abbott Laboratories, Stratus Computers, Tektronix and Sun
Microsystems, since 1987.
Zytec's quality management techniques focus on all elements of the production
process, rather than merely the quality of the end product. To implement this
strategy, Zytec uses sophisticated design and manufacturing techniques (such as
computer integrated design and manufacture, computer aided design, and automated
testing and assembly of printed circuit boards), combined with advanced
management techniques, including just-in-time ("JIT") manufacturing, statistical
process control ("SPC"), and total quality commitment ("TQC"). These techniques
allow the Company to decrease production costs by improving the efficiency of
production processes.
* JIT manufacturing increases efficiencies and shortens the manufacturing
cycle.
* SPC complements the JIT process and is a set of analytical and problem
solving techniques through which Company personnel can continuously evaluate
stages of production and administrative processes.
* TQC is a management approach which involves all employees in establishing
overall and specific goals, tracking adherence to these goals on a monthly,
weekly or daily basis, and being responsible and accountable for achieving
the established objectives.
MANUFACTURING PROCESS. A typical power supply consists primarily of one or more
printed circuit boards, electronic components, transformers and other
electromagnetic components, and a sheet metal chassis. The production of the
Company's power supplies entails the assembly of structural hardware combined
with sophisticated automated assembly of circuit boards using automated surface
mount and pin-through-hole interconnection technology. Surface mount technology
permits reduction in board size by eliminating the need for holes in the printed
circuit boards, allowing components to be placed on both sides of a board.
Pin-through-hole assembly involves attaching electrical components to circuit
boards by means of pins or leads that are inserted into pre-drilled holes and
soldered to the electrical circuits on the boards.
In response to market demands for increased quality and reliability, design
complexity, and sophisticated technology, Zytec has automated many electronic
assembly and testing processes which were traditionally performed manually. In
addition, the demand for shorter manufacturing cycles has also led to increased
use of automated assembly and testing. The Company believes that the power
supply manufacturing industry has remained fragmented partly because it
traditionally has been a labor intensive, low investment industry; thus, it
believes that increased levels of automation will strengthen Zytec's competitive
position.
Many of the Company's customers increasingly require that their power supplies
meet or exceed established international safety and quality standards as their
operations expand internationally. In response to this need, Zytec designs and
manufactures power supplies in accordance with the certification requirements of
many international agencies, such as Underwriters Laboratories Incorporated (UL)
in the United States; the Canadian Standards Association (CSA) in Canada;
Technischer Uberwachungs-Verein (TUV) and Verband Deutscher Electrotechniker
(VDE), both in Germany; the British Approval Board for Telecommunications (BABT)
in the United Kingdom; and International Electrotechnical Committee (IEC), a
European standards organization. Both Zytec Austria and Zytec USA (Redwood
Falls) are certified to ISO 9001, which is a European model for quality
assurance.
SUPPLIERS. Zytec typically uses a primary source of supply for each specific
component, but it has several sources for each kind of component. As with
customers, Zytec stresses early supplier involvement in design, the use of
quality methods such as SPC and TQC, and frequent feedback through monthly
statistical analysis of quality and delivery. Several major suppliers provide
"just in time" shipments of products to Zytec. No supplier provides more than
10% of the dollar value of material used by the Company on a consolidated basis.
In March 1996, an existing supplier of magnetic components (transformers, coils
and toroids) to Austria was acquired by the Company from the Hungarian
government by privatization. The acquisition gives the Company a source of very
high quality, low-cost custom components. This facility will be operated as a
wholly-owned subsidiary of the Austrian operation. It will provide the majority
of magnetic components used by Zytec Austria and has recently become a supplier
to US operations as well.
SALES, MARKETING AND CUSTOMERS
Zytec markets its products and services through an integrated sales approach
involving direct sales representatives and account managers, along with active
support from design engineering and production personnel. The Company's products
and repair services are sold worldwide through a nine-member sales organization.
Six sales personnel based in Eden Prairie, Minnesota, are responsible for North
American power supply sales. One sales representative is responsible for
marketing the Company's repair business in North America. Two sales persons,
headquartered in Vienna, Austria, are responsible for European power supply
sales.
Because of the costs inherent in starting new customer relationships, the
Company focuses on retaining existing customers and targets a select few major
and emerging OEM industry leaders with which the opportunity exists to provide
products and services across a number of product families and through successive
product generations. The Company focuses its resources on market segments that
are (a) growing relatively fast and (b) have the potential for profit. Potential
customers are assigned to Company sales representatives who evaluate the
customer against the Company's customer selection criteria. For most end
products of a customer, or versions of such end products, the Company believes
it has established itself as a sole source provider of power supplies for the
product.
The typical sales process begins with a customer or a potential customer making
a request for quote ("RFQ") from a number of power supply manufacturers. Based
on the nature of the RFQ, the Zytec sales representative may work with the
Company's design engineers on early stage design in an effort to determine the
product's likely specifications, cost and price range. Once this process is
completed, Zytec will submit its bid for the project. The requesting OEM will
review the RFQ responses it receives and make a "short list" of two or three
potential suppliers. Further refinements are made during a second round of
bidding, at which point one supplier is selected, usually within 60 days. If
Zytec's bid is selected, a Zytec account manager is assigned to manage order
placement, delivery scheduling and design change implementation for that
customer. On an ongoing basis, Zytec's engineering personnel provide technical
support to customers in the areas of product design changes, field performance
and testing.
Some customers prefer to use Zytec to produce customer-designed products as an
introduction to the Company and its full service design and manufacturing
capabilities. Zytec's collaborative relationships allow it to gain valuable
knowledge about an existing customer and its processes, which Zytec believes
gives it an advantage in obtaining future business from that customer.
Historically, the Company has had substantial recurring sales from existing
customers. In 1995, revenue growth came solely from existing customers.
The Company's promotional activities include informational mailings to customers
and selected potential customers and the publication in industry periodicals of
articles written by Zytec personnel. In addition, the Company participates
regularly in industry-wide conferences and trade shows and sponsors customer
seminars.
The following chart profiles the percentage of Zytec's 1995 revenues and typical
customers in major market application segments:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
WORLDWIDE
PRODUCT OR MARKET SERVED BY CUSTOMERS REVENUES REPRESENTATIVE CUSTOMERS
<S> <C> <C> <C>
POWER SUPPLIES:
Computers and peripherals:
COMPUTER PERIPHERALS/OFFICE
AUTOMATION 21% Digital Equipment, Hewlett-Packard,
IBM, 3M, Xerox
FILE SERVERS 19 Digital Equipment, Hewlett-Packard,
Compaq, Apple
MINI COMPUTERS/FAULT TOLERANT
COMPUTERS 16 IBM, Unisys, Stratus
WORKSTATIONS 6 Hewlett-Packard, Silicon Graphics,
--- Sun Microsystems
SUBTOTAL COMPUTERS AND
PERIPHERALS 62%
Data communications 20 Cabletron, Bay Networks,
Cisco, Ericsson
Test and measurement 9 Tektronix, Hewlett-Packard, Abbott
--- Laboratories
SUBTOTAL POWER SUPPLIES 91
REPAIR AND SERVICE:
REPAIR 2 Various
SERVICE AND LOGISTICS 7 Hewlett-Packard
---
SUBTOTAL REPAIR AND SERVICE 9
---
TOTAL 100%
===
</TABLE>
Although the Company seeks to diversify both its customer and market application
base, a small number of companies are responsible for a significant portion of
Zytec's net sales. At December 31, 1995, the Company had 25 power supply product
customers worldwide. During 1995, the Company had four customers with revenue
exceeding $20 million, including Digital Equipment Corporation ($29 million, or
17% of net sales), Hewlett-Packard ($28 million, or 16% of net sales), IBM ($26
million, or 15% of net sales), and Cabletron ($21 million, or 12% of net sales),
and a total of eight customers with revenues exceeding $5 million. The Company
expects to continue to depend upon a limited number of customers for a
substantial portion of its revenues.
BACKLOG
Sales are made pursuant to purchase orders rather than long-term contracts.
Backlog consists of purchase orders on hand generally having delivery dates
scheduled within the next three months. Zytec's backlog was $59.3 million, $52.3
million and $26.8 million at March 31, 1996, December 31, 1995 and December 31,
1994, respectively. Due to the increasing trend for OEMs to reduce their lead
time for purchase orders, and because customers may cancel or reschedule
deliveries, the Company does not consider backlog to be a reliable indicator of
future financial results.
COMPETITION
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. According to Micro-Tech Consultants, there
were approximately 300 power supply manufacturers in the United States in 1994.
Over 80% of the power supply companies in the world have annual revenues less
than $10 million. According to Micro-Tech Consultants, in 1994 Zytec was the 3rd
largest power supply company in the United States and the 9th largest power
supply company in the world.
Zytec's competition includes companies located throughout the world, some of
which have advantages over the Company in terms of labor and component costs,
and which may offer products comparable in quality to those of Zytec. Certain
of the Company's competitors have greater resources and geographic presence than
Zytec. Zytec also views as competitive threats the potential that its customers
may decide to produce their own power supplies, and that OEMs with captive
manufacturing capabilities may compete in the merchant market. However, several
large OEMs have divested their captive power supply manufacturing operations,
including NCR, TRW and Digital Equipment. Management believes that the principal
bases of competition in Zytec's targeted market are manufacturing technology,
cycle time of design and manufacture, technical knowledge, quality, and the
availability of value added services. To remain competitive, Zytec must compete
favorably on the basis of value by providing technologically advanced
manufacturing services, improving quality and reliability levels, offering
flexible delivery schedules, and delivering finished products on a reliable
basis.
RESEARCH AND DEVELOPMENT
Zytec's research and development activities are principally directed to the
development of new custom power supply products to satisfy specific customer
needs. Additionally, the Company continues to develop common circuit design to
assist in the development of future products for specific customers. Zytec's
research activities also include internally performed research and an
affiliation with the Virginia Polytechnic Institute Power Electronics Center.
Internal research efforts are primarily focused on improving electromagnetic
components in order to reduce component costs, improve ease of manufacture, and
accommodate product size constraints.
Customers in the Company's target markets require product designs to be
completed quickly. A major challenge for Zytec is to reduce design time without
reducing quality of the design. In 1995, the Company's average time to design
and introduce a product into production improved by 20%, the same rate of
improvement achieved in 1994. Most of the improvement comes from restructuring
existing resources and process improvements. In 1995, the Company began a
product to use computer simulation to speed the process of original design. The
Company does not expect to realize results from this project in 1996.
Product development is performed by a group of 36 engineers located in
Minnesota, 3 engineers in Texas and 18 engineers in Austria. The Company's total
expenditures for research and development were $2.4 million for the quarter
ended March 31, 1996, and were $8.6 million, $8.1 million, and $6.9 million for
the years of 1995, 1994 and 1993, respectively. Of these amounts, 14.8%, 18.2%,
30.2% and 52.2%, respectively, were funded by customers in connection with new
product designs. Customer reimbursements of research and development
expenditures are reported as "Other revenue" in the Company's financial
statements. In 1993, the Company received an unusual reimbursement to the
Company for work performed in prior periods. Other revenue as a percentage of
research and development expenditures is declining, due in part to higher levels
of research (which are not reimbursed by customers) and in part to the trend
toward lower funding per project. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTELLECTUAL PROPERTY MATTERS
Certain equipment, processes, information and knowledge developed by Zytec and
used in the design and manufacture of its products are regarded as proprietary
by the Company. Within Zytec, intellectual property protection is implemented
through nondisclosure agreements with employees. In addition, Zytec relies on a
combination of trade secret and other intellectual property law and other
measures to protect its proprietary rights, including holding patents and
evaluating the benefits of obtaining patents. If the Company believes that it
has patentable properties and that patents could enhance the Company's position,
patents are pursued. Zytec currently holds patents in the United States and
Europe relating to proprietary technology used in its products, as well as two
trademarks and a service mark. The remaining terms for these marks vary from
five to 15 years and, subject to use, the Company expects to renew each mark.
The Company's United States patent expires in 2004, and its European patents
have 20-year terms from the dates of their filings. The Company believes that
although the patents and other proprietary information it holds and may obtain
will be of value, they will not determine the Company's success, which depends
principally on its emphasis on quality, service and value.
Zytec signed a licensing agreement in September 1992 with Digital Equipment
Corporation to complete the design and manufacture of a family of DC/DC
converters in the 150 watt to 300 watt range. In addition, Zytec signed a
license agreement with Ericsson Components AB ("Ericsson"), a multinational
telecommunications firm headquartered in Sweden, for Ericsson's power division
to market Zytec's DC/DC converters in the standard power supply marketplace
world wide. The licensing agreement with Ericsson will expire December 31, 1996.
Zytec also signed a licensing agreement in December 1994, with Galaxy Power
Inc., Boston, Massachusetts to develop a "next generation" family of high
density DC/DC converters. This agreement is a non-exclusive, perpetual license
to make, have made, use, market and sell certain high density DC/DC product
lines under Zytec's name and on a private label basis to Ericsson for an
up-front license fee plus engineering fees. Zytec also has a first right to
acquire a license from Galaxy for certain future products developed by Galaxy.
These products will be introduced to the marketplace in 1996.
FACILITIES
The following table identifies the Company's facilities. Assuming successful
commencement of operations in the Company's Colorado facility, management
believes that the Company's facilities are adequate for the foreseeable future.
APPROXIMATE OWNED VS.
FACILITY PRIMARY ACTIVITY SQUARE FOOTAGE LEASED
Eden Prairie, MN Engineering, Administration 28,000 Leased
Redwood Falls, MN Manufacturing 98,700 Owned
118,000 Leased
Broomfield, CO Manufacturing 74,000 Leased
Vienna, Austria Engineering, Administration 8,700 Leased
Kindberg, Austria Manufacturing 58,000 Leased
Lincoln, CA Repair, Logistics, 180,000 Leased
Hewlett-Packard
Tatabanya, Hungary Magnetics Manufacturing 62,000 Owned
EMPLOYEES
As of March 31, 1996, the Company had 1,764 full-time employees, in the
following locations:
Minnesota 649
Colorado 101
California 341
Texas 3
Austria 339
Hungary 331
-----
Total 1,764
=====
Of these employees, 1,377 were in production, 92 were in research and
development, 69 were in clerical positions, 23 were in sales, marketing and
customer service, and 203 were in executive and administrative positions. The
Company also engaged other personnel on a part-time basis. None of the Company's
United States employees are members of a collective bargaining unit. The
employees of Zytec Austria are members of a national labor union, as are most
employees of Austrian companies. Management believes employee relations are
good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
Ronald D. Schmidt 60 Chairman of the Board, President, and
Chief Executive Officer
John M. Steel 52 Vice President, Marketing and Sales and Director
Josef J. Matz 55 Managing Director of Zytec Austria and Director
John B. Rogers 53 Treasurer and Vice President, Finance
N. Charles Wussow 50 Vice President, Engineering
Max Davis 52 Vice President, Manufacturing
Sherman Winthrop 65 Secretary and Director
Lawrence J. Matthews 67 Director
Gary C. Flack 59 Director
Dr. Fred C. Lee 50 Director
John V. Titsworth 70 Director
James S. Womack 67 Director
RONALD D. SCHMIDT is a co-founder of the Company and has served as an officer
and a Director since the Company commenced operations in January 1984. Until
January 1984, he was employed by Control Data Corporation ("CDC") in many areas
of general and product management, including Vice President and General Manager,
Computer Peripherals, Inc., and Managing Director for Control Data Portugal. Mr.
Schmidt also was involved with CDC in connection with its divestiture of the
Centronics printer business and the merger of the Sperry disk operations into
Magnetic Peripherals, Inc.
JOHN M. STEEL is a co-founder of the Company and has been an officer and a
Director since January 1984. Until January 1984, he was employed by CDC in
numerous positions in marketing and general management, with his latest position
with CDC being General Manager -- OEM Technical Support.
JOSEF J. MATZ joined Zytec in November 1991 as Managing Director -- Zytec GmbH,
the Company's wholly-owned subsidiary located in Austria. From October 1990 to
November 1991, he was Vice President -- European Operations for Modular Computer
Systems, a computer manufacturer. Until accepting this position with Modular
Computer Systems, Mr. Matz had been employed with CDC for approximately 20
years, including positions as General Manager -Marketing and Operations Europe,
and several sales, marketing and operations positions.
JOHN B. ROGERS has been Treasurer and Vice President -- Finance of the Company
since January 1986. He held prior positions as Chief Financial Officer of Wagner
Spray Tech, Vice President -- Administration of Bachman's, Inc., and Director of
Finance of Dayton-Hudson Corporation.
N. CHARLES WUSSOW joined Zytec in March 1993 as Vice President --
Engineering. In 1978, he co-founded Summit Electronics, Inc. ("Summit"), a
power supply company. In 1982, Summit was sold to Basler Electric Company and
Mr. Wussow remained as General Manager of Basler's Electronic Product Group
until his employment with Zytec.
MAX DAVIS has been Vice President -- Manufacturing since April 1995. From July
1991 to April 1995, he was a Senior Partner for Thomas Group, Inc., a management
consulting firm. Mr. Davis served as Vice President Manufacturing for Outbound
Systems, Inc. from January 1990 to July 1991, and as Vice President
Manufacturing for Loredan Biomedical from September 1988 to November 1989. For
19 years prior to 1988, Mr. Davis was employed in various manufacturing
management positions with Hewlett-Packard, most recently as Manufacturing
Manager, Terminals and Personal Computers, in Roseville, California.
SHERMAN WINTHROP has been Secretary since January 1984 and a Director since
November 1984. He has been a principal in the law firm of Winthrop & Weinstine,
P.A., since 1979. Winthrop & Weinstine, P.A. has been counsel to the Company
since Zytec's formation in 1983. See "Legal Matters." Mr. Winthrop is also a
director of Bremer Financial Corporation, a regional multi-bank holding company.
LAWRENCE J. MATTHEWS is a co-founder of the Company, has been a Director since
January 1984, and was Vice President -- Engineering of the Company from January
1984 until his retirement in May 1993. Until January 1984, he was employed by
CDC in engineering design and management and operations management.
GARY C. FLACK has been a Director of the Company since April 1988 and an
associate in Thomas Group, Inc., a management consulting firm, since November
1988. He was Vice President -- Manufacturing for the Company from December 1987
to November 1988. Prior to December 1987, he was Vice President and General
Manager of the Interconnect Group of Sheldahl, Inc., which manufactures
electronic materials, flexible circuitry, graphic display systems and engineered
products.
DR. FRED C. LEE has been a Director of the Company since February 1986. He
has been a Professor at Virginia Polytechnic Institute and State University
("VPI") in Blacksburg, Virginia, and Director of the Virginia Power
Electronics Center at VPI since 1977.
JOHN V. TITSWORTH has been a Director of the Company since August 1986. He is
retired Chairman, Board of Managers, at the Rose Hulman Institute of Technology,
a private engineering college, and held that position from 1988 to 1995. From
February 1988 until March 1989, he was Chairman of the Board and Chief Executive
Officer of Priam Corporation, a computer disk memory company in San Jose,
California, and prior to February 1988 he was Executive Vice President and a
member of the Board of Directors of Xerox Corp.
JAMES S. WOMACK has been a Director of the Company since April 1984. He is
Chairman of the Board of Sheldahl, Inc., and was its Chief Executive Officer
until 1991. He is also a Director of General Securities, a mutual fund.
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified or until their earlier
death, resignation or removal from office. The officers of the Company are
appointed by the Board of Directors and hold office until their successors
are chosen and qualified or until their earlier death, resignation, or removal
from office.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 4, 1996, except as
otherwise noted, with respect to the beneficial ownership of the Company's
Common Stock by (i) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (ii) each director
and each executive officer, (iii) each Selling Shareholder, and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING (1)
----------------------- SHARES BEING -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT (2) OFFERED NUMBER PERCENT (3)
- ------------------------ ------ ----------- ------- ------ -----------
<S> <C> <C> <C> <C> <C>
Stein Roe & Farnham Incorporated (3) 509,000 5.7% -- 509,000 4.6%
One South Wacker Drive
Chicago, IL 60606
Ronald D. Schmidt (4)(5) 951,950 10.6 95,200 856,750 7.8
7575 Market Place Drive
Eden Prairie, MN 55344
John M. Steel (5) 870,952 9.7 87,100 783,852 7.1
7575 Market Place Drive
Eden Prairie, MN 55344
Lawrence J. Matthews 896,620 10.0 89,700 806,920 7.3
7601 Fifth Avenue
Richfield, MN 55423
Gary C. Flack (4) 251,250 2.8 -- 251,250 2.3
John B. Rogers (5) 93,804 1.0 -- 93,804 *
Sherman Winthrop 60,000 * -- 60,000 *
James S. Womack 60,000 * -- 60,000 *
Dr. Fred C. Lee 29,000 * -- 29,000 *
Josef J. Matz (6) 156,000 1.7 -- 160,000 1.4
John V. Titsworth 30,000 * -- 30,000 *
N. Charles Wussow (6) 60,000 * -- 60,000 *
Max Davis (6) 20,650 * -- 20,650 *
All executive officers and
directors as a group (12 persons)(7) 3,480,226 38.0% 272,000 3,208,226 28.8%
</TABLE>
*Less than 1%.
(1) Unless otherwise indicated, each person or group has sole voting and
investment power with respect to all outstanding shares. The table includes
shares not outstanding but which may be acquired within 60 days of June 4,
1996 pursuant to the exercise of options to purchase Common Stock.
(2) The percentage calculations are based upon 8,996,472 shares outstanding at
June 4, 1996, and 10,996,472 shares outstanding after the offering,
respectively. The number of shares which may be acquired within 60 days of
June 4, 1996 pursuant to the exercise of options is deemed outstanding for
purposes of computing the percent of class owned by such person.
(3) Reflects information as of December 31, 1995, based on a Schedule 13G, dated
February 12, 1996, filed by such company with the Securities and Exchange
Commission, which indicates that the shareholder has no voting power and
sole dispositive power with respect to said shares.
(4) Includes shares held by a partnership consisting of the individual and
members of his family, as follows: Mr. Schmidt (400,000 shares) and Mr.
Flack (25,650).
(5) Includes shares held by the individual's spouse and children, as follows:
Mr. Schmidt (1,700 shares), Mr. Steel (200,000), Mr. Flack (95,600), and
Mr. Rogers (48,502).
(6) Includes, for each individual named, the following number of shares
subject to non-qualified options or options granted under the Company's
Incentive Stock Option Plans ("ISOPs"): Mr. Matz (80,000), Mr. Wussow
(60,000) and Mr. Davis (20,000).
(7) Includes 160,000 shares subject to non-qualified options or options granted
under the ISOPs.
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement, the
Underwriters named below, for whom Needham & Company, Inc. and Nesbitt Burns
Securities Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholders, and
the Company and the Selling Shareholders agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite their respective
names in the table below. The Underwriting Agreement provides that the
obligations of the Underwriters to pay for and accept delivery of the shares of
Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase and pay for all shares if any shares are
purchased.
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
Needham & Company, Inc.
Nesbitt Burns Securities Inc.
----------
Total 2,272,000
==========
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may allow, a concession not
in excess of $ per share to certain other dealers (who may include the
Underwriters). After the offering to the public, the offering price and other
selling terms may be changed by the Representatives.
The Company has granted the Underwriters a 30-day option to purchase up to an
additional 300,000 shares, solely to cover over-allotments, if any, at the
public offering price per share, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriters as shown in the above table bears to the total shown.
In the Underwriting Agreement, the Company and the Selling Stockholders have
agreed to indemnify the Underwriters against certain liabilities that may be
incurred in connection with this offering, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company's officers and directors and the Selling Stockholders have agreed
that, without the prior written consent of Needham & Company, Inc., they will
not directly or indirectly offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible or exchangeable
therefor for 180 days after the date of this Prospectus; however, beginning on
the thirty first day after the date of this Prospectus, the Representatives have
consented to the sale of up to an aggregate of 25,000 of these shares, provided,
however, such sales are made through Needham & Company, Inc. The Company has
agreed in the Underwriting Agreement not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock, other than the shares of Common
Stock being offered hereby, for a period of 180 days after the date of this
Prospectus without the prior written consent of Needham & Company, Inc.
The representatives have advised the Company that the Underwriters do not intend
to confirm sales to any account over which they exercise discretionary
authority.
The offering of the shares is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject any order for the purchase of shares in whole or in part.
In connection with this offering, the Underwriters may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under Securities and the Exchange Act of 1934, as amended (the
"Exchange Act"). Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of independent market makers and
purchase limited by such prices. Net purchases by a passive market maker on each
day are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified prior period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
The foregoing is a brief summary of the provisions of the Underwriting Agreement
and does not purport to be a complete statement of its terms and conditions. A
copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Common Stock
offered hereby will be passed upon for the Company by Winthrop & Weinstine,
P.A., St. Paul, Minnesota. Sherman Winthrop, a director, officer and shareholder
of the Company, is a principal of Winthrop & Weinstine, P.A., which receives
compensation from the Company for rendering legal services. Certain legal
matters relating to the offering will be passed upon for the Underwriter by
Oppenheimer Wolff & Donnelly, Minneapolis, Minnesota, counsel for the
Underwriter.
EXPERTS
The consolidated financial statements and financial statement schedules of Zytec
Corporation as of December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995 included or incorporated by reference in the
Registration Statement have been included or incorporated herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at Northwestern Atrium Center,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may also be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
This Prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
securities offered hereby. This Prospectus omits certain information contained
in the Registration Statement, to which reference is hereby made for further
information with respect to the Company and the Shares offered hereby. Copies of
the Registration Statement may be inspected without charge at the offices of the
Commission or obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are hereby incorporated by reference in this Prospectus
except as superseded or modified herein: (i) the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995; (ii) the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996; and (iii) the
description of the Company's Common Stock, contained in the Company's Form 8-A
relating to its Common Stock, filed by the Company with the Commission on
September 21, 1993.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the shares offered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person, including a beneficial
owner, to whom this Prospectus is delivered, upon written or oral request of
such person, a copy of any or all documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to the Chief Financial Officer at the Company's
principal executive offices at 7575 Market Place Drive, Eden Prairie, Minnesota
55344, telephone number (612) 941-1100.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1996 F-2
Consolidated Statements of Operations for the three months ended
March 31, 1996 and April 2, 1995 F-3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and April 2, 1995 F-4
Notes to Consolidated Financial Statements F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants F-8
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-9
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-10
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-12
Notes to Consolidated Financial Statements F-13
ZYTEC CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996
-------
<S> <C>
Current assets:
Cash and cash equivalents $ 2
Accounts receivable 34,092
Inventories 31,185
Deferred income taxes 959
Other current assets 2,194
-------
Total current assets 68,432
Property, plant and equipment, net 16,772
Other assets 808
-------
Total assets $86,012
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt and capital lease obligations, current portion $20,874
Accounts payable 24,880
Accrued expenses 8,205
-------
Total current liabilities 53,959
Debt and capital lease obligations, less current portion 6,916
Deferred income taxes 1,012
Other liabilities 575
-------
Total liabilities 62,462
-------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 25,000,000 shares authorized, 8,811,156
shares outstanding at March 31, 1996 11,919
Retained earnings 11,793
Foreign currency translation adjustments (162)
-------
Total stockholders' equity 23,550
-------
Total liabilities and stockholders' equity $86,012
=======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31, APRIL 2,
1996 1995
---------- ----------
Net sales $ 61,087 $ 32,881
Cost of goods sold 53,141 29,233
---------- ----------
Gross profit 7,946 3,648
---------- ----------
Other revenue 353 384
---------- ----------
Operating expenses:
Selling 844 755
General and administrative 1,616 850
Research and development 2,390 2,161
---------- ----------
Total operating expenses 4,850 3,766
---------- ----------
Operating income 3,449 266
Other income (expense):
Interest expense (381) (224)
Other, net (129) 149
---------- ----------
Income before income taxes 2,939 191
Income taxes 831 71
---------- ----------
Net income $ 2,108 $ 120
========== ==========
Net income per share:
Primary $ 0.22 $ 0.01
========== ==========
Fully diluted $ 0.21 $ 0.01
========== ==========
Common and common equivalent shares outstanding:
Primary 9,606,038 9,233,254
========== ==========
Fully diluted 9,812,288 9,248,516
========== ==========
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 31, APRIL 2,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 2,108 $ 120
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 817 610
Changes in operating assets and liabilities (8,691) 3,444
Other (44) (184)
-------- --------
Net cash (used in) provided by operating
activities (5,810) 3,990
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,343) (614)
Cash paid for Zytec Hungary Elektronikai Kft. (839)
Increase in other assets (25)
-------- --------
Net cash used in investing activities (2,207) (614)
-------- --------
Cash flows from financing activities:
Payments of debt and capital lease obligations (2,283) (2,450)
Proceeds from debt and capital lease obligations 1,931 2,152
Proceeds from revolving credit agreement 55,509 23,657
Payments on revolving credit agreement (48,866) (25,979)
Sale of common stock for cash 120 7
Decrease in bank overdrafts 1,534 (511)
-------- --------
Net cash provided by (used in) financing
activities 7,945 (3,124)
-------- --------
Effect of exchange rate changes on cash 72 (252)
-------- --------
Change in cash and cash equivalents $ -- $ --
======== ========
See accompanying notes to unaudited consolidated financial statements.
ZYTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements as of March 31, 1996 and for the periods
ended March 31, 1996 and April 2, 1995, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the results for the indicated
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the accompanying audited
consolidated financial statements and notes thereto.
2. SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31,
1996
--------
(IN THOUSANDS)
<S> <C>
Inventories
Work in process and finished goods $ 8,728
Parts and subassemblies 22,457
--------
$ 31,185
========
Property, plant and equipment:
Land and land improvements $ 76
Building and building improvements 649
Equipment, furniture and leasehold improvements 19,279
Equipment, furniture and leasehold improvements
under capital leases 6,181
--------
26,185
Less accumulated depreciation (12,769)
Less accumulated amortization of equipment and leasehold improvements
under capital leases (2,084)
--------
11,332
Construction in progress and deposits on equipment 5,440
--------
$ 16,772
========
</TABLE>
Accounts payable included bank overdrafts of $2,727,000 at March 31, 1996.
3. SUPPLEMENTAL CASH FLOW DATA:
The following provides supplemental disclosures of cash flow activities for the
three months ended March 31, 1996 and April 2, 1995, respectively:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS
----------------------
MARCH 31, APRIL 2,
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable $(7,644) $ 387
Inventories (7,137) 375
Other current assets (162) 939
Accounts payable 4,977 1,952
Accrued expenses 1,275 (209)
------- ------
$(8,691) $3,444
======= ======
Noncash transactions:
Property and equipment acquired through capital lease
obligations $ 2,920 $ 413
Equipment acquired through issuance of debt 781 --
</TABLE>
4. INCOME TAXES:
The 1996 and 1995 consolidated effective tax rates differ from the federal
statutory tax rate primarily due to state taxes offset by the utilization of the
Austrian subsidiary's net operating loss carryforwards. See further explanation
regarding the Company's effective tax rate in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
5. EMPLOYEE BENEFIT PLANS:
In April 1996, the Company's Board of Directors established a noncontributory
profit-sharing plan covering substantially all employees. The Company may make
semiannual contributions to the plan based on profit performance in relation to
goals to be established by the Board of Directors. The plan will become
effective July 1, 1996.
In April 1996, the Company's Board of Directors established a stock purchase
plan that will allow substantially all employees to purchase, through payroll
deductions, newly issued shares of the Company's common stock. The plan will
become effective July 1, 1996.
6. STOCK SPLIT:
In April 1996, the Company's Board of Directors authorized a two-for-one stock
split in the form of a 100% stock dividend to be distributed on June 3, 1996 to
shareholders of record on May 20, 1996. All per share and number of share data
have been retroactively restated to reflect the stock split, except for the
Consolidated Statements of Stockholders' Equity.
7. DEBT ARRANGEMENTS:
In May 1996, the Company extended its revolving credit arrangement with its bank
through June 30, 1996. This agreement also extended the maximum amount of
borrowings from $14 million to $16 million. On May 30, 1996, the Company entered
into a revolving credit facility with a new bank. The agreement provides up to
$23 million in borrowing through August 1996, and $10 million thereafter, and
expires in May 1999. Credit availability under this facility is subject to a
defined borrowing base that is based on certain percentages of accounts
receivable, inventories and plant and equipment. At the Company's option,
advances from the revolving credit agreement may be made at either a floating
rate which is approximately equal to the bank's prime rate or at a LIBOR rate
which is based on the British Bankers' Association LIBOR setting rate. The
Company must pay a fee of .25% on the unused portion of the revolving credit
balance. The agreement requires the Company to maintain certain leverage,
interest coverage, current and funded debt ratios.
8. ACQUISITION:
In March 1996, the Company completed the acquisition of the outstanding stock of
BHG Tatabanya Alkatrezsgyarto Kft. (now known as Zytec Hungary Elektronikai
Kft.) located in Hungary. The $839,000 purchase price was paid in cash. This
acquisition has been recorded using the purchase method of accounting. This
acquisition is not significant to the Company's consolidated results of
operations and financial position.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Zytec Corporation:
We have audited the accompanying consolidated balance sheets of Zytec
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zytec Corporation
as of December 31, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
February 21, 1996
ZYTEC CORORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
------- -------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2 $ 2
Accounts receivable 26,648 16,315
Inventories 24,201 17,303
Deferred income taxes 932 750
Other current assets 2,082 2,180
------- -------
Total current assets 53,865 36,550
------- -------
Property, plant and equipment, net 11,823 8,621
Other assets 679 304
------- -------
Total assets $66,367 $45,475
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt and capital lease obligations, current portion $13,942 $ 7,280
Accounts payable 18,487 9,988
Accrued expenses 6,979 5,102
------- -------
Total current liabilities 39,408 22,370
------- -------
Debt and capital lease obligations, less current portion 4,050 4,764
Deferred income taxes 1,001 823
Other liabilities 541 405
------- -------
Total liabilities 45,000 28,362
Commitments and contingencies
Stockholders' equity (Common stock, no par value;
25,000,000 shares authorized, 8,687,306 and 8,479,666
shares outstanding at December 31, 1995 and December 31,
1994, respectively) 21,367 17,113
------- -------
Total liabilities and stockholders' equity $66,367 $45,475
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Net sales $ 170,518 $ 128,141 $ 90,614
Cost of goods sold 149,922 109,847 76,622
---------- ---------- ----------
Gross profit 20,596 18,294 13,992
---------- ---------- ----------
Other revenue 1,559 2,462 3,624
---------- ---------- ----------
Operating expenses:
Selling 3,117 2,857 2,456
General and administrative 4,022 3,533 2,853
Research and development 8,587 8,144 6,936
---------- ---------- ----------
Total operating expenses 15,726 14,534 12,245
---------- ---------- ----------
Operating income 6,429 6,222 5,371
Other income (expense):
Interest expense (1,053) (766) (1,173)
Other, net 703 (38) 191
---------- ---------- ----------
Income before income taxes 6,079 5,418 4,389
Income taxes 2,201 2,054 1,718
---------- ---------- ----------
Net income $ 3,878 $ 3,364 $ 2,671
========== ========== ==========
Net income per share:
Primary $ 0.42 $ 0.36 $ 0.37
========== ========== ==========
Fully diluted $ 0.41 $ 0.36 $ 0.35
========== ========== ==========
Common and common equivalent shares outstanding:
Primary 9,267,784 9,323,936 7,298,676
========== ========== ==========
Fully diluted 9,388,880 9,323,936 7,554,586
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED FOREIGN
COMMON STOCK EARNINGS CURRENCY
--------------------- (ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT) ADJUSTMENTS TOTAL
------ ------ -------- ----------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 2,876,027 $ 1,546 $ (228) $(170) $ 1,148
Exercise of stock options 158,736 153 153
Tax benefit realized upon exercise of stock
options 145 145
Proceeds from initial public offering of common
stock (net of offering costs of $1,155) 1,000,000 9,220 9,220
Net income for the year 2,671 2,671
Foreign currency translation adjustments (6) (6)
--------- ------- ------ ----- -------
Balance, December 31, 1993 4,034,763 11,064 2,443 (176) 13,331
Exercise of stock options 205,070 219 219
Tax benefit realized upon exercise of stock
options 173 173
Net income for the year 3,364 3,364
Foreign currency translation adjustments 26 26
--------- ------- ------ ----- -------
Balance, December 31, 1994 4,239,833 11,456 5,807 (150) 17,113
Exercise of stock options 103,820 147 147
Tax benefit realized upon exercise of stock
options 196 196
Net income for the year 3,878 3,878
Foreign currency translation adjustments 33 33
--------- ------- ------ ----- -------
Balance, December 31, 1995 4,343,653 $11,799 $9,685 $(117) $21,367
========= ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income $ 3,878 $ 3,364 $ 2,671
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 2,728 2,172 1,954
Deferred income taxes (4) (108) 177
Changes in operating assets and liabilities (5,872) (11,243) (3,048)
Other 90 124 58
--------- -------- --------
Net cash provided by (used in) operating
activities 820 (5,691) 1,812
--------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (3,035) (3,212) (673)
Increase in other assets (300) -- --
--------- -------- --------
Net cash used in investing activities (3,335) (3,212) (673)
--------- -------- --------
Cash flows from financing activities:
Proceeds from debt and capital lease obligations 6,950 6,500 3,494
Payments of debt and capital lease obligations (8,884) (7,043) (5,503)
Proceeds from revolving credit loan 139,050 71,872 76,087
Payments on revolving credit loan (134,474) (68,493) (79,354)
Increase (decrease) in bank overdrafts (307) 1,442 (1,089)
Exercise of stock options 147 219 161
Tax benefit realized upon exercise of stock
options 196 173 145
Net proceeds from issuance of common stock in
initial public offering -- -- 9,220
--------- -------- --------
Net cash provided by financing activities 2,678 4,670 3,161
--------- -------- --------
Effect of exchange rate changes on cash (163) (36) (31)
--------- -------- --------
Increase (decrease) in cash and cash equivalents -- (4,269) 4,269
Cash and cash equivalents, beginning of year 2 4,271 2
--------- -------- --------
Cash and cash equivalents, end of year $ 2 $ 2 $ 4,271
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ZYTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
Zytec Corporation (the Company) is a designer and manufacturer of custom
electronic power supplies for original equipment manufacturers in the computer
and electronic equipment industries. The Company also provides repair services
for power supplies and repair and materials management services for a
significant customer.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned Austrian subsidiary, Zytec GmbH.
All intercompany accounts and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION: The financial position and results of operations
of the Company's international subsidiary are measured using the local currency
as the functional currency. Assets and liabilities of this subsidiary are
translated at the exchange rates in effect at each fiscal year-end. Statement of
Operations accounts are translated at the average rates of exchange prevailing
during the year. Translation adjustments arising from the use of differing
exchange rates from period to period are included in the foreign currency
translation adjustments account in stockholders' equity.
FOREIGN CURRENCY OPTIONS AND FORWARD CONTRACTS: The Company utilizes hedging
financial instruments (foreign currency option and forward contracts) from time
to time to limit the financial risk of foreign currency exchange rates primarily
related to certain receivables. The Company does not use hedging instruments of
a speculative nature for trading purposes. Realized and unrealized gains and
losses are deferred and recognized as part of the specific transaction being
hedged. The Company had foreign currency option and forward contracts with a
face amount of $5.0 million and $1.0 million at December 31, 1995 and December
31, 1994, respectively. The unrealized losses on the contracts were not
significant.
CASH AND CASH EQUIVALENTS: The Company considers its investments in all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Depreciation and amortization are computed on the straight-line method
over the estimated useful lives of the assets or the lease terms, if shorter.
Maintenance and repairs are charged to expense as incurred. The cost and related
accumulated depreciation on asset disposals are removed from the accounts and
any gain or loss thereon is included in operations in the year of disposition.
INCOME TAXES: Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of differences in the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
provided, when necessary, to reduce defferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change in deferred income tax assets and liabilities during the period.
REVENUE RECOGNITION: Sales are recorded as products are shipped or services are
rendered. The Company enters into agreements with certain customers whereby the
customers fund a portion of research and development expenses relating to the
designing of particular products. This funding is recognized as Other revenue in
the Consolidated Statements of Operations in the periods the Company incurs the
related costs and has agreed with the customer as to the amount.
The Company functions as a buying agent for certain materials and supplies for a
significant customer. Because the customer reimburses the Company for all actual
costs and bears all risk of loss under this arrangement, the costs for these
materials and supplies are presented net of the related reimbursements in the
Consolidated Statements of Operations. Revenues for the services the Company
provides as a buying agent and the related costs are included in Net sales and
Cost of goods sold, respectively, in the Consolidated Statements of Operations.
PRODUCT WARRANTY: The Company records estimated product warranty costs in the
period in which the related sales are recognized.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES: Net income per common and
common equivalent shares has been computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding for
the period, using the modified treasury stock method. Common equivalent shares
relate to stock options. For 1995 and 1993, fully diluted earnings per share
reflects the additional dilution related to stock options because the market
price at the end of the period was higher than the average market price during
the period.
Shares sold and stock options issued within twelve months prior to the date of
the initial public offering for a per share price less than the initial public
offering price are included in the calculation of net income per share under
Securities and Exchange Commission rules as if they had been outstanding for the
entire period prior to the initial public offering, using the modified treasury
stock method.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, allowance for inventory obsolescence, and valuation
allowance for deferred taxes.
STOCK SPLIT: In April 1996, the Company's Board of Directors authorized a
two-for-one stock split in the form of a 100% stock dividend to be distributed
on June 3, 1996 to shareholders of record on May 20, 1996. All per share and
number of share data have been retroactively restated to reflect the stock
split, except for the Consolidated Statements of Stockholders' Equity.
NOTE 2 -- SELECTED BALANCE SHEET DATA:
1995 1994
-------- -------
(IN THOUSANDS)
Inventories:
Work in process and finished goods $ 7,392 $ 4,770
Parts and subassemblies 16,809 12,533
-------- -------
$ 24,201 $17,303
======== =======
Property, plant and equipment, net:
Land and land improvements $ 76 $ 76
Building and building improvements 637 612
Equipment, furniture and leasehold
improvements 18,493 14,462
Equipment, furniture and leasehold
improvements under capital leases 5,228 4,205
-------- -------
24,434 19,355
Less accumulated depreciation (12,176) (9,370)
Less accumulated amortization (1,970) (1,889)
10,288 8,096
Construction in progress and deposits
on equipment 1,535 525
-------- -------
$ 11,823 $ 8,621
======== =======
Accrued expenses:
Vacation $ 2,160 $ 1,938
Other 4,819 3,164
-------- -------
$ 6,979 $ 5,102
======== =======
Accounts payable included bank overdrafts of $1,148,000 and $1,442,000 at
December 31, 1995 and 1994, respectively.
NOTE 3 -- SUPPLEMENTAL CASH FLOW DATA:
The following provides supplemental disclosures of cash flow activities for the
years ended December 31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1995 1994 1993
- ------------------------------------------------ ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable $(9,839) $ (5,835) $(2,979)
Inventories (6,499) (7,820) (1,408)
Other current assets 244 (1,036) (496)
Accounts payable 8,472 2,032 2,129
Accrued expenses 1,750 1,416 (294)
------- -------- -------
$(5,872) $(11,243) $(3,048)
======= ======== =======
</TABLE>
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Cash paid during the year for:
Interest $1,054 $ 787 $1,199
Income taxes 1,202 2,120 1,596
Noncash transactions:
Property and equipment acquired through
capital lease obligations 2,377 331 288
Equipment acquired through issuance of debt 372 -- 625
NOTE 4 -- DEBT ARRANGEMENTS:
Debt consisted of the following at December 31:
1995 1994
-------- -------
(IN THOUSANDS)
Capital lease obligations (Note 5) $ 2,787 $ 1,478
Variable rate demand industrial development revenue
bonds due 2002 (A) 1,140 1,300
Revolving credit and term loan due April 1996 (B) 7,273 2,883
Revolving credit loan due March 1996 (C) 3,461 3,177
Notes payable due 1996 (D) 2,156 2,033
Loan payable to bank due 2002 (E) 995 --
Loan payable to bank -- 912
Other 180 261
-------- -------
17,992 12,044
Less current portion (13,942) (7,280)
-------- -------
$ 4,050 $ 4,764
======== =======
(A) The interest rate is established weekly according to market conditions such
that the market value of the bonds will remain equal to their principal
value; the maximum interest rate payable under the bonds is 10%. The
interest rate at December 31, 1995, was 5.85%. The agreement requires a bank
letter of credit to be maintained in an amount approximately equal to the
outstanding principal balance of the bonds. The letter of credit is
collateralized by accounts receivable, inventories and certain property,
plant and equipment.
(B) The revolving credit agreement provides up to a maximum of $10,000,000 of
borrowings, subject to a defined borrowing base that is based on certain
percentages of accounts receivable and inventories. At the Company's option,
advances from the revolving credit agreement may be made at either a
floating rate equal to the bank's prime rate or at a LIBOR rate which is
equal to the British Bankers' Association LIBOR setting rate. The bank's
prime rate at December 31, 1995, was 8.5%. The Company must pay a fee of
.25% on the unused portion of the revolving credit balance. The debt is
collateralized by domestic accounts receivable, inventories and certain
property, plant and equipment. The agreement requires the Company to
maintain certain debt coverage, debt to worth and current ratios. In January
1996, the maximum amount of borrowings available to the Company was
increased to $14,000,000.
(C) Zytec GmbH has a revolving credit loan with a bank for financing export
sales. The agreement is renewable quarterly and, as of December 31, 1995,
extends through March 31, 1996, with an interest rate of 4.5%. The Company
had borrowed the maximum amounts of $3,461,000 and $3,156,000 at December
31, 1995 and 1994, respectively. These borrowings are collateralized by
export receivables. Zytec GmbH also has a line of credit agreement which
provides $494,000 of overdraft financing at an interest rate of 9.25% and
$1,483,000 of notes at a floating interest rate which was 5.125% at December
31, 1995. The agreement extends through March 31, 1996. At December 31,
1995, no amounts were outstanding. At December 31, 1994, the Company had an
outstanding balance of $21,000.
(D) Notes payable include various notes which mature from January to April 1996.
The interest rate was 5.125% at December 31, 1995. The notes are
collateralized by accounts receivable of Zytec GmbH totaling $3,241,000 and
$2,415,000 at December 31, 1995 and 1994, respectively, which exclude the
export receivables collateralized in (C) above.
(E) Interest is payable at a rate of 3.5% from January 1, 1995 to December 31,
1996 and then changes to 5% for the remaining life of the loan. The loan is
guaranteed by the Austrian government and is collateralized by certain
property, plant and equipment. As part of the agreement, the Company is
obligated to make capital contributions to Zytec GmbH up to a limit of
$2,966,000, if its cumulative cash flow as defined in the loan agreement
becomes negative. Cumulative cash flow was $2,793,000 at December 31, 1995;
therefore, no capital contribution is required at December 31, 1995.
The aggregate amount of maturities of long-term debt, excluding capital lease
obligations, is as follows at December 31, 1995:
AMOUNT
---------
(IN THOUSANDS)
1996 $12,949
1997 557
1998 376
1999 331
2000 331
Thereafter 661
-------
$15,205
=======
In January 1996, the Company entered into a $1,200,000 construction and term
loan agreement with a bank to finance the expansion of a building. Upon the
completion date of the building expansion, the loan will be payable in equal
monthly installments over seven years at which time the remaining principal
balance is due. The interest rate on the loan will be 2.25% in excess of the
current yield on United States Government Treasury Securities with constant
maturities of five years.
The fair value of the debt based upon discounted cash flow analysis approximates
its carrying value at December 31, 1995.
NOTE 5 -- LEASE OBLIGATIONS:
Equipment under capital leases includes certain production and office equipment.
The Company also leases production facilities, warehouses, office buildings and
various equipment under operating leases.
Related to certain capital lease agreements, the Company was contingently liable
under irrevocable letters of credit for $1,200,000 and $1,367,000 at December
31, 1995 and December 31, 1994, respectively.
Minimum annual rental commitments as of December 31, 1995, are as follows:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
1996 $1,209 $1,892
1997 910 1,627
1998 594 1,063
1999 392 735
2000 104 562
Thereafter 43 442
------ ------
$3,252 $6,321
Less amount representing interest (465)
------
Present value of net minimum lease payments $2,787
======
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$2,323,000, $1,638,000, and $1,070,000, respectively. Future minimum rental
income under subleases related to operating leases is $785,000.
Subsequent to December 31, 1995, the Company entered into approximately
$3,600,000 in capital lease obligations and an operating lease for production
facilities in Colorado which will result in additional annual rent expense of
approximately $329,000 for 10 years.
NOTE 6 -- INCOME TAXES:
Income tax expense (benefit) consisted of the following:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Current:
Federal $1,906 $1,765 $1,380
State 299 397 161
Deferred (4) (108) 177
------ ------ ------
$2,201 $2,054 $1,718
====== ====== ======
The components of domestic deferred income taxes as of December 31, are as
follows:
1995 1994
------ ----
(IN THOUSANDS)
Current deferred tax asset:
Inventories $ 235 $165
Other accruals, primarily vacation 697 585
------ ----
$ 932 $750
====== ====
Net noncurrent deferred tax liability:
Depreciation $1,002 $825
Other, net (1) (2)
------ ----
$1,001 $823
====== ====
At December 31, 1995, the Company's Austrian subsidiary has accumulated
approximately $8,500,000 of operating loss carryforwards for income tax purposes
(representing approximately $2,900,000 of tax benefits at the statutory rate).
These carryforwards are only available to offset future taxable income of the
subsidiary until their expiration, occurring primarily in 1998 and 1999. A
valuation allowance has been established for the entire tax benefit associated
with the Austrian subsidiary's operating loss carryforwards due to uncertainty
regarding whether future taxable income will be sufficient to realize the
operating loss carryforwards before they expire.
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to income before income tax expense is as
follows:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Income before income tax expense:
Domestic $5,119 $5,194 $4,346
Foreign 960 224 43
------ ------ ------
$6,079 $5,418 $4,389
====== ====== ======
Computed income tax expense at federal
statutory rate $2,067 $1,842 $1,536
Increase (reduction) resulting from:
State taxes, net of federal tax effect 196 236 115
Utilization of subsidiary operating
loss carryforwards (326) (76) (15)
Other 264 52 82
------ ------ ------
Income tax expense $2,201 $2,054 $1,718
====== ====== ======
NOTE 7 -- STOCK OPTION PLANS AND WARRANTS:
The Company has several qualified incentive stock option plans under which a
total of 4,000,000 shares of its common stock have been reserved for the
granting of options to employees. Options can be granted under these plans until
January 2000.
Participants in the plans will be granted options at the fair value of the stock
at the date of the grant. The options expire six years from the date of the
grant or three months after termination of employment, if earlier. In the case
of termination of employment due to death or disability, the options expire six
years after grant or twelve months after termination of employment, if earlier.
Twenty percent of the total number of options become exercisable at each
anniversary date of the granting of the options. As of December 31, 1995,
573,510 shares were available for grant under the plans.
Incentive stock option transactions during 1995, 1994 and 1993 were as follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
--------- -----------
Balance, December 31, 1992 1,587,630 $ .50-$1.00
Granted 503,800 1.00- 5.19
Exercised (311,182) .50- .75
Cancelled (348,882) .50- 1.50
--------- -----------
Balance, December 31, 1993 1,431,366 .50- 5.19
Granted 228,000 4.25- 4.75
Exercised (386,454) .50- 1.50
Cancelled (71,800) .50- 5.19
--------- -----------
Balance, December 31, 1994 1,201,112 .50- 5.19
Granted 495,000 3.00- 4.81
Exercised (197,640) .50- 1.50
Cancelled (76,760) .50- 5.19
--------- -----------
Balance, December 31, 1995 1,421,712 .50- 5.19
--------- -----------
Options exercisable at December 31, 1995 339,952 $ .50-$5.19
========= ===========
The Company has also granted nonqualified stock options to employees and outside
directors. The terms and conditions of these options are the same as those
provided under the Company's incentive stock option plans. As of December 31,
1995, 70,000 options exercisable at $.50 per share were outstanding, all of
which were exercisable.
As a part of the Company's initial public offering, the Company issued warrants
to the underwriters for the purchase of 124,000 shares of common stock. These
warrants have an exercise price of $6.23 per share and are exercisable through
November 1998.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stockbased compensation plans. The Company is not required to
adopt the new standard until 1996. The Company will continue to measure
compensation cost for its stock option plans using the intrinsic value based
method of accounting it has historically used and, therefore, the new standard
will have no effect on the Company's operating results. The Company's financial
statement disclosures will be expanded in 1996, as required, to include pro
forma disclosures as if the fair value based method of accounting had been
followed.
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution 401(k) plan covering substantially all
domestic employees. Contributions to the plan by the Company are based on
employee contributions to the plan. Costs charged to operations were $370,000,
$350,000, and $219,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
During 1991, the Company established an Employee Stock Ownership Plan (ESOP) for
the benefit of its domestic employees. The amount contributed by the Company to
the ESOP is determined annually by the Board of Directors. No contribution was
authorized for 1995, 1994 or 1993. The ESOP has purchased no shares of the
Company's common stock and has no effect on the Company's financial statements.
Substantially all of the employees of Zytec GmbH are entitled to benefit
payments under a severance plan. The benefit payments are based primarily on the
employees' salaries and the number of years of service and are paid upon the
employees' voluntary retirement. At December 31, 1995, and 1994, the Company had
recorded a liability of $541,000 and $405,000, respectively, related to this
severance plan. The Company recorded $124,000, $104,000 and $136,000 in
severance expense during 1995, 1994 and 1993, respectively.
NOTE 9 -- TRANSACTIONS WITH SIGNIFICANT CUSTOMERS AND SUPPLIERS:
A portion of the Company's sales has been derived from significant customers in
1995, 1994 and 1993 as follows:
1995 1994 1993
---- ---- ----
Customer 1 17% 11% 7%
Customer 2 16 9 8
Customer 3 15 29 36
Customer 4 12 12 12
-- -- --
60% 61% 63%
== == ==
The Company's major customers operate in the electronics industry. As a result,
the Company has a concentration of trade receivables in this broad industrial
segment.
The Company sells its manufactured products to original equipment manufacturers
in accordance with agreements specific to certain manufacturer product programs.
The Company's continued sales to these customers is often dependent upon the
continuance of the customers' product programs. The Company's ten largest
customers accounted for approximately 85%, 86% and 89% of net sales in 1995,
1994 and 1993, respectively.
Because of the custom nature of the Company's manufactured products and
quality-driven reasons, the Company currently limits the number of suppliers of
individual components used in the manufacture of products. Although there are a
limited number of manufacturers of certain components, management believes that
other suppliers could provide similar components on comparable terms. A change
in suppliers, however, could cause a delay in manufacturing and a possible loss
of sales, which could affect operating results adversely.
NOTE 10 -- GEOGRAPHIC REPORTING:
The following presents information about the operations in the United States and
Europe for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
Net sales:
Domestic $125,394 $ 93,337 $64,404
Foreign 45,124 34,804 26,210
-------- -------- -------
$170,518 $128,141 $90,614
======== ======== =======
Operating income:
Domestic $ 5,627 $ 5,600 $ 5,003
Foreign 802 622 368
-------- -------- -------
$ 6,429 $ 6,222 $ 5,371
======== ======== =======
Identifiable assets:
Domestic $ 53,558 $ 33,815 $24,881
Foreign 16,678 14,030 9,068
Eliminations (3,869) (2,370) (1,082)
-------- -------- -------
$ 66,367 $ 45,475 $32,867
======== ======== =======
Identifiable assets are all assets, including corporate assets, identified with
operations in each geographic area. Loans between the geographic areas and the
investment in the wholly-owned subsidiary have been excluded.
Foreign currency transaction gains (losses) were $202,000, ($229,000), and
$162,000 in 1995, 1994 and 1993, respectively.
In February 1996, the Company agreed to acquire the outstanding stock of BHG
Tatabanya Alkatreszgyarto Kft. (BHG) located in Hungary. In March 1996, the
transaction will be effective after payment of the purchase price which is
approximately $845,000. The purchase price will be financed by a loan, interest
on which is subsidized by the Austrian government, such that the interest rate
is approximately 5%. BHG manufactures magnetics which are used by the Company in
manufacturing power supplies. The transaction will be recorded using the
purchase method of accounting.
[Photo of Malcolm Baldrige National Quality Award]
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR
INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS
PROSPECTUS RELATES, OR AN OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN OR INCORPORATED HEREIN BY REFERENCE IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OF THE DATE OF THE REPORT
FROM WHICH IT IS INCORPORATED OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 9
Recent Developments 9
Price Range of Common Stock 10
Dividend Policy 10
Capitalization 11
Selected Consolidated Financial Data 12
Management's Discussion and
Analysis of Financial Condition and Results
of Operations 13
Business 19
Management 30
Principal and Selling Shareholders 32
Underwriting 33
Legal Matters 34
Experts 34
Available Information 34
Incorporation of Certain Documents
by Reference 35
Index to Consolidated Financial Statements F-1
2,272,000 Shares
[ZYTEC LOGO]
Common Stock
------------------
PROSPECTUS
------------------
Needham & Company, Inc.
Nesbitt Burns Securities Inc.
------------------
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the shares of Common Stock offered hereby:
SEC registration fee $ 17,738
NASD filing fee 5,644
Nasdaq listing fee 17,500
Legal fees and expenses 60,000
Accounting fees and expenses 50,000
Blue Sky fees and expenses 7,500
Printing expenses 50,000
Transfer agent fees and expenses 2,500
Miscellaneous 64,118
--------
TOTAL $275,000
========
Each amount set forth above, except the SEC registration fee, NASD filing fee
and Nasdaq listing fee, is estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes provides that unless prohibited or
limited by a corporation's articles of incorporation or bylaws, the Company must
indemnify its current and former officers, directors, employees and agents
against expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement and which were incurred in connection with actions,
suits, or proceedings in which such persons are parties by reason of the fact
that they are or were an officer, director, employee or agent of the
corporation, if they (i) have not been indemnified by another organization, (ii)
acted in good faith, (iii) received no improper personal benefit, (iv) in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful, and (v) reasonably believed that the conduct was in the best
interests of the corporation. Section 302A.521 also permits a corporation to
purchase and maintain insurance on behalf of its officers, directors, employees
and agents against any liability which may be asserted against, or incurred by,
such persons in their capacities as officers, directors, employees and agents of
the corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.
Article VI of the Bylaws of the Company provides that current and former
officers, directors, employees and agents of the Company and other persons shall
have the rights to indemnification provided by Section 302A.521 of the Minnesota
Statutes.
Section 7 of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides certain indemnification rights to officers and
directors of the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this Registration Statement on Form
S-3:
EXHIBIT
NO. DESCRIPTION
1.1 Form of Underwriting Agreement
5.1 Opinion of Winthrop & Weinstine, P.A.
23.1 Consent of Winthrop & Weinstine, P.A. (included in Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
24.1 Powers of Attorney (included in signature page on page II-3).
99.1 Credit Agreement dated as of May 30, 1996, among Zytec Corporation,
the Lenders named therein, and Harris Trust and Savings Bank,
Individually and as Agent.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, were applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Eden Prairie, State of Minnesota, on June 6, 1996.
Zytec Corporation
By /S/ RONALD D. SCHMIDT
Ronald D. Schmidt
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Ronald
D. Schmidt and John B. Rogers, or either of them, such person's true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution
for such person and in such person's name, place and stead, in any and all
capacities, to sign the Registration Statement on Form S-3 of Zytec Corporation
and any or all amendments (including post-effective amendments) to the
Registration Statement, and to file the same, with all exhibits hereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ RONALD D. SCHMIDT Chairman of the Board, President
Ronald D. Schmidt and Chief Executive Officer
(Principal Executive Officer) June 6, 1996
/S/ JOHN B. ROGERS Chief Financial Officer (Principal
John B. Rogers Financial and Accounting Officer) June 6, 1996
/S/ JOHN M. STEEL Vice President, Marketing and Sales
John M. Steel and Director June 6, 1996
/S/ JOSEF J. MATZ Managing Director of Zytec GmbH
Josef J. Matz and Director June 6, 1996
/S/ SHERMAN WINTHROP Secretary and Director June 6, 1996
Sherman Winthrop
/S/ LAWRENCE J. MATTHEWS Director June 6, 1996
Lawrence J. Matthews
/S/ GARY C. FLACK Director June 6, 1996
Gary C. Flack
/S/ DR. FRED C. LEE Director June 6, 1996
Dr. Fred C. Lee
/S/ JOHN V. TITSWORTH Director June 6, 1996
John V. Titsworth
/S/ JAMES S. WOMACK Director June 6, 1996
James S. Womack
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C> <C>
1.1 Form of Underwriting Agreement electronically
5.1 Opinion of Winthrop & Weinstine, P.A. electronically
23.1 Consent of Winthrop & Weinstine, P.A. (included in Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants electronically
24.1 Powers of Attorney (included in signature page on page II-3).
99.1 Credit Agreement dated as of May 30, 1996, among Zytec Corporation,
the Lenders named therein, and Harris Trust and Savings Bank,
Individually and as Agent electronically
</TABLE>
DRAFT OF 6/6/96
2,272,000 Shares*
ZYTEC CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
NEEDHAM & COMPANY, INC.
NESBITT BURNS SECURITIES INC.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Zytec Corporation, a Minnesota corporation (the "Company"), proposes to
issue and sell 2,000,000 shares (the "Company Firm Shares") of the Company's
Common Stock, no par value per share (the "Common Stock"), and the stockholders
of the Company named in Schedule II hereto (the "Selling Stockholders") propose
to sell an aggregate of 272,000 shares (the "Selling Stockholder Firm Shares")
of Common Stock, in each case to you and to the several other Underwriters named
in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting
as representatives (the "Representatives"). The Company has also agreed to grant
to you and the other Underwriters an option (the "Option") to purchase up to an
additional 300,000 shares of Common Stock, on the terms and for the purposes set
forth in Section 1(b) (the "Option Shares"). The Company Firm Shares and the
Selling Stockholder Firm Shares are referred to collectively herein as the "Firm
Shares," and the Firm Shares and the Option Shares are referred to collectively
herein as the "Shares."
The Company and each of the Selling Stockholders confirm as follows
their respective agreements with the Representatives and the several other
Underwriters.
1. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the representations, warranties and agreements of
the Company and the Selling Stockholders herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company agrees to issue and sell
the Company Firm Shares to the several Underwriters, (ii) each Selling
Stockholder, severally and not jointly, agrees to sell to the several
Underwriters the respective number of Selling Stockholder Firm Shares set forth
opposite that Selling Stockholders's name on Schedule II hereto and (iii) each
of the Underwriters, severally and not jointly, agrees to purchase from the
Company and the Selling Stockholders the respective number of Firm Shares set
forth opposite that Underwriter's name in Schedule I hereto, at the purchase
price of $____ for each Firm Share. The number of Firm Shares to be purchased by
each Underwriter from the Company and each Selling Stockholder shall be as
nearly as practicable in the same proportion to the
- --------
* Plus an option to purchase up to an additional 300,000 shares to cover
over-allotments.
PG 1
total number of Firm Shares being sold by the Company and each Selling
Stockholder as the number of Firm Shares being purchased by each Underwriter
bears to the total number of Firm Shares to be sold hereunder.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to the maximum number of Option Shares at the same price per
share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company no later than 12:00 noon, New York City time, at
least two and no more than five business days before the date specified for
closing in the Option Shares Notice (the "Option Closing Date"), setting forth
the aggregate number of Option Shares to be purchased and the time and date for
such purchase. On the Option Closing Date, the Company will issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks or by wire transfers payable
in same-day funds to the order of the Company for the Company Firm Shares to be
sold by it and to [Norwest Bank Minnesota, National Association], as custodian
for the Selling Stockholders (the "Custodian") for the Firm Shares to be sold by
the Selling Stockholders at the office of Needham & Company, Inc., 445 Park
Avenue, New York, New York 10022, at 10:00 a.m., New York City time, on the
third (or, if the purchase price set forth in Section 1(b) hereof is determined
after 4:30 p.m., Washington D.C. time, the fourth) business day following the
commencement of the offering contemplated by this Agreement, or at such time on
such other date, not later than seven business days after the date of this
Agreement, as may be agreed upon by the Company and the Representatives (such
date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall
be registered in such names and in such denominations as the Representatives
shall request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay and
save each Underwriter and any subsequent holder of the Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to such Underwriter of the Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents, warrants and covenants to each Underwriter that:
(a) The Company meets the requirements for use of Form S-3, and a
registration statement (Registration No. 333-___) on Form S-3 relating to the
Shares, including a preliminary prospectus and such amendments to such
registration statement as may have been required to the date of this Agreement,
has been
PG 2
prepared by the Company under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (collectively referred to as
the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The term
"preliminary prospectus" as used herein means a preliminary prospectus,
including the documents incorporated by reference therein, as contemplated by
Rule 430 or Rule 430A of the Rules and Regulations included at any time as part
of the registration statement. Copies of such registration statement and
amendments and of each related preliminary prospectus have been delivered to the
Representatives. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of final
prospectus, necessary to permit such registration statement to become effective
will be filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the Rules
and Regulations will be filed promptly by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations. The term "Registration
Statement" means the registration statement as amended at the time it becomes or
became effective (the "Effective Date"), including all documents incorporated by
reference therein, financial statements and all exhibits and any information
deemed to be included by Rule 430A and includes any registration statement
relating to the offering contemplated by this Agreement and filed pursuant to
Rule 462(b) of the Rules and Regulations. The term "Prospectus" means the
prospectus, including the documents incorporated by reference therein, as first
filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations
or, if no such filing is required, the form of final prospectus, including the
documents incorporated by reference therein, included in the Registration
Statement at the Effective Date. Any reference herein to the terms "amend,"
"amendment" or "supplement" with respect to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the filing of any document under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), after the Effective Date, the date of any preliminary
prospectus or the date of the Prospectus, as the case may be, and deemed to be
incorporated therein by reference.
(b) No order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission. On the Effective Date, the date
the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act, the Exchange Act, the rules and regulations under the
Exchange Act (the "Exchange Act Rules and Regulations"), and the Rules and
Regulations and will contain all statements required to be stated therein in
accordance with the Act, the Exchange Act, the Exchange Act Rules and
Regulations, and the Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective, no
part of the Registration Statement, the Prospectus or any such amendment or
supplement did or will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement.
PG 3
(c) The documents that are incorporated by reference in the preliminary
prospectus and the Prospectus or from which information is so incorporated by
reference, when they became or become effective or were or are filed with the
Commission, as the case may be, complied or will comply in all material respects
with the requirements of the Act or the Exchange Act, as applicable, and the
Rules and Regulations or the Exchange Act Rules and Regulations, as applicable;
and any documents so filed and incorporated by reference subsequent to the
Effective Date shall, when they are filed with the Commission, comply in all
material respects with the requirements of the Act or the Exchange Act, as
applicable, and the Rules and Regulations or the Exchange Act Rules and
Regulations, as applicable.
(d) The Company does not own, and at the Closing Date and, if later, the
Option Closing Date, will not own, directly or indirectly, any shares of stock
or any other equity or long-term debt securities of any corporation or have any
equity interest in any corporation, firm, partnership, joint venture,
association or other entity, other than the subsidiaries listed in Exhibit 21 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995
(the "Subsidiaries"). The Company and each of its Subsidiaries is, and at the
Closing Date and, if later, the Option Closing Date, will be, a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. The Company and each of its Subsidiaries has, and
at the Closing Date and, if later, the Option Closing Date, will have, full
power and authority to conduct all the activities conducted by it, to own or
lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and each
of its Subsidiaries is, and at the Closing Date and, if later, the Option
Closing Date, will be, duly licensed or qualified to do business and in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such license or qualification necessary, except to the extent that the
failure to be so qualified or be in good standing would not materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or other) or results of operations. All of the outstanding
shares of capital stock of each Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable, and owned by the Company free and
clear of all claims, liens, charges and encumbrances; there are no securities
outstanding that are convertible into or exercisable or exchangeable for capital
stock of any Subsidiary. The Company is not, and at the Closing Date and, if
later, the Option Closing Date, will not be, engaged in any discussions or a
party to any agreement or understanding, written or oral, regarding the
acquisition of an interest in any corporation, firm, partnership, joint venture,
association or other entity where such discussions, agreements or understandings
would require amendment to the Registration Statement pursuant to applicable
securities laws. Complete and correct copies of the articles of incorporation
and of the by-laws of the Company and each of its Subsidiaries and all
amendments thereto have been delivered to the Representatives, and no changes
therein will be made subsequent to the date hereof and prior to the Closing Date
or, if later, the Option Closing Date.
(e) All of the outstanding shares of capital stock of the Company
(including the Selling Stockholder Firm Shares to be sold by the Selling
Stockholders under this Agreement) have been duly authorized, validly issued and
are fully paid and nonassessable and were issued in compliance with all
applicable state and federal securities laws; the Company Firm Shares and the
Option Shares issued by the Company (if any) have been duly authorized and when
issued and paid for as contemplated herein will be validly issued, fully paid
and nonassessable; no preemptive or similar rights exist with respect to any of
the Shares or the issue and sale thereof. The description of the capital stock
of the Company in the Registration Statement and the Prospectus is, and at the
Closing Date and, if later, the Option Closing Date, will be, complete and
accurate in all respects. Except as set forth in the Prospectus, the Company
does not have outstanding, and at the Closing Date and, if later, the Option
Closing Date, will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible into,
or any contracts or commitments to issue or sell, any shares of capital stock,
or any such warrants, convertible securities or obligations. No further approval
or authority of stockholders or the Board of Directors of the Company will be
required for the transfer and sale of the Selling Stockholder Firm Shares or the
issuance and sale of the Company Firm Shares and the Option Shares as
contemplated herein.
PG 4
(f) The financial statements and schedules included or incorporated by
reference in the Registration Statement or the Prospectus present fairly the
financial condition of the Company and its consolidated Subsidiaries as of the
respective dates thereof and the results of operations and cash flows of the
Company and its consolidated Subsidiaries for the respective periods covered
thereby, all in conformity with generally accepted accounting principles applied
on a consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act, the Exchange Act, the Exchange Act Rules and
Regulations or the Rules and Regulations to be included in the Registration
Statement or the Prospectus. Coopers & Lybrand L.L.P. (the "Accountants"), who
have reported on such financial statements and schedules, are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations. The summary consolidated financial and statistical data included in
the Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and prior to the Closing Date
and, if later, the Option Closing Date, except as set forth in or contemplated
by the Registration Statement and the Prospectus, (i) there has not been and
will not have been any change in the capitalization of the Company (other than
in connection with the exercise of options to purchase the Company's Common
Stock granted pursuant to the Company's stock option plans from the shares
reserved therefor as described in the Registration Statement), or any material
adverse change in the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company or any of its
Subsidiaries, arising for any reason whatsoever, (ii) neither the Company nor
any of its Subsidiaries has incurred nor will any of them incur, except in the
ordinary course of business as described in the Prospectus, any material
liabilities or obligations, direct or contingent, nor has the Company or any of
its Subsidiaries entered into nor will it enter into, except in the ordinary
course of business as described in the Prospectus, any material transactions
other than pursuant to this Agreement and the transactions referred to herein,
and (iii) the Company has not and will not have paid or declared any dividends
or other distributions of any kind on any class of its capital stock, other than
the two-for-one stock split effected as a 100% stock dividend, payable on June
3, 1996.
(h) The Company is not, will not become as a result of the transactions
contemplated hereby, and does not intend to conduct its business in a manner
that would cause it to become, an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company, any of
its Subsidiaries or any of its or their officers in their capacity as such, nor
any basis therefor, before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might materially and
adversely affect the Company, any of its Subsidiaries or the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company or any of its Subsidiaries.
(j) The Company and each Subsidiary has, and at the Closing Date and, if
later, the Option Closing Date, will have, performed all the obligations
required to be performed by it, and is not, and at the Closing Date, and, if
later, the Option Closing Date, will not be, in default, under any contract or
other instrument to which it is a party or by which its property is bound or
affected, which default might reasonably be expected to materially and adversely
affect the Company or the business, properties, business prospects, condition
(financial or other) or results of operations of the Company or any of its
Subsidiaries. To the best knowledge of the Company, no other party under any
contract or other instrument to which it or any of its Subsidiaries is a party
is in default in any respect thereunder, which default might reasonably be
expected to materially and adversely affect the Company, any of its Subsidiaries
or the business, properties, business prospects, condition (financial or other)
or results of operations of the Company or any of its Subsidiaries. Neither the
Company nor any of
PG 5
its Subsidiaries is, and at the Closing Date and, if later, the Option Closing
Date, will not be, in violation of any provision of its articles of
incorporation or by-laws or other organizational documents.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriters of the
Shares.
(l) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with the terms hereof. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the articles of incorporation or by-laws of the Company or any
of its Subsidiaries, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company, any of
its Subsidiaries or any of its or their properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Company or any of its Subsidiaries.
(m) The Company or one of its Subsidiaries has good and marketable title
to all properties and assets described in the Prospectus as owned by it, free
and clear of all liens, charges, encumbrances or restrictions, except such as
are described in the Prospectus or are not material to the business of the
Company or its Subsidiaries. The Company or one of its Subsidiaries has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by them. The Company or one of its Subsidiaries owns or leases all
such properties as are necessary to its operations as now conducted or as
proposed to be conducted, except where the failure to so own or lease would not
materially and adversely affect the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
its Subsidiaries.
(n) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement or to any documents incorporated into the
Registration Statement which is not described or filed as required. All such
contracts to which the Company or any of its Subsidiaries is a party have been
duly authorized, executed and delivered by the Company or such Subsidiary,
constitute valid and binding agreements of the Company or such Subsidiary and
are enforceable against and by the Company or such Subsidiary in accordance with
the terms thereof.
(o) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
Section 6 of this Agreement to be delivered to the Representatives was or will
be, when made, inaccurate, untrue or incorrect.
(p) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action designed, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
PG 6
(q) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, which rights have not been waived by the holder thereof
as of the date hereof.
(r) The Common Stock has been registered pursuant to Section 12(g) of
the Exchange Act and has been listed on the Nasdaq National Market ("NNM") and
the Company has filed an application to list the Shares to be sold by the
Company hereunder on the NNM and has received notification that the listing has
been approved, subject to notice of issuance of such Shares.
(s) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company and its Subsidiaries have sufficient trademarks,
trade names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted, (ii) the Company
has no knowledge of any infringement by it or any of its Subsidiaries of
trademarks, trade name rights, patent rights, copyrights, licenses, trade
secrets or other similar rights of others, where such infringement could have a
material and adverse effect on the Company, any of its Subsidiaries or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries, and (iii) there
is no claim being made against the Company or any of its Subsidiaries or, to the
best of the Company's knowledge, any employee of the Company or any of its
Subsidiaries regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which could have a material and adverse effect on
the Company, any of its Subsidiaries or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company or any of its Subsidiaries.
(t) The Company and each of its Subsidiaries has filed all federal,
state, local and foreign income tax returns which have been required to be filed
and has paid all taxes and assessments received by it to the extent that such
taxes or assessments have become due. Neither the Company nor any of its
Subsidiaries has any tax deficiency which has been or, to the best knowledge of
the Company, might be asserted or threatened against it which could have a
material and adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
its Subsidiaries.
(u) The Company or its Subsidiaries owns or possesses all
authorizations, approvals, orders, licenses, registrations, other certificates
and permits of and from all governmental regulatory officials and bodies,
necessary to conduct their respective businesses as contemplated in the
Prospectus, except where the failure to own or possess all such authorizations,
approvals, orders, licenses, registrations, other certificates and permits would
not materially and adversely affect the Company, any of its Subsidiaries or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries. There is no
proceeding pending or, to the best knowledge of the Company, threatened (or any
basis therefor known to the Company) which may cause any such authorization,
approval, order, license, registration, certificate or permit to be revoked,
withdrawn, cancelled, suspended or not renewed; and the Company and each of its
Subsidiaries is conducting its business in compliance with all laws, rules and
regulations applicable thereto (including, without limitation, all applicable
federal, state and local environmental laws and regulations), except where such
noncompliance would not materially and adversely affect the Company or any of
its Subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company or any of its
Subsidiaries.
(v) The Company and each of its Subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for its business, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company and its Subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(w) Neither the Company nor any of its Subsidiaries nor, to the best of
the Company's knowledge, any of its or their respective employees or agents has
at any time during the last five years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or
PG 7
(ii) made any payment to any federal or state governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to records is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) Other than as contemplated by this Agreement, the Company has not
incurred any liability for any finder's or broker's fee or agent's commission in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby.
(z) Other than as permitted by the Act and the Rules and Regulations,
neither the Company nor any of its directors, officers or controlling persons
have distributed and will not distribute any preliminary prospectus, the
Prospectus or any other offering material in connection with the offering and
sale of the Shares.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(a) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and the
Power-of-Attorney and Custody Agreement hereinafter referred to ( "a
Stockholders' Agreement"), and for the sale and delivery of the Selling
Stockholder Firm Shares to be sold by such Selling Stockholder hereunder, have
been obtained; and such Selling Stockholder has full right, power and authority
to enter into this Agreement and the Stockholders' Agreement, to make the
representations, warranties and agreements hereunder and thereunder, and to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder.
(b) Certificates in negotiable form representing all of the Selling
Stockholder Firm Shares to be sold by such Selling Stockholder have been placed
in custody under the Stockholders' Agreement, in the form heretofore furnished
to you, duly executed and delivered by such Selling Stockholder to the
Custodian, and such Selling Stockholder has duly executed and delivered a
power-of-attorney, in the form heretofore furnished to you and included in the
Stockholders' Agreement (the "Power-of-Attorney"), appointing _________ and
___________, and each of them, as such Selling Stockholder's attorney-in-fact
(the "Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine (subject to the provisions
of the Stockholders' Agreement) the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in Section 2 hereof, to
authorize the delivery of the Selling Stockholder Firm Shares to be sold by such
Selling Stockholder hereunder and otherwise to act on behalf of such Selling
Stockholder in connection with the transactions contemplated by this Agreement
and the Stockholders' Agreement.
(c) Such Selling Stockholder specifically agrees that the Selling
Stockholder Firm Shares represented by the certificates held in custody for such
Selling Stockholder under the Stockholders' Agreement are for the benefit of and
coupled with and subject to the interests of the Underwriters, the Custodian,
the Attorneys-in- Fact, each other Selling Stockholder and the Company, that the
arrangements made by such Selling Stockholder for such custody, and the
appointment by such Selling Stockholder of the Attorneys-in-Fact by the
Power-of- Attorney, are to that extent irrevocable, and that the obligations of
such Selling Stockholder hereunder shall not be terminated by operation of law,
whether by the death, disability, incapacity, liquidation or dissolution of any
Selling Stockholder or by the occurrence of any other event. If any individual
Selling Stockholder or any executor or trustee for a Selling Stockholder should
die or become incapacitated, or if any Selling Stockholder that is an
PG 8
estate or trust should be terminated, or if any Selling Stockholder that is a
partnership or corporation should be dissolved, or if any other such event
should occur, before the delivery of the Selling Stockholder Firm Shares
hereunder, certificates representing the Selling Stockholder Firm Shares shall
be delivered by or on behalf of the Selling Stockholders in accordance with the
terms and conditions of this Agreement and of the Stockholders' Agreement, and
actions taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney shall
be as valid as if such death, incapacity, termination, dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
(d) This Agreement and the Stockholders' Agreement have each been duly
authorized, executed and delivered by such Selling Stockholder and each such
document constitutes a valid and binding obligation of such Selling Stockholder,
enforceable in accordance with its terms.
(e) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the sale of the Selling Stockholder Firm Shares by such Selling
Stockholder or the consummation by such Selling Stockholder of the transactions
on its part contemplated by this Agreement and the Stockholders' Agreement,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares to be sold by such Selling Stockholder.
(f) The sale of the Selling Stockholder Firm Shares to be sold by such
Selling Stockholder hereunder and the performance by such Selling Stockholder of
this Agreement and the Stockholders' Agreement and the consummation of the
transactions contemplated hereby and thereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of such
Selling Stockholder pursuant to the terms or provisions of, or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under, any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to such
Selling Stockholder or, if such Selling Stockholder is a corporation,
partnership or other entity, the organizational documents of such Selling
Stockholder.
(g) Such Selling Stockholder has, and at the Closing Date, will have,
good and marketable title to the Selling Stockholder Firm Shares to be sold by
such Selling Stockholder hereunder, free and clear of all liens, encumbrances,
equities or claims whatsoever; and, upon delivery of such Selling Stockholder
Firm Shares and payment therefor pursuant hereto, good and marketable title to
such Selling Stockholder Firm Shares, free and clear of all liens, encumbrances,
equities or claims whatsoever, will be delivered to the Underwriters.
(h) On the Closing Dates, all stock transfer or other taxes (other than
income taxes) that are required to be paid in connection with the sale and
transfer of the Shares to be sold by such Selling Stockholder to the several
Underwriters hereunder will be have been fully paid or provided for by such
Selling Stockholder and all laws imposing such taxes will have been fully
complied with by such Selling Stockholder.
(i) Other than as permitted by the Act and the Rules and Regulations,
such Selling Stockholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. Such Selling Stockholder
has not taken and will not at any time take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, or which
will constitute, stabilization of the price of shares of Common Stock to
facilitate the sale or resale of any of the Shares.
PG 9
(j) All information with respect to such Selling Stockholder contained
in the Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto complied or will comply in all material respects
with all applicable requirements of the Act and the Rules and Regulations and
does not and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(k) To such Selling Stockholder's knowledge, neither the Registration
Statement nor any amendment thereto, and neither the Prospectus nor any
supplement thereto, contains or will contain, as the case may be, any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that such Selling Stockholder makes no representation or warranty as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Selling Stockholders or
the Company by or on behalf of any Underwriter through the Representatives,
expressly for use in the preparation thereof. Such Selling Stockholder has no
knowledge of any material fact or condition not set forth in the Registration
Statement or the Prospectus that has adversely affected, or may adversely
affect, the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries, and the
sale of the Shares proposed to be sold by such Selling Stockholder is not
prompted by any such knowledge.
(l) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 3 hereof are
not true and correct.
(m) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, such Selling
Stockholder agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
5. AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each of the
Company and the Selling Stockholders respectively covenants and agrees with the
several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 5(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible
PG 10
moment. If the Company has omitted any information from the Registration
Statement pursuant to Rule 430A of the Rules and Regulations, the Company will
comply with the provisions of and make all requisite filings with the Commission
pursuant to said Rule 430A and notify the Representatives promptly of all such
filings.
(c) The Company will furnish to each Representative, without charge, one
signed copy of each of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request. The Company will not file any document under the Exchange Act or the
Exchange Act Rules and Regulations before the termination of the offering of the
Shares by the Underwriters, if such document would be deemed to be incorporated
by reference into the Prospectus, that is not approved by the Representatives
after reasonable notice thereof.
(f) Prior to any public offering of the Shares, the Company will
cooperate with the Representatives and counsel to the Underwriters in connection
with the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) The Company will, so long as required under the Rules and
Regulations, furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flow of the Company and its consolidated
Subsidiaries, if any, certified by independent public accountants) and, as soon
as practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of the
Company and its Subsidiaries, if any, for such quarter in reasonable detail.
(h) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the fifteenth full calendar month following the calendar
PG 11
quarter in which the Effective Date falls, an earnings statement (which need not
be audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company and, unless otherwise
paid by the Company, the Selling Stockholders will pay or reimburse if paid by
the Representatives, in such proportions as they may agree upon themselves, all
costs and expenses incident to the performance of the obligations of the Company
and the Selling Stockholders under this Agreement and in connection with the
transactions contemplated hereby, including but not limited to costs and
expenses of or relating to (i) the preparation, printing and filing of the
Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, the
Stockholders' Agreements, any Underwriters' Powers of Attorney, and any
invitation letters to prospective Underwriters, (iv) furnishing (including costs
of shipping and mailing) such copies of the Registration Statement, the
Prospectus and any preliminary prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the
listing of the Shares on the NNM, (vi) any filings required to be made by the
Underwriters with the NASD, and the fees, disbursements and other charges of
counsel for the Underwriters in connection therewith, (vii) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 5(f), including the
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (viii) fees, disbursements and other
charges of counsel to the Company (but not those of counsel for the
Underwriters, except as otherwise provided herein), and (ix) the transfer agent
for the Shares. The Underwriters may deem the Company to be the primary obligor
with respect to all costs, fees and expenses to be paid by the Company and by
the Selling Stockholders. The Selling Stockholders will pay (directly or by
reimbursement) all fees and expenses incident to the performance of their
obligations under this Agreement that are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of counsel for
such Selling Stockholders, any fees and expenses of the Attorneys-in-Fact and
the Custodian, and all expenses and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Stockholders to the Underwriters
hereunder.
(k) The Company will not at any time, directly or indirectly, take any
action designed or which might reasonably be expected to cause or result in, or
which will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(m) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, without the
prior written consent of Needham & Company, Inc., the Company will not offer,
sell, contract to sell, grant options to purchase or otherwise dispose of any of
the Company's equity securities of the Company or any other securities
convertible into or exchangeable with its Common Stock or other equity security
(other than pursuant to employee stock option plans or the conversion of
convertible securities or the exercise of warrants outstanding on the date of
this Agreement).
(n) During the period of 180 days after the date of the Prospectus, the
Company will not, without the prior written consent of Needham & Company, Inc.,
grant options to purchase shares of Common Stock at a price less than the public
offering price. During the period of 180 days after the date of the Prospectus,
the Company will not file with the Commission or cause to become effective any
registration statement relating to any securities of the Company without the
prior written consent of Needham & Company, Inc.
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(o) The Selling Stockholders will, and the Company will cause each of
its officers, directors and certain stockholders designated by the
Representatives to, enter into lock-up agreements with the Representatives to
the effect that they will not, without the prior written consent of Needham &
Company, Inc., sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the terms set forth
in Schedule III hereto.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities, (iv) after
the date hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to
the Representatives and the Representatives have not objected thereto in good
faith, and (v) the Representatives shall have received certificates, dated the
Closing Date and, if later, the Option Closing Date, signed by the Chief
Executive Officer and the Chief Financial Officer of the Company (who may, as to
proceedings threatened, rely upon the best of their information and belief), to
the effect of clauses (i), (ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company or any of its Subsidiaries, whether or not arising
from transactions in the ordinary course of business, in each case other than as
described in or contemplated by the Registration Statement and the Prospectus,
and (ii) the Company shall not have sustained any material loss or interference
with its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not
described in the Registration Statement and the Prospectus, if in the judgment
of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company, any of its Subsidiaries, or
any of its or their officers or directors in their capacities as such, before or
by any Federal, state or local court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in which
litigation or proceeding an unfavorable ruling, decision or finding would, in
the judgment of the Representatives, materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries.
(e) Each of the representations and warranties of the Company and the
Selling Stockholders contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company or the Selling Stockholders and all
conditions contained herein to be fulfilled or complied
PG 13
with by the Company or the Selling Stockholders at or prior to the Closing Date
and, with respect to the Option Shares, at or prior to the Option Closing Date,
shall have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for the
Underwriters from Winthrop & Weinstine, P.A., counsel to the Company and the
Selling Stockholders, with respect to the following matters (except that the
matters set forth in subparagraphs (xix)-(xxi) need not be addressed in the
opinion delivered at the Option Closing Date, if later than the Closing Date):
(i) Each of the Company and its Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of
its jurisdiction of incorporation; has full corporate power and
authority to conduct all the activities conducted by it, to own or lease
all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and Prospectus; and is duly
licensed or qualified to do business and is in good standing as a
foreign corporation in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or
leased by it makes such license or qualification necessary and where the
failure to be licensed or qualified would have a material and adverse
effect on the business or financial condition of the Company.
(ii) All of the outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares) have been duly
authorized, validly issued and are fully paid and nonassessable, to such
counsel's knowledge, were issued pursuant to exemptions from the
registration and qualification requirements of federal and applicable
state securities laws, and were not issued in violation of or subject to
any preemptive or, to such counsel's knowledge, similar rights;
(iii) The specimen certificate evidencing the Common Stock filed
or incorporated by reference as an exhibit to the Registration Statement
is in due and proper form under Minnesota law, the Shares to be sold by
the Company hereunder have been duly authorized and, when issued and
paid for as contemplated by this Agreement, will be validly issued,
fully paid and nonassessable; and no preemptive or similar rights exist
with respect to any of the Shares or the issue and sale thereof.
(iv) All of the outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable, and owned by the Company free and clear of all
claims, liens, charges and encumbrances; to such counsel's knowledge,
there are no securities outstanding that are convertible into or
exercisable or exchangeable for capital stock of any Subsidiary.
(v) The authorized and outstanding capital stock of the Company
is as set forth in the Registration Statement and the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee benefit plans or the exercise of
convertible securities, options or warrants referred to in the
Prospectus). To such counsel's knowledge, except as disclosed in or
specifically contemplated by the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of capital stock
of the Company or any security convertible into or exchangeable or
exercisable for capital stock of the Company. The description of the
capital stock of the Company in the Registration Statement and the
Prospectus conforms in all material respects to the terms thereof.
(vi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or
any of its Subsidiaries is a party or to which any of their
PG 14
respective properties is subject that are required to be described in
the Registration Statement or the Prospectus but are not so described.
(vii) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company of the transactions on its
part contemplated under this Agreement, except such as have been
obtained or made under the Act or the Rules and Regulations and such as
may be required under state securities or Blue Sky laws or the by-laws
and rules of the NASD in connection with the purchase and distribution
by the Underwriters of the Shares.
(viii) The Company has full corporate power and authority to
enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and
binding agreement of the Company in accordance with its terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency or other laws affecting creditors' rights generally or by
general principles of equity.
(ix) The execution and delivery of this Agreement, the compliance
by the Company with all of the terms hereof and the consummation of the
transactions contemplated hereby does not contravene any provision of
applicable law or the Articles of Incorporation or By-Laws of the
Company or any of its Subsidiaries, and to the best of such counsel's
knowledge will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to
the terms and provisions of, result in a breach or violation of any of
the terms or provisions of, or constitute a default under, or give any
party a right to terminate any of its obligations under, or result in
the acceleration of any obligation under, any indenture, mortgage, deed
of trust, voting trust agreement, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument known to such counsel to which the Company or
any of its Subsidiaries is a party or by which the Company, any of its
Subsidiaries, or any of their respective properties is bound or
affected, or violate or conflict with (i) any judgment, ruling, decree
or order known to such counsel or (ii) any statute, rule or regulation
of any court or other governmental agency or body, applicable to the
business or properties of the Company or any of its Subsidiaries.
(x) To such counsel's knowledge, there is no document or contract
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration
Statement or to any documents incorporated by reference into the
Registration Statement which is not described or filed or incorporated
by reference as required, and each description of such contracts and
documents that is contained in the Registration Statement and Prospectus
fairly presents in all material respects the information required under
the Act and the Rules and Regulations.
(xi) The statements under the captions "Risk Factors --
Fluctuations in Financial Results," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Intellectual Property Matters," and "Description
of Capital Stock" in the Prospectus, insofar as the statements
constitute a summary of documents referred to therein or matters of law,
are accurate summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents and
matters (provided, however, that such counsel may rely on
representations of the Company with respect to the factual matters
contained in such statements, and provided further that such counsel
shall state that nothing has come to the attention of such counsel which
leads them to believe that such representations are not true and correct
in all material respects).
PG 15
(xii) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment
Company Act of 1940, as amended.
(xiii) The Common Stock (including the Selling Stockholder
Shares) are duly listed on the NNM, and the Company Shares have been
duly authorized for listing on the NNM, subject to notice of issuance.
(xiv) To such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived, to require the Company
to register with the Commission shares of Common Stock or other
securities as part of the offering contemplated hereby.
(xv) The Registration Statement has become effective under the
Act, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or is
pending, threatened or contemplated.
(xvi) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirements of the Act and the
Rules and Regulations (other than the financial statements, schedules
and other financial data contained or incorporated by reference in the
Registration Statement or the Prospectus, as to which such counsel need
express no opinion).
(xvii) Such counsel has participated in the preparation of the
Registration Statement and Prospectus and has no reason to believe that,
as of the Effective Date, the Registration Statement, or any amendment
or supplement thereto (other than the financial statements, schedules
and other financial data contained or incorporated by reference therein,
as to which such counsel need express no opinion), contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, or any amendment or
supplement thereto, as of its date and the Closing Date and, if later,
the Option Closing Date, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading (other than the financial
statements, schedules and other financial data contained or incorporated
by reference therein, as to which such counsel need express no opinion).
(xviii) The documents incorporated by reference in the Prospectus
(other than the financial statements, schedules and other financial data
contained therein, as to which such counsel need express no opinion),
when they were filed with the Commission, complied as to form in all
material respects with the requirements of the Exchange Act and the
Exchange Act Rules and Regulations. Neither the Registration Statement
nor any amendment thereto, and neither the Prospectus nor any supplement
thereto, contains or will contain, as the case may be, any untrue
statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(xix) This Agreement and the Stockholders' Agreement have each
been duly executed and delivered by or on behalf of each Selling
Stockholder; the Stockholders' Agreement constitutes a valid and binding
agreement of such Selling Stockholder in accordance with its terms,
except as enforceability may be limited by the application of
bankruptcy, insolvency or other laws affecting creditors' rights
generally or by general principles of equity; the Attorneys-in-Fact and
the Custodian have been duly authorized by such Selling Stockholder to
deliver the Shares on behalf of such Selling Stockholder in accordance
with the terms of this Agreement; and the sale of the
PG 16
Shares to be sold by such Selling Stockholder hereunder, the performance
by such Selling Stockholder of this Agreement and the Stockholders'
Agreement and the consummation of the transactions contemplated hereby
and thereby will not, to the best of such counsel's knowledge, result in
a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any party a right to terminate any
of its obligations under, or result in the acceleration of any
obligation under any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness, lease, contract or other agreement or
instrument to which such Selling Stockholder is a party or by which such
Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute,
rule or regulation of any court or other governmental agency or body
applicable to such Selling Stockholder or, if such Selling Stockholder
is a corporation, partnership or other entity, the organizational
documents of such Selling Stockholder.
(xx) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required for the consummation by the Selling Stockholders of the
transactions on their part contemplated by this Agreement, except such
as have been obtained or made under the Act or the Rules and Regulations
and such as may be required under state securities or Blue Sky laws or
the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares.
(xxi) Each Selling Stockholder has full legal right, power and
authority to enter into this Agreement and the Stockholders' Agreement
and to sell, assign, transfer and deliver the Shares to be sold by such
Selling Stockholder hereunder and, upon payment for such Shares and
assuming that the Underwriters are purchasing such Shares in good faith
and without notice of any other adverse claim within the meaning of the
Uniform Commercial Code, the Underwriters will have acquired all rights
of such Selling Stockholder in such Shares free of any adverse claim,
any lien in favor of the Company and any restrictions on transfer
imposed by the Company.
In rendering the opinions in subparagraphs (xix) - (xxi), such counsel
may rely upon opinions of other counsel retained by the Selling Stockholders
reasonably acceptable to the Representatives and as to matters of fact on
certificates of the Selling Stockholders, officers of the Company and
governmental officials and the representations and warranties of the Company and
the Selling Stockholders contained in this Agreement and the Stockholders'
Agreement, provided that the opinion of counsel to the Company and Selling
Stockholders shall state that they are doing so, that they have no reason to
believe that they and the Underwriters are not entitled to rely on such opinions
or certificates and that copies of such opinions or certificates are to be
attached to the opinion.
In rendering such opinion, such counsel may rely upon as to matters of
local law on opinions of counsel satisfactory in form and substance to the
Representatives and counsel for the Underwriters, provided that the opinion of
counsel to the Company and the Selling Stockholders shall state that they are
doing so, that they have no reason to believe that they and the Underwriters are
not entitled to rely on such opinions and that copies of such opinions are to be
attached to the opinion.
(g) The representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Oppenheimer Wolff & Donnelly,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
(h) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its Subsidiaries as required by the
Act and the Exchange Act and the Rules and
PG 17
Regulations and with respect to certain financial and other statistical and
numerical information contained or incorporated by reference in the Registration
Statement. At the Closing Date and, as to the Option Shares, the Option Closing
Date, the Accountants shall have furnished to the Representatives a letter,
dated the date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the letter from the Accountants,
that nothing has come to their attention during the period from the date of the
letter referred to in the prior sentence to a date (specified in the letter) not
more than five days prior to the Closing Date and the Option Closing Date, as
the case may be, which would require any change in their letter dated the date
hereof if it were required to be dated and delivered at the Closing Date and the
Option Closing Date.
(i) Concurrently with the execution and delivery of this Agreement and
at the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus (including any documents filed
under the Exchange Act and deemed to be incorporated by reference into
the Prospectus) and (A) as of the date of such certificate, such
documents are true and correct in all material respects and do not omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein not untrue or misleading and (B) in
the case of the certificate delivered at the Closing Date and the Option
Closing Date, since the Effective Date no event has occurred as a result
of which it is necessary to amend or supplement the Prospectus in order
to make the statements therein not untrue or misleading.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the
Company herein on or prior to the date of such certificate has been
duly, timely and fully performed and each condition herein required to
be satisfied or fulfilled on or prior to the date of such certificate
has been duly, timely and fully satisfied or fulfilled.
(j) Concurrently with the execution and delivery of this Agreement and
at the Closing Date there shall be furnished to the Representatives a
certificate, dated the date of its delivery, signed by the Selling Stockholders
(or the Attorneys-in-Fact on their behalf), in form and substance satisfactory
to the Representatives, to the effect that the representations and warranties of
the Selling Stockholders contained herein are true and correct in all material
respects on and as of the date of such certificate as if made on and as of the
date of such certificate, and each of the covenants and conditions required
herein to be performed or complied with by the Selling Stockholders on or prior
to the date of such certificate has been duly, timely and fully performed or
complied with by the Selling Stockholders.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 5(o) hereof.
(l) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request, and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly
authorized for listing on the NNM upon official notice of issuance.
PG 18
(n) The Company and the Selling Stockholders shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. INDEMNIFICATION.
(a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted) to which
they, or any of them, may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based on any untrue statement or alleged untrue statement of a material fact
contained or incorporated in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances in which
they were made, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the Selling
Stockholders contained herein or any failure of the Company or the Selling
Stockholders to perform its or their obligations hereunder or under law in
connection with the transactions contemplated hereby; provided, however, that
(i) the Company and the Selling Stockholders will not be liable to the extent
that such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives, on behalf of any
Underwriter, expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus; (ii) the Company and the Selling
Stockholders will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person;
provided however, the Company provides copies of such Prospectus to the
Underwriters on a timely basis; and (iii) the liability of each Selling
Stockholder under this Section 7(a) shall not exceed the product of the purchase
price for each Share set forth in Section 1(a) hereof multiplied by the number
of Shares sold by such Selling Stockholder hereunder. The Company and the
Selling Stockholders acknowledge that the statements set forth under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Representatives on behalf of the Underwriters expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Company and
the Selling Stockholders might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and each Selling
Stockholder to the same extent as the foregoing indemnity from the Company and
each Selling Stockholder to
PG 19
each Underwriter, as set forth in Section 7(a), but only insofar as losses,
claims, liabilities, expenses or damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives, on behalf of such Underwriter,
expressly for use in the Registration Statement, the preliminary prospectus or
the Prospectus. The Company and the Selling Stockholders acknowledge that the
statements set forth under the heading "Underwriting" in the preliminary
prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives on behalf
of the Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 7 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 7 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(iii) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party), or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 7 is applicable
in accordance with its terms but for any reason is held to be unavailable to or
insufficient to hold harmless an indemnified party under paragraphs (a), (b) and
(c) of this Section 7 in respect of any losses, claims, liabilities, expenses
and damages referred to therein, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company or the Selling Stockholders from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who also may be liable for
PG 20
contribution) by such indemnified party as a result of such losses, claims,
liabilities, expenses and damages in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand. The
relative benefits received by the Company and the Selling Stockholders, on the
one hand, and the Underwriters, on the other hand, shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any other
relevant equitable considerations with respect to such offering. Such relative
fault shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 7(d) shall be deemed to
include, for purposes of this Section 7(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts received by it and no person found guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 7(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 7(d), any
person who controls a party to this Agreement within the meaning of the Act will
have the same rights to contribution as that party, and each officer of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against any such party in respect of which a claim for
contribution may be made under this Section 7(d), will notify any such party or
parties from whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have under this Section 7(d). No party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section
7 and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor, or
(iii) any termination of this Agreement.
8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon,
in whole or in part, any statement or omission or alleged statement or omission,
or any inaccuracy in the representations and warranties of the Company or the
Selling Stockholder contained herein or failure of the Company or the Selling
Stockholders to perform its or their respective obligations hereunder or under
law, all as described in Section 7(a), notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 8 and the
PG 21
possibility that such payment might later be held to be improper; provided,
however, that, to the extent any such payment is ultimately held to be improper,
the persons receiving such payments shall promptly refund them.
9. TERMINATION. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company and the Selling Stockholders from the Representatives,
without liability on the part of any Underwriter to the Company if, prior to
delivery and payment for the Firm Shares or Option Shares, as the case may be,
in the sole judgment of the Representatives, (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by the
NASD, (ii) trading in securities generally on the New York Stock Exchange or the
Nasdaq Stock Market shall have been suspended or limited or minimum or maximum
prices shall have been generally established, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by the Nasdaq Stock
Market, by order of the Commission or any court or other governmental authority,
or by the Nasdaq Stock Market, (iii) a general banking moratorium shall have
been declared by either Federal, New York or Minnesota authorities, or (iv) any
material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States or
any outbreak or material escalation of hostilities or other calamity or crisis
shall have occurred, the effect of which is such as to make it, in the sole
judgment of the Representatives, impracticable or inadvisable to proceed with
completion of the public offering or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 10 hereof, neither
the Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 5(j), 7 and 8 hereof; but, if for any
other reason the purchase of the Shares by the Underwriters is not consummated
or if for any reason the Company shall be unable to perform its obligations
hereunder, the Company and the Selling Stockholders will reimburse the several
Underwriters for all out-of-pocket expenses (including the fees, disbursements
and other charges of counsel to the Underwriters) incurred by them in connection
with the offering of the Shares.
10. SUBSTITUTION OF UNDERWRITERS. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 10 by more than one-ninth of such number of Firm Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase exceeds one-tenth of the aggregate number of
the Firm Shares and arrangements satisfactory to the Representatives and the
Company for the purchase of such Firm Shares are not made within 48 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
11. MISCELLANEOUS. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company or the Selling Stockholders,
PG 22
at the office of the Company, 7575 Market Place Drive, Eden Prairie, Minnesota
55344, Attention: Chief Executive Officer, with a copy to Winthrop & Weinstein,
P.A., 3000 Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis, Minnesota
55402, Attention: Eric O. Madson, Esq., or (b) if to the Underwriters, to the
Representatives at the offices of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, Attention: Corporate Finance Department, with a copy to
Oppenheimer Wolff & Donnelly, 45 South Seventh Street, Suite 3400, Minneapolis,
Minnesota 55402, Attention: Tom C. Thomas, Esq. Any such notice shall be
effective only upon receipt. Any notice under such Section 9 or 10 hereof may be
made by telex or telephone, but if so made shall be subsequently confirmed in
writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, the Selling Stockholders and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successors and assigns" as
used in this Agreement shall not include a purchaser, as such purchaser, of
Shares from any of the several Underwriters.
Any action required or permitted to be made by the Representatives under
this Agreement may be taken by them jointly or by Needham & Company, Inc.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may
have to a trial by jury in respect of any claim based upon or arising out of
this Agreement or the transactions contemplated hereby.
PG 23
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
ZYTEC CORPORATION
By:
Title: Chief Executive Officer
SELLING STOCKHOLDERS
(named in Schedule II hereto)
By:
Attorney-in-Fact
Confirmed as of the date first above mentioned:
NEEDHAM & COMPANY, INC.
NESBITT BURNS SECURITIES INC.
Acting on behalf of themselves and as the Representatives of the other
several Underwriters named in Schedule I hereto.
By: NEEDHAM & COMPANY, INC.
By:
Title:
PG 24
SCHEDULE I
UNDERWRITERS
Number of
Firm
Shares
Underwriters to be Purchased
NEEDHAM & COMPANY, INC..........................
NESBITT BURNS SECURITIES INC....................
Total............................... 2,272,000
=========
PG 25
SCHEDULE II
Total Number Total Number of
of Firm Shares Option Shares
to be Sold to be Sold
Zytec Corporation................. 2,000,000 300,000
Ronald D. Schmidt................. 95,200 --
John M. Steel..................... 87,100 --
Lawrence J. Matthews.............. 89,700
--------- -------
TOTALS..................... 2,272,000 300,000
========= =======
PG 26
SCHEDULE III
FORM OF LOCK-UP AGREEMENT
The undersigned is a holder of securities of Zytec Corporation, a
Minnesota corporation (the "Company"), and wishes to facilitate the public
offering of shares of the Common Stock (the "Common Stock") of the Company (the
"Offering"). The undersigned recognizes that such Offering will be of benefit to
the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby agrees that
the undersigned will not, without the prior written approval of Needham &
Company, Inc., acting on its own behalf and/or on behalf of other
representatives of the underwriters, directly or indirectly, sell, contract to
sell, make any short sale, pledge, or otherwise dispose of, or enter into any
hedging transaction that is likely to result in a transfer of, any shares of
Common Stock, options to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock of the Company which
the undersigned may own, for a period commencing as of the date hereof and
ending on the date which is one hundred eighty (180) days after the date of the
final Prospectus relating to the Offering; provided, however, that with respect
to Joseph J. Matz, John B. Rogers, N. Charles Wussow and Max Davis, beginning on
the thirty first (31st) day after the date of the final Prospectus, the
foregoing shall not prohibit the sale by the undersigned of up to 6,000 shares
of Common Stock of the Company, provided that such sale is made through Needham
& Company, Inc. The undersigned confirms that the undersigned understands that
the underwriters and the Company will rely upon the representations set forth in
this Agreement in proceeding with the Offering. The undersigned further confirms
that the agreements of the undersigned are irrevocable and shall be binding upon
the undersigned's heirs, legal representatives, successors and assigns. The
undersigned agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of securities held by the
undersigned except in compliance with this Agreement.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
PG 27
Exhibit 5.1
WINTHROP & WEINSTINE, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
June 6, 1996
Zytec Corporation
7575 Market Place Drive
Eden Prairie, Minnesota 55344
Re: Registration Statement on Form S-3
Gentlemen:
We have acted as legal counsel for Zytec Corporation (the "Company") in
connection with the preparation and filing of a Registration Statement on Form
S-3 (the "Registration Statement"), relating to the registration under the
Securities Act of 1933, as amended, of an aggregate of 2,572,000 shares of
common stock, no par value, of the Company (the "Common Stock"), including (a)
2,000,000 shares to be sold by the Company, (b) 272,000 shares to be sold by the
Selling Shareholders named in the Registration Statement and (c) 300,000 shares
subject to the Underwriters' over-allotment option.
In connection therewith, we have examined, among other things, (i) the Articles
of Incorporation and Bylaws of the Company, both as amended to date; (ii) the
corporate proceedings of the Company relative to its organization and to the
authorization and issuance and the shares of Common Stock to be sold by the
Company pursuant to the Registration Statement; (iii) the Registration Statement
and the Prospectus included as a part thereof; and (iv) the form of Underwriting
Agreement included as an exhibit to the Registration Statement (the
"Underwriting Agreement"). In addition to such examination, we have reviewed
such other proceedings, documents, and records and have obtained from the
Company or its officers such additional information as we deem necessary or
appropriate for purposes of this opinion.
Based on the foregoing, we are of the opinion that:
1. The Company has been legally incorporated and is validly existing
under the laws of the State of Minnesota.
2. All necessary corporate action has been taken by the Company to
authorize the issuance of (a) the 2,000,000 shares of Common Stock to
be issued by the Company, and (b) up to an additional 300,000 shares
of Common Stock issuable by the Company upon the exercise of the
Underwriters' over-allotment option.
3. The 2,000,000 shares of Common Stock to be issued by the Company and
the 300,000 shares of Common Stock issuable by the Company upon the
exercise of the Underwriters' over-allotment option are validly
authorized by the Company's Articles of Incorporation and, when
issued, delivered and paid for in accordance with the Underwriting
Agreement, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
WINTHROP & WEINSTINE, P.A.
BY -
Eric O. Madson
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion or incorporation by reference in this registration
statement on Form S-3 of our reports dated February 21, 1996, on our audits of
the consolidated financial statements and financial statement schedule of Zytec
Corporation. We also consent to the reference to our firm under the captions
"Selected Consolidated Financial Data" and "Experts."
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
June 7, 1996
CREDIT AGREEMENT
DATED AS OF MAY 30, 1996,
AMONG
ZYTEC CORPORATION,
THE LENDERS
PARTY HERETO,
AND
HARRIS TRUST AND SAVINGS BANK,
INDIVIDUALLY AND AS AGENT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
<S> <C> <C>
SECTION 1. THE CREDITS...........................................................................................1
Section 1.1. Revolving Credit..................................................................................1
Section 1.2. Loans.............................................................................................1
Section 1.3. Letters of Credit.................................................................................2
Section 1.4. Manner and Disbursement of Loans..................................................................5
SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES..................................................................6
Section 2.1. Interest Rate Options.............................................................................6
Section 2.2. Minimum LIBOR Portion Amounts.....................................................................7
Section 2.3. Computation of Interest...........................................................................7
Section 2.4. Manner of Rate Selection..........................................................................7
Section 2.5. Change of Law.....................................................................................7
Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR...............................8
Section 2.7. Taxes and Increased Costs.........................................................................8
Section 2.8. Change in Capital Adequacy Requirements...........................................................9
Section 2.9. Funding Indemnity.................................................................................9
Section 2.10. Lending Branch...................................................................................10
Section 2.11. Discretion of Lenders as to Manner of Funding....................................................10
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, AND APPLICATIONS....................................................10
Section 3.1. Fees.............................................................................................10
Section 3.2. Voluntary Prepayments............................................................................11
Section 3.3. Mandatory Prepayments............................................................................12
Section 3.4. Terminations.....................................................................................12
Section 3.5. Place and Application of Payments................................................................12
Section 3.6. Notations........................................................................................13
Section 3.7. Extensions of the Commitments....................................................................14
SECTION 4. DEFINITIONS; INTERPRETATION..........................................................................14
Section 4.1. Definitions......................................................................................14
Section 4.2. Interpretation...................................................................................23
SECTION 5. REPRESENTATIONS AND WARRANTIES.......................................................................24
Section 5.1. Organization and Qualification...................................................................24
Section 5.2. Subsidiaries.....................................................................................24
Section 5.3. Corporate Authority and Validity of Obligations..................................................24
Section 5.4. Use of Proceeds; Margin Stock....................................................................25
Section 5.5. Financial Reports................................................................................25
Section 5.6. No Material Adverse Change.......................................................................25
Section 5.7. Full Disclosure..................................................................................25
Section 5.8. Good Title.......................................................................................26
Section 5.9. Litigation and Other Controversies...............................................................26
Section 5.10. Taxes............................................................................................26
Section 5.11. Approvals........................................................................................26
Section 5.12. Affiliate Transactions...........................................................................26
Section 5.13. Investment Company; Public Utility Holding Company...............................................26
Section 5.14. ERISA............................................................................................26
Section 5.15. Compliance with Laws.............................................................................27
Section 5.16. Other Agreements.................................................................................27
Section 5.17. No Default.......................................................................................27
SECTION 6. CONDITIONS PRECEDENT.................................................................................27
Section 6.1. All Advances.....................................................................................27
Section 6.2. Initial Advance..................................................................................28
Section 6.3. Use of Initial Loan..............................................................................29
SECTION 7. COVENANTS............................................................................................29
Section 7.1. Maintenance of Business..........................................................................29
Section 7.2. Maintenance of Properties........................................................................29
Section 7.3. Taxes and Assessments............................................................................29
Section 7.4. Insurance........................................................................................30
Section 7.5. Financial Reports................................................................................30
Section 7.6. Inspection.......................................................................................32
Section 7.7. Minimum Net Worth................................................................................32
Section 7.8. Leverage Ratio...................................................................................32
Section 7.9. Interest Coverage Ratio..........................................................................32
Section 7.10. Current Ratio....................................................................................32
Section 7.11. Net Income.......................................................................................33
Section 7.12. Funded Debt to EBITDA Ratio......................................................................33
Section 7.13. Rental Expense...................................................................................33
Section 7.14. Capital Expenditures.............................................................................33
Section 7.15. Indebtedness for Borrowed Money..................................................................33
Section 7.16. Liens............................................................................................34
Section 7.17. Investments, Acquisitions, Loans, Advances and Guaranties........................................35
Section 7.18. Mergers, Consolidations and Sales................................................................35
Section 7.19. Maintenance of Subsidiaries......................................................................36
Section 7.20. Dividends and Certain Other Restricted Payments..................................................36
Section 7.21. ERISA............................................................................................36
Section 7.22. Compliance with Laws.............................................................................37
Section 7.23. Burdensome Contracts With Affiliates.............................................................37
Section 7.24. Negative Pledges; Subsidiary Payments............................................................37
Section 7.25. No Changes in Fiscal Year........................................................................37
Section 7.26. Formation of Subsidiaries........................................................................37
Section 7.27. Change in the Nature of Business.................................................................37
Section 7.28. Issuance of Replacement Letter of Credit.........................................................37
SECTION 8. EVENTS OF DEFAULT AND REMEDIES.......................................................................38
Section 8.1. Events of Default................................................................................38
Section 8.2. Non-Bankruptcy Defaults..........................................................................40
Section 8.3. Bankruptcy Defaults..............................................................................40
Section 8.4. Collateral for Undrawn Letters of Credit.........................................................40
SECTION 9. THE AGENT............................................................................................41
Section 9.1. Appointment and Authorization....................................................................41
Section 9.2. Rights as a Lender...............................................................................41
Section 9.3. Standard of Care.................................................................................41
Section 9.4. Costs and Expenses...............................................................................42
Section 9.5. Indemnity........................................................................................42
SECTION 10. MISCELLANEOUS........................................................................................43
Section 10.1. Withholding Taxes................................................................................43
Section 10.2. Non-Business Days................................................................................44
Section 10.3. No Waiver, Cumulative Remedies...................................................................44
Section 10.4. Waivers, Modifications and Amendments............................................................44
Section 10.5. Costs and Expenses...............................................................................44
Section 10.6. Documentary Taxes................................................................................45
Section 10.7. Survival of Representations......................................................................45
Section 10.8. Survival of Indemnities..........................................................................45
Section 10.9. Participations...................................................................................45
Section 10.10. Assignment Agreements............................................................................45
Section 10.11. Notices..........................................................................................46
Section 10.12. Construction.....................................................................................47
Section 10.13. Headings.........................................................................................47
Section 10.14. Severability of Provisions.......................................................................47
Section 10.15. Counterparts.....................................................................................47
Section 10.16. Entire Understanding.............................................................................47
Section 10.17. Binding Nature, Governing Law, Etc...............................................................47
Section 10.18. Submission to Jurisdiction; Waiver of Jury Trial.................................................48
Section 10.19. Sharing Set-Off..................................................................................48
Signature.......................................................................................................................49
Exhibit A - Note
Exhibit B - Borrowing Base Certificate
Exhibit C - Compliance Certificate
Schedule 5.2 - Subsidiaries
</TABLE>
CREDIT AGREEMENT
To each of the Lenders party hereto:
Ladies and Gentlemen:
The undersigned, Zytec Corporation, a Minnesota corporation (the "Company"),
applies to you for your several commitments, subject to the terms and conditions
hereof and on the basis of the representations and warranties hereinafter set
forth, to extend credit to the Company, all as more fully hereinafter set forth.
SECTION 1. THE CREDITS.
Section 1.1. Revolving Credit. Subject to the terms and conditions
hereof, each Lender severally agrees to extend a revolving credit (the
"Revolving Credit") to the Company which may be availed of by the Company from
time to time during the period from and including the date hereof to but not
including the Termination Date, at which time the commitments of the Lenders to
extend credit under the Revolving Credit shall expire. The maximum amount of the
Revolving Credit which each Lender agrees to extend to the Company shall be as
set forth opposite such Lender's signature hereto under the heading "Commitment"
or as otherwise provided in Section 10.10 hereof, as such amount may be reduced
pursuant hereto. The Revolving Credit may be utilized by the Company in the form
of Loans and Letters of Credit, all as more fully hereinafter set forth,
provided that the aggregate principal amount of Loans and Letters of Credit
outstanding at any one time shall not exceed (A) at any time the Borrowing Base
Condition is not satisfied the lesser of: (i) the Commitments and (ii) the
Borrowing Base as then determined and computed and (B) at any time the Borrowing
Base Condition has been satisfied, the Commitments. During the period from and
including the date hereof to but not including the Termination Date, the Company
may use the Commitments by borrowing, repaying and reborrowing Loans in whole or
in part and/or by having the Agent issue Letters of Credit, having such Letters
of Credit expire or otherwise terminate without having been drawn upon or, if
drawn upon, reimbursing the Agent for each such drawing, and having the Agent
issue new Letters of Credit, all in accordance with the terms and conditions of
this Agreement. For purposes of this Agreement, where a determination of the
unused or available amount of the Commitments is necessary, the Loans and,
except as specified in Section 3.1 hereof, Letters of Credit shall be deemed to
utilize the Commitments. The obligations of the Lenders hereunder are several
and not joint, and no Lender shall under any circumstances be obligated to
extend credit under the Revolving Credit in excess of its Commitment.
Section 1.2. Loans. Subject to the terms and conditions hereof, the
Revolving Credit may be availed of by the Company in the form of loans
(individually a "Loan" and collectively the "Loans"). Each Borrowing of Loans
shall be made ratably by the Lenders in accordance with their Percentages of the
Commitments. Each Borrowing of Loans shall be in an amount of $500,000 or such
greater amount which is an integral multiple of $100,000; provided, however,
that a Borrowing of Loans which bears interest with reference to the Adjusted
LIBOR shall be in such greater amount as is required by Section 2 hereof. All
Loans made by a Lender shall be made against and evidenced by a single Note of
the Company (individually a "Note" and collectively the "Notes") payable to the
order of such Lender in the amount of its Commitment, with each Note to be in
the form (with appropriate insertions) attached hereto as Exhibit A. Each Note
shall be dated the date of issuance thereof, be expressed to bear interest as
set forth in Section 2 hereof, and be expressed to mature on the Termination
Date. Without regard to the principal amount of each Note stated on its face,
the actual principal amount at any time outstanding and owing by the Company on
account thereof shall be the sum of all advances then or theretofore made
thereon less all payments of principal actually received.
Section 1.3. Letters of Credit.
(a) General Terms. Subject to the terms and conditions hereof, the
Revolving Credit may be availed of by the Company in the form of standby and
commercial letters of credit issued by the Agent for the account of the Company
(individually a "Letter of Credit" and collectively the "Letters of Credit"),
provided that the aggregate amount of (i) Standby Letters of Credit issued and
outstanding hereunder shall not at any time exceed $2,000,000 and (ii)
commercial letters of credit issued and outstanding hereunder shall not at any
time exceed 2,000,000. For purposes of this Agreement, a Letter of Credit shall
be deemed outstanding as of any time in an amount equal to the maximum amount
which could be drawn thereunder under any circumstances and over any period of
time plus any unreimbursed drawings then outstanding with respect thereto. If
and to the extent any Letter of Credit expires or otherwise terminates without
having been drawn upon, the availability under the Commitments shall to such
extent be reinstated. The Letters of Credit shall be issued by the Agent, but
each Lender shall be obligated to reimburse the Agent for such Lender's
Percentage of the amount of each draft drawn under a Letter of Credit in
accordance with this Section 1.3 and, accordingly, each Letter of Credit shall
be deemed to utilize the Commitments of all Lenders pro rata in accordance with
their Percentages thereof. Notwithstanding anything herein to the contrary, that
certain Irrevocable Letter of Credit Number S-0057045-5199 dated September 1,
1994 in the amount of $1,366,809 issued by Firstar Bank of Minnesota, National
Association ("Firstar") naming First Trust National Association as beneficiary
and expiring on April 30, 1997 (the "Existing Letter of Credit") shall
constitute, if and so long as Firstar is a Lender hereunder, a "Letter of
Credit" herein for all purposes of this Agreement to the same extent, and with
the same force and effect, as if (x) the Existing Letter of Credit had been
issued hereunder by the Agent at the request of the Company and (y) the term
"Agent" when used with reference to the Existing Letter of Credit shall mean
Firstar instead of the Agent and the term "Lender" when used with reference to
the Existing Letter of Credit shall mean Harris Trust and Savings Bank, in its
individual capacity.
(b) Term. Each Letter of Credit issued hereunder shall expire not later
than the earlier of (i) twelve (12) months from the date of issuance (or be
cancelable not later than twelve (12) months from the date of issuance and each
renewal) or (ii) the Termination Date. In the event the Agent issues any Letter
of Credit with an expiration date that is automatically extended unless the
Agent gives notice that the expiration date will not so extend beyond its then
scheduled expiration date, the Agent will give such notice of non-renewal before
the time necessary to prevent such automatic extension if before such required
notice date (i) the expiration date of such Letter of Credit if so extended
would be after the Termination Date, (ii) the Commitments have terminated or
(iii) an Event of Default exists and the Required Lenders have given the Agent
instructions not to so permit the extension of the expiration date of such
Letter of Credit.
(c) General Characteristics. Each Letter of Credit issued hereunder
shall be payable in U.S. Dollars, conform to the general requirements of the
Agent for the issuance of standby or commercial letters of credit, as the case
may be, as to form and substance, and be a letter of credit which the Agent may
lawfully issue.
(d) Applications. At the time the Company requests each Letter of Credit
to be issued (or prior to the first issuance of a Letter of Credit in the case
of a continuing application), the Company shall execute and deliver to the Agent
an application for such Letter of Credit in the form then customarily prescribed
by the Agent (individually an "Application" and collectively the
"Applications"). Subject to the other provisions of this subsection, the
obligation of the Company to reimburse the Agent for drawings under a Letter of
Credit shall be governed by the Application for such Letter of Credit. Anything
contained in the Applications to the contrary notwithstanding, (i) in the event
the Agent is not reimbursed by the Company for the amount the Agent pays on any
draft drawn under a Letter of Credit issued hereunder by 11:00 a.m. (Chicago
time) on the date when such drawing is paid, the obligation of the Company to
reimburse the Agent for the amount of such draft paid shall bear interest (which
the Company hereby promises to pay on demand) from and after the date the draft
is paid until payment in full thereof at a fluctuating rate per annum determined
by adding 2% to the Domestic Rate as from time to time in effect (computed on
the basis of a year of 360 days for the actual number of days elapsed), (ii) the
Company shall pay fees in connection with each Letter of Credit as set forth in
Section 3 hereof, (iii) except as otherwise provided in Section 3.3 hereof,
prior to the occurrence of a Default or an Event of Default the Agent will not
call for additional collateral security for the obligations of the Company under
the Applications other than the collateral security consisting of rights in
goods (or documents of title covering the same) financed under such
Applications, and (iv) except as otherwise provided in Section 3.3 hereof, prior
to the occurrence of a Default or an Event of Default the Agent will not call
for the funding of a Letter of Credit by the Company prior to being presented
with a draft drawn thereunder (or, in the event the draft is a time draft, prior
to its due date). The Company hereby irrevocably authorizes the Agent to charge
any of the Company's deposit accounts maintained with the Agent for the amount
necessary to reimburse the Agent for any drafts drawn under Letters of Credit
issued hereunder.
(e) Change in Laws. If the Agent or any Lender shall determine in good
faith that any change in any applicable law, regulation or guideline (including,
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System) or any new law, regulation or guideline, or any interpretation
of any of the foregoing by any governmental authority charged with the
administration thereof or any central bank or other fiscal, monetary or other
authority having jurisdiction over the Agent or such Lender (whether or not
having the force of law), shall:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against the Letters of Credit, or the
Agent's or such Lender's or the Company's liability with respect
thereto; or
(ii) impose on the Agent or such Lender any penalty with
respect to the foregoing or any other condition regarding this
Agreement, the Applications or the Letters of Credit;
and the Agent or such Lender shall determine in good faith that the result of
any of the foregoing is to increase the cost (whether by incurring a cost or
adding to a cost) to the Agent or such Lender of issuing, maintaining or
participating in the Letters of Credit hereunder (without benefit of, or credit
for, any prorations, exemptions, credits or other offsets available under any
such laws, regulations, guidelines or interpretations thereof), then the Company
shall pay on demand to the Agent or such Lender from time to time as specified
by the Agent or such Lender such additional amounts as the Agent or such Lender
shall determine are sufficient to compensate and indemnify it for such increased
cost. If the Agent or any Lender makes such a claim for compensation, it shall
provide the Company (with a copy to the Agent in the case of any Lender) a
certificate setting forth the computation of the increased cost as a result of
any event mentioned herein in reasonable detail and such certificate shall be
conclusive if reasonably determined.
(f) Participations in Letters of Credit. Each Lender shall participate
on a pro rata basis in accordance with its Percentage of the Commitments in the
Letters of Credit issued by the Agent, which participation shall automatically
arise upon the issuance of each Letter of Credit. Each Lender unconditionally
agrees that in the event the Agent is not immediately reimbursed by the Company
for the amount paid by the Agent on any draft presented under a Letter of
Credit, then in that event such Lender shall pay to the Agent such Lender's
Percentage of the amount of each draft so paid and in return such Lender shall
automatically receive an equivalent percentage participation in the rights of
the Agent to obtain reimbursement from the Company for the amount of such draft,
together with interest thereon as provided for herein. The obligations of the
Lenders to the Agent under this subsection shall be absolute, irrevocable and
unconditional under any and all circumstances whatsoever and shall not be
subject to any set-off, counterclaim or defense to payment which any Lender may
have or have had against the Company, the Agent, any other Lender or any other
party whatsoever. In the event that any Lender fails to honor its obligation to
reimburse the Agent for its Percentage of the amount of any such draft, then in
that event (i) each other Lender shall pay to the Agent its pro rata share of
the payment due the Agent from the defaulting Lender, (ii) the defaulting Lender
shall have no right to participate in any recoveries from the Company in respect
of such draft and (iii) all amounts to which the defaulting Lender would
otherwise be entitled under the terms of this Agreement or any of the other Loan
Documents shall first be applied to reimbursing the Lenders for their respective
pro rata shares of the defaulting Lender's portion of the draft, together with
interest thereon as provided for herein. Upon reimbursement to the other Lenders
(pursuant to clause (iii) above or otherwise) of the amount advanced by them to
the Agent in respect of the defaulting Lender's share of the draft together with
interest thereon, the defaulting Lender shall thereupon be entitled to its
participation in the Agent's right of recovery against the Company in respect of
the draft paid by the Agent.
Section 1.4. Manner and Disbursement of Loans. The Company shall give
written or telephonic notice to the Agent (which notice shall be irrevocable
once given and, if given by telephone, shall be promptly confirmed in writing)
by no later than 11:00 a.m. (Chicago time) one (1) Business Day prior to the
date the Company requests that any Borrowing of Loans be made to it under the
Commitments, and the Agent shall promptly notify each Lender of the Agent's
receipt of each such notice. Each such notice shall specify the date of the
Borrowing of Loans requested (which must be a Business Day), the type of Loan
being requested, and the amount of such Borrowing. Each Borrowing of Loans shall
initially constitute part of the applicable Domestic Rate Portion except to the
extent the Company has otherwise timely elected that such Borrowing, or any part
thereof, constitute part of a LIBOR Portion as provided in Section 2 hereof. The
Company agrees that the Agent may rely upon any written or telephonic notice
given by any person the Agent in good faith believes is an Authorized
Representative without the necessity of independent investigation and, in the
event any telephonic notice conflicts with the written confirmation, such
telephonic notice shall govern if the Agent and the Lenders have acted in
reliance thereon. Not later than 1:00 p.m. (Chicago time) on the date specified
for any Borrowing of Loans to be made hereunder, each Lender shall make the
proceeds of its Loan comprising part of such Borrowing available to the Agent in
Chicago, Illinois in immediately available funds. Subject to the provisions of
Section 6 hereof, the proceeds of each Loan shall be made available to the
Company at the principal office of the Agent in Chicago, Illinois, in
immediately available funds, upon receipt by the Agent from each Lender of its
Percentage of such Borrowing. Unless the Agent shall have been notified by a
Lender prior to 1:00 p.m. (Chicago time) on the date a Borrowing is to be made
hereunder that such Lender does not intend to make the proceeds of its Loan
available to the Agent, the Agent may assume that such Lender has made such
proceeds available to the Agent on such date and the Agent may in reliance upon
such assumption make available to the Company a corresponding amount. If such
corresponding amount is not in fact made available to the Agent by such Lender
and the Agent has made such amount available to the Company, the Agent shall be
entitled to receive such amount from such Lender forthwith upon the Agent's
demand, together with interest thereon in respect of each day during the period
commencing on the date such amount was made available to the Company and ending
on but excluding the date the Agent recovers such amount at a rate per annum
equal to the effective rate charged to the Agent for overnight federal funds
transactions with member banks of the federal reserve system for each day as
determined by the Agent (or in the case of a day which is not a Business Day,
then for the preceding day). If such amount is not received from such Lender by
the Agent immediately upon demand, the Company will, on demand, repay to the
Agent the proceeds of such Loan attributable to such Lender with interest
thereon at a rate per annum equal to the interest rate applicable to the
relevant Loan, but without such payment being considered a payment or prepayment
of a LIBOR Portion, so that the Company will have no liability under Section 2.9
hereof with respect to such payment.
SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES.
Section 2.1. Interest Rate Options.
(a) Portions. Subject to the terms and conditions of this Section 2,
portions of the principal indebtedness evidenced by the Notes (all of the
indebtedness evidenced by Notes of the same type bearing interest at the same
rate for the same period of time being hereinafter referred to as a "Portion")
may, at the option of the Company, bear interest with reference to the Domestic
Rate ("Domestic Rate Portions") or with reference to the Adjusted LIBOR ("LIBOR
Portions"), and Portions may be converted from time to time from one basis to
another. All of the indebtedness evidenced by Notes of the same type which is
not part of a LIBOR Portion shall constitute a single Domestic Rate Portion. All
of the indebtedness evidenced by Notes of the same type which bears interest
with reference to a particular Adjusted LIBOR for a particular Interest Period
shall constitute a single LIBOR Portion. There shall not be more than five LIBOR
Portions applicable to Notes of the same type outstanding at any one time, and
each Lender shall have a ratable interest in each Portion based on its
Percentage. Anything contained herein to the contrary notwithstanding, the
obligation of the Lenders to create, continue or effect by conversion any LIBOR
Portion shall be conditioned upon the fact that at the time no Default or Event
of Default shall have occurred and be continuing. The Company hereby promises to
pay interest on each Portion at the rates and times specified in this Section 2.
(b) Domestic Rate Portion. Each Domestic Rate Portion shall bear
interest at the rate per annum equal to the Domestic Rate as in effect from time
to time, provided that if a Domestic Rate Portion or any part thereof is not
paid when due (whether by lapse of time, acceleration or otherwise) such Portion
shall bear interest, whether before or after judgment, until payment in full
thereof at the rate per annum determined by adding 2% to the interest rate which
would otherwise be applicable thereto from time to time. Interest on each
Domestic Rate Portion shall be payable monthly in arrears on the last day of
each month in each year (commencing June 30, 1996) and at maturity of the
applicable Notes, and interest after maturity (whether by lapse of time,
acceleration or otherwise) shall be due and payable upon demand. Any change in
the interest rate on the Domestic Rate Portions resulting from a change in the
Domestic Rate shall be effective on the date of the relevant change in the
Domestic Rate.
(c) LIBOR Portions. Each LIBOR Portion shall bear interest for each
Interest Period selected therefor at a rate per annum determined by adding the
Applicable LIBOR Margin to the Adjusted LIBOR for such Interest Period, provided
that if any LIBOR Portion is not paid when due (whether by lapse of time,
acceleration or otherwise) such Portion shall bear interest, whether before or
after judgment, until payment in full thereof through the end of the Interest
Period then applicable thereto at the rate per annum determined by adding 2% to
the interest rate which would otherwise be applicable thereto, and effective at
the end of such Interest Period such LIBOR Portion shall automatically be
converted into and added to the applicable Domestic Rate Portion and shall
thereafter bear interest at the interest rate applicable to such Domestic Rate
Portion after default. Interest on each LIBOR Portion shall be due and payable
on the last day of each Interest Period applicable thereto and, with respect to
any Interest Period applicable to a LIBOR Portion in excess of one month, on the
date occurring every month after the date such Interest Period began and at the
end of such Interest Period, and interest after maturity (whether by lapse of
time, acceleration or otherwise) shall be due and payable upon demand. The
Company shall notify the Agent on or before 11:00 a.m. (Chicago time) on the
third Business Day preceding the end of an Interest Period applicable to a LIBOR
Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which
event the Company shall notify the Agent of the new Interest Period selected
therefor, and in the event the Company shall fail to so notify the Agent, such
LIBOR Portion shall automatically be converted into and added to the applicable
Domestic Rate Portion as of and on the last day of such Interest Period. The
Agent shall promptly notify each Lender of each notice received from the Company
pursuant to the foregoing provision.
Section 2.2. Minimum LIBOR Portion Amounts. Each LIBOR Portion shall be
in an amount equal to $1,000,000 or such greater amount which is an integral
multiple of $500,000.
Section 2.3. Computation of Interest. All interest on the Domestic Rate
Portion shall be computed on the basis of a year of 365 days for the actual
number of days elapsed, and all interest on the LIBOR Portions shall be computed
on the basis of a year of 360 days for the actual number of days elapsed.
Section 2.4. Manner of Rate Selection. The Company shall notify the
Agent by 11:00 a.m. (Chicago time) at least 3 Business Days prior to the date
upon which the Company requests that any LIBOR Portion be created or that any
part of the Domestic Rate Portion be converted into a LIBOR Portion (each such
notice to specify in each instance the amount thereof and the Interest Period
selected therefor), and the Agent shall promptly notify each Lender of each
notice received from the Company pursuant to the foregoing provision. If any
request is made to convert a LIBOR Portion into the Domestic Rate Portion, such
conversion shall only be made so as to become effective as of the last day of
the Interest Period applicable thereto. All requests for the creation,
continuance and conversion of Portions under this Agreement shall be
irrevocable. Such requests may be written or oral and the Agent is hereby
authorized to honor telephonic requests for creations, continuances and
conversions received by it from any person the Agent in good faith believes to
be an Authorized Representative without the necessity of independent
investigation, the Company hereby indemnifying the Agent and the Lenders from
any liability or loss ensuing from so acting.
Section 2.5. Change of Law. Notwithstanding any other provisions of this
Agreement or any Note, if at any time any Lender shall determine in good faith
that any change in applicable laws, treaties or regulations or in the
interpretation thereof makes it unlawful for such Lender to create or continue
to maintain any LIBOR Portion, it shall promptly so notify the Agent (which
shall in turn promptly notify the Company and the other Lenders) and the
obligation of such Lender to create, continue or maintain any such LIBOR Portion
under this Agreement shall terminate until it is no longer unlawful for such
Lender to create, continue or maintain such LIBOR Portion. The Company, on
demand, shall, if the continued maintenance of any such LIBOR Portion is
unlawful, thereupon prepay the outstanding principal amount of the affected
LIBOR Portion, together with all interest accrued thereon and all other amounts
payable to affected Lender with respect thereto under this Agreement; provided,
however, that the Company may elect to convert the principal amount of the
affected Portion into another type of Portion available hereunder, subject to
the terms and conditions of this Agreement.
Section 2.6. Unavailability of Deposits or Inability to Ascertain
Adjusted LIBOR. Notwithstanding any other provision of this Agreement or any
Note, if prior to the commencement of any Interest Period, the Required Lenders
shall determine in good faith that deposits in the amount of any LIBOR Portion
scheduled to be outstanding during such Interest Period are not readily
available to such Lenders in the relevant market or, by reason of circumstances
affecting the relevant market, adequate and reasonable means do not exist for
ascertaining Adjusted LIBOR, then such Lenders shall promptly give notice
thereof to the Agent (which shall in turn promptly notify the Company and the
other Lenders) and the obligations of the Lenders to create, continue or effect
by conversion any such LIBOR Portion in such amount and for such Interest Period
shall terminate until deposits in such amount and for the Interest Period
selected by the Company shall again be readily available in the relevant market
and adequate and reasonable means exist for ascertaining Adjusted LIBOR.
Section 2.7. Taxes and Increased Costs. With respect to any LIBOR
Portion, if any Lender shall determine in good faith that any change in any
applicable law, treaty, regulation or guideline (including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System) or any new
law, treaty, regulation or guideline, or any interpretation of any of the
foregoing by any governmental authority charged with the administration thereof
or any central bank or other fiscal, monetary or other authority having
jurisdiction over such Lender or its lending branch or the LIBOR Portions
contemplated by this Agreement (whether or not having the force of law), shall:
(i) impose, increase, or deem applicable any reserve, special
deposit or similar requirement against assets held by, or deposits in
or for the account of, or loans by, or any other acquisition of funds
or disbursements by, such Lender which is not in any instance already
accounted for in computing the interest rate applicable to such LIBOR
Portion;
(ii) subject such Lender, any LIBOR Portion or a Note to the
extent it evidences such a Portion to any tax (including, without
limitation, any United States interest equalization tax or similar tax
however named applicable to the acquisition or holding of debt
obligations and any interest or penalties with respect thereto), duty,
charge, stamp tax, fee, deduction or withholding in respect of this
Agreement, any LIBOR Portion or a Note to the extent it evidences such
a Portion, except such taxes as may be measured by the overall net
income or gross receipts of such Lender or its lending branches and
imposed by the jurisdiction, or any political subdivision or taxing
authority thereof, in which such Lender's principal executive office or
its lending branch is located;
(iii) change the basis of taxation of payments of principal
and interest due from the Company to such Lender hereunder or under a
Note to the extent it evidences any LIBOR Portion (other than by a
change in taxation of the overall net income or gross receipts of such
Lender or its lending branches); or
(iv) impose on such Lender any penalty with respect to the
foregoing or any other condition regarding this Agreement, any LIBOR
Portion, or its disbursement, or a Note to the extent it evidences any
LIBOR Portion;
and such Lender shall determine in good faith that the result of any of the
foregoing is to increase the cost (whether by incurring a cost or adding to a
cost) to such Lender of creating or maintaining any LIBOR Portion hereunder or
to reduce the amount of principal or interest received or receivable by such
Lender (without benefit of, or credit for, any prorations, exemption, credits or
other offsets available under any such laws, treaties, regulations, guidelines
or interpretations thereof), then the Company shall pay on demand to the Agent
for the account of such Lender from time to time as specified by such Lender
such additional amounts as such Lender shall reasonably determine are sufficient
to compensate and indemnify it for such increased cost or reduced amount. If a
Lender makes such a claim for compensation, it shall provide to the Company
(with a copy to the Agent) a certificate setting forth the computation of the
increased cost or reduced amount as a result of any event mentioned herein in
reasonable detail and such certificate shall be conclusive if reasonably
determined.
Section 2.8. Change in Capital Adequacy Requirements. If any Lender
shall determine that the adoption after the date hereof of any applicable law,
rule or regulation regarding capital adequacy, or any change in any existing
law, rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by such Lender
(or any of its branches) or any corporation controlling such Lender with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on such Lender's or such
corporation's capital, as the case may be, as a consequence of such Lender's
obligations hereunder or for the credit which is the subject matter hereof to a
level below that which such Lender or such corporation could have achieved but
for such adoption, change or compliance (taking into consideration such Lender's
or such corporation's policies with respect to liquidity and capital adequacy)
by an amount deemed by such Lender to be material, then from time to time,
within fifteen (15) days after demand by such Lender, the Company shall pay to
the Agent for the account of such Lender such additional amount or amounts
reasonably determined by such Lender as will compensate such Lender for such
reduction.
Section 2.9. Funding Indemnity. In the event any Lender shall incur any
loss, cost or expense (including, without limitation, any loss (including loss
of profit), cost or expense incurred by reason of the liquidation or
re-employment of deposits or other funds acquired or contracted to be acquired
by such Lender to fund or maintain its part of any LIBOR Portion or the
relending or reinvesting of such deposits or other funds or amounts paid or
prepaid to such Lender) as a result of:
(i) any payment of a LIBOR Portion on a date other than the
last day of the then applicable Interest Period for any reason, whether
before or after default, and whether or not such payment is required by
any provisions of this Agreement; or
(ii) any failure by the Company to create, borrow, continue or
effect by conversion a LIBOR Portion on the date specified in a notice
given pursuant to this Agreement;
then, upon the demand of such Lender, the Company shall pay to the Agent for the
account of such Lender such amount as will reimburse such Lender for such loss,
cost or expense. If a Lender requests such a reimbursement, it shall provide to
the Company (with a copy to the Agent) a certificate setting forth the
computation of the loss, cost or expense giving rise to the request for
reimbursement in reasonable detail and such certificate shall be conclusive if
reasonably determined.
Section 2.10. Lending Branch. Each Lender may, at its option, elect to
make, fund or maintain its pro rata share of the Loans hereunder at the branches
or offices specified on the signature pages hereof or on any Assignment
Agreement executed and delivered pursuant to Section 10.10 hereof or at such of
its branches or offices as such Lender may from time to time elect. To the
extent reasonably possible, a Lender shall designate an alternate branch or
funding office with respect to its pro rata share of the LIBOR Portions to
reduce any liability of the Company to such Lender under Section 2.7 hereof or
to avoid the unavailability of an interest rate option under Section 2.6 hereof,
so long as such designation is not otherwise disadvantageous to the Lender.
Section 2.11. Discretion of Lenders as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, each Lender
shall be entitled to fund and maintain its funding of all or any part of its
Notes in any manner it sees fit, it being understood, however, that for the
purposes of this Agreement all determinations hereunder (including, without
limitation, determinations under Sections 2.6, 2.7 and 2.9 hereof) shall be made
as if each Lender had actually funded and maintained each LIBOR Portion during
each Interest Period applicable thereto through the purchase of deposits in the
relevant market in the amount of its pro rata share of such LIBOR Portion,
having a maturity corresponding to such Interest Period, and bearing an interest
rate equal to LIBOR for such Interest Period.
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, AND APPLICATIONS.
Section 3.1. Fees.
(a) Commitment Fee. For the period from and including the date hereof to
but not including the Termination Date, the Company shall pay to the Agent for
the account of the Lenders a commitment fee at the rate of 1/4 of 1% per annum
(computed on the basis of a year of 360 days for the actual number of days
elapsed) on the average daily unused portion of the Commitments; provided that
for purposes of this Section 3.1(a) only the aggregate amount of commercial
Letters of Credit outstanding hereunder shall not be deemed usage of the
Commitments. Such commitment fee shall be payable quarterly in arrears on the
last day of each March, June, September and December in each year (commencing
June 30, 1996) and on the Termination Date.
(b) Letter of Credit Fees. On the date of issuance of each standby
Letter of Credit, and as condition thereto, and annually thereafter, the Company
shall pay to the Agent for the account of itself and the Lenders a letter of
credit fee computed at the rate of 3/4 of 1% per annum (computed on the basis of
a year of 360 days for the actual number of days elapsed) (of which amount the
Agent shall retain for its own account, as the issuing bank and not on account
of its interest therein as a Lender, 1/16% per annum with the balance of the
3/4% fee to be remitted to the Lenders pro rata in accordance with the amounts
of their Commitments) on the maximum amount of the related standby Letter of
Credit which is scheduled to be outstanding during the immediately succeeding
twelve (12) months; provided, however, that the letter of credit fee for the
Existing Letter of Credit shall be payable monthly in advance on the first day
of each month. In addition to the letter of credit fee called for above, the
Company further agrees to pay to the Agent for its own account such processing
and transaction fees and charges as the Agent from time to time customarily
imposes in connection with any issuance, amendment, cancellation, negotiation
and/or payment of standby and commercial letters of credit and drafts drawn
thereunder.
(c) Prepayment Premium. If the Company shall terminate the Commitments
hereunder pursuant to Section 3.4(a) hereof substantially concurrently with the
execution of a credit facility with a lender other than the Agent at any time
prior to November 30, 1996, the Company shall pay at the effective date of any
such termination of the Commitments a prepayment premium to the Agent for the
ratable benefit of the Banks, as liquidated damages for the loss of bargain and
not as a penalty, in an amount equal to one half of one percent (0.50%) of the
Commitments in effect on the date hereof; provided, however, that the Company
shall not be required to pay such prepayment premium if it terminates the
Commitments as a result of a request for compensation by all of the Lenders
under Sections 1.3(e), 2.7 or 2.8 hereof.
Section 3.2. Voluntary Prepayments. The Company shall have the privilege
of prepaying the Notes in whole or in part (but if in part, then in a minimum
amount of $500,000 or such greater amount which is an integral multiple of
$100,000) at any time upon one Business Day's prior notice to the Agent (such
notice if received subsequent to 11:00 a.m. (Chicago time) on a given day to be
treated as though received at the opening of business on the next Business Day),
which shall promptly so notify the Lenders, by paying to the Agent for the
account of the Lenders the principal amount to be prepaid and (i) if such a
prepayment prepays the Notes in full and is accompanied by the termination in
whole of the Commitments, accrued interest thereon to the date of prepayment and
(ii) any amounts due to the Lenders under Sections 2.9 and 3.1(c) hereof.
Section 3.3. Mandatory Prepayments. (a) Upon Borrowing Base Deficiency.
The Company covenants and agrees that at any time the Borrowing Base Condition
is not satisfied, if the sum of the then unpaid principal balance of the Notes
plus the then outstanding amount of Letters of Credit shall be in excess of the
Borrowing Base as then determined and computed, the Company shall immediately
and without notice or demand pay over the amount of the excess to the Agent for
the account of the Lenders as and for a mandatory prepayment on such
Obligations, with each such prepayment first to be applied to the Notes until
payment in full thereof with any remaining balance to be held by the Agent as
collateral security for the Obligations owing under the Applications.
(b) Reduction in Commitments. The Company covenants and agrees that if
at any time the sum of the then unpaid principal balance of the Notes plus the
then outstanding amount of Letters of Credit shall be in excess of the
Commitments after giving effect to any reduction therein (whether voluntary or
required), the Company shall immediately and without notice or demand pay over
the amount of the excess to the Agent for the account of the Lenders as and for
a mandatory prepayment on such Obligations, with each such prepayment first to
be applied to the Notes until payment in full thereof with any remaining balance
to be held by the Agent as collateral security for the Obligations owing under
the Applications.
Section 3.4. Terminations. (a) Optional. The Company shall have the
right at any time and from time to time, upon 3 Business Days' prior notice to
the Agent (which shall promptly so notify the Lenders), to ratably terminate
without penalty and in whole or in part (but if in part, then in an aggregate
amount not less than $500,000 or such greater amount which is an integral
multiple of $500,000) the Commitments, provided that the Commitments may not be
reduced to an amount less than the aggregate principal amount of the Loans and
Letters of Credit then outstanding. Any termination of the Commitments pursuant
to this Section may not be reinstated.
(b) Mandatory Reduction of Commitments. Effective August 31, 1996, the
Commitments shall reduce by $13,000,000, such reduction to reduce the
Commitments of the Lenders pro rata in accordance with their respective
percentage.
1. Place and Application of Payments. All payments of
principal, interest, fees and all other Obligations payable hereunder and under
the other Loan Documents shall be made to the Agent at its office at 111 West
Monroe Street, Chicago, Illinois (or at such other place as the Agent may
specify) on the date any such payment is due and payable. Payments received by
the Agent after 11:00 a.m. (Chicago time) shall be deemed received as of the
opening of business on the next Business Day. All such payments shall be made in
lawful money of the United States of America, in immediately available funds at
the place of payment, without set-off or counterclaim and without reduction for,
and free from, any and all present or future taxes, levies, imposts, duties,
fees, charges, deductions, withholdings, restrictions and conditions of any
nature imposed by any government or any political subdivision or taxing
authority thereof (but excluding any taxes imposed on or measured by the net
income of any Lender). Except as herein provided, all payments shall be received
by the Agent for the ratable account of the Lenders and shall be promptly
distributed by the Agent ratably to the Lenders. Unless the Company otherwise
directs, principal payments shall be first applied to the applicable Domestic
Rate Portion until payment in full thereof, with any balance applied to the
LIBOR Portions in the order in which their Interest Periods expire.
Anything contained herein to the contrary notwithstanding, all payments and
collections received in respect of the Obligations, in each instance, by the
Agent or any of the Lenders after the occurrence of an Event of Default shall be
remitted to the Agent and distributed as follows:
(a) first, to the payment of any outstanding costs and expenses incurred
by the Agent in protecting, preserving or enforcing rights under this Agreement
or any of the other Loan Documents, and in any event including all costs and
expenses of a character which the Company has agreed to pay under Section 10.4
hereof (such funds to be retained by the Agent for its own account unless it has
previously been reimbursed for such costs and expenses by the Lenders, in which
event such amounts shall be remitted to the Lenders to reimburse them for
payments theretofore made to the Agent);
(b) second, to the payment of any outstanding interest or other fees or
amounts due under this Agreement or any of the other Loan Documents other than
for principal, pro rata as among the Agent and the Lenders in accord with the
amount of such interest and other fees or amounts owing each;
(c) third, to the payment of the principal of the Notes and any
liabilities in respect of unpaid drawings under the Letters of Credit, pro rata
as among the Lenders in accord with the then respective unpaid principal
balances of the Notes and the then unpaid liabilities in respect of unpaid
drawings under the Letters of Credit;
(d) fourth, to the Agent, to be held as collateral security for any
undrawn Letters of Credit, until the Agent is holding an amount of cash equal to
the then outstanding amount of all Letters of Credit; and
(e) fifth, to the Company or to whoever the Agent reasonably determines
to be lawfully entitled thereto.
Section 3.6. Notations. Each Loan made against a Note, the status of all
amounts evidenced by a Note as constituting part of the Domestic Rate Portion or
a LIBOR Portion and, in the case of any LIBOR Portion, the rates of interest and
Interest Periods applicable to such Portions shall be recorded by the relevant
Lender on its books and records or, at its option in any instance, endorsed on a
schedule to its Note and the unpaid principal balance and status, rates and
Interest Periods so recorded or endorsed by such Lender shall be prima facie
evidence in any court or other proceeding brought to enforce such Note of the
principal amount remaining unpaid thereon, the status of the Loan or Loans
evidenced thereby and the interest rates and Interest Periods applicable
thereto; provided that the failure of a Lender to record any of the foregoing
shall not limit or otherwise affect the obligation of the Company to repay the
principal amount of each Note together with accrued interest thereon. Prior to
any negotiation of a Note, a Lender shall record on a schedule thereto the
status of all amounts evidenced thereby as constituting part of the applicable
Domestic Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion,
the rates of interest and the Interest Periods applicable thereto.
Section 3.7. Extensions of the Commitments. Not less than 60 days or
more than 120 days prior to the one-year and two-year anniversaries of the date
hereof, the Company may advise the Agent in writing of its desire to extend the
Termination Date for an additional one year period (but not beyond May 30, 2001)
and the Agent shall promptly notify the Lenders of each such request. In the
event that the Lenders are agreeable to such extension (it being understood that
any Lender may accept or decline such a request in its sole discretion), the
Company, the Lenders and the Agents shall enter into such documents as the
Agents and Lenders may reasonably deem necessary or appropriate to reflect such
extension.
SECTION 4. DEFINITIONS; INTERPRETATION.
Section 4.1. Definitions. The following terms when used herein shall
have the following meanings:
"Adjusted LIBOR" means a rate per annum determined by the Agent in
accordance with the following formula:
Adjusted LIBOR = LIBOR
------------------------
100%-Reserve Percentage
"Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the
maximum rate of all reserve requirements (including, without limitation, any
marginal, emergency, supplemental or other special reserves) imposed by the
Board of Governors of the Federal Reserve System (or any successor) under
Regulation D on Eurocurrency liabilities (as such term is defined in Regulation
D) for the applicable Interest Period as of the first day of such Interest
Period, but subject to any amendments to such reserve requirement by such Board
or its successor, and taking into account any transitional adjustments thereto
becoming effective during such Interest Period. For purposes of this definition,
LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in
Regulation D without benefit of or credit for prorations, exemptions or offsets
under Regulation D. "LIBOR" means, for each Interest Period, (a) the LIBOR Index
Rate for such Interest Period, if such rate is available, and (b) if the LIBOR
Index Rate cannot be determined, the arithmetic average of the rates of interest
per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which
deposits in U.S. Dollars in immediately available funds are offered to the Agent
at 11:00 a.m. (London, England time) 2 Business Days before the beginning of
such Interest Period by 3 or more major banks in the interbank eurodollar market
selected by the Agent for a period equal to such Interest Period and in an
amount equal or comparable to the applicable LIBOR Portion scheduled to be
outstanding from the Agent during such Interest Period. "LIBOR Index Rate"
means, for any Interest Period, the rate per annum (rounded upwards, if
necessary, to the next higher one hundred-thousandth of a percentage point) for
deposits in U.S. Dollars for a period equal to such Interest Period which
appears on the Telerate Page 3750 as of 11:00 a.m. (London, England time) on the
date 2 Business Days before the commencement of such Interest Period. "Telerate
Page 3750" means the display designated as "Page 3750" on the Telerate Service
(or such other page as may replace Page 3750 on that service or such other
service as may be nominated by the British Bankers' Association as the
information vendor for the purpose of displaying British Banker's Association
Interest Settlement Rates for U.S. Dollar deposits). Each determination of LIBOR
made by the Agent shall be conclusive and binding on the Company and the Lenders
absent manifest error.
"Affiliate" means any Person directly or indirectly controlling or
controlled by, or under direct or indirect common control with, another Person.
A Person shall be deemed to control another Person for the purposes of this
definition if such Person possesses, directly or indirectly, the power to
direct, or cause the direction of, the management and policies of the other
Person, whether through the ownership of voting securities, common directors,
trustees or officers, by contract or otherwise; provided that, in any event for
purposes of this definition, any Person that owns, directly or indirectly, 5% or
more of the securities having the ordinary voting power for the election of
directors or governing body of a corporation or 5% or more of the partnership or
other ownership interests of any other Person (other than as a limited partner
of such other Person) will be deemed to control such corporation or other
Person.
"Agent" means Harris Trust and Savings Bank and any successor thereto
appointed pursuant to Section 9.1 hereof.
"Agreement" means this Credit Agreement, as the same may be amended,
modified or restated from time to time in accordance with the terms hereof.
"Applicable LIBOR Margin" means 1.50% per annum until the first Pricing
Date and thereafter from, and including, one Pricing Date to, but not including,
the next Pricing Date, a rate per annum determined in accordance with the
following schedule, subject, however, to the provisions set forth in the
definition of Pricing Date:
LEVERAGE RATIO FOR APPLICABLE LIBOR
SUCH PRICING DATE MARGIN
1. Less than 1.00 to 1.00 0.75%
2. Greater than or equal to 1.00%
1.00 to 1.00 but less than
1.25 to 1.00
3. Greater than or equal to 1.25%
1.25 to 1.00 but less than
1.50 to 1.00
4. Greater than or equal 1.50%
to 1.50 to 1.00.
"Application" is defined in Section 1.3 hereof.
"Assignment Agreements" is defined in Section 10.10 hereof.
"Authorized Representative" means those persons shown on the list of
officers provided by the Company pursuant to Section 6.2(a) hereof or on any
update of any such list provided by the Company to the Agent, or any further or
different officer of the Company so named by any Authorized Representative of
the Company in a written notice to the Agent.
"Borrowing" means the total of Loans of a single type made to the
Company by all the Lenders on a single date, and if such Loans are to be part of
a LIBOR Portion, for a single Interest Period. Borrowings of Loans are made and
maintained ratably from each of the Lenders according to their Percentages.
"Borrowing Base" means, as of any time it is to be determined, the sum
of:
(a) 80% of the then outstanding unpaid amount of Eligible Accounts;
plus
(b) 50% of the value (computed at the lower of market or cost using the
first-in/first-out method of inventory valuation applied by the Company in
accordance with GAAP) of Eligible Inventory;
(c) 50% of the net value of all plant and equipment of the Company as
shown on the financial statements of the Borrower most recently delivered
pursuant to Section 7.5 hereof.
provided that the Borrowing Base shall be computed only as against and on so
much of the Property as is included on the certificates to be furnished from
time to time by the Company pursuant to Section 7.5(a) hereof and, if required
by the Agent or the Required Lenders pursuant to any of the terms hereof as
verified by such other evidence required to be furnished to the Agent or the
Lenders pursuant hereto.
"Borrowing Base Condition" shall mean that the Leverage Ratio as most
recently calculated pursuant to Section 7.8 hereof is less than 1.50 to 1.00.
"Business Day" means any day other than a Saturday or Sunday on which
banks are not authorized or required to close in Chicago, Illinois and, when
used with respect to LIBOR Portions, a day on which banks are also dealing in
United States Dollar deposits in London, England and Nassau, Bahamas.
"Capital Lease" means any lease of Property which in accordance with
GAAP is required to be capitalized on the balance sheet of the lessee.
"Capitalized Lease Obligation" means the amount of the liability shown
on the balance sheet of any Person in respect of a Capital Lease determined in
accordance with GAAP.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Commitments" means the commitments of the Lenders to extend credit
under the Revolving Credit in the amounts set forth opposite their signatures
hereto under the heading "Commitment" and opposite their signatures on
Assignment Agreements delivered pursuant to Section 10.10 hereof under the
heading "Commitment", as such amounts may be reduced pursuant hereto.
"Company" is defined in the introductory paragraph hereof.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Company or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Current Ratio" means, at any time the same is to be determined, the
ratio of current assets of the Company and its Subsidiaries to current
liabilities of the Company and its Subsidiaries, all as determined on a
consolidated basis in accordance with GAAP consistently applied.
"Default" means any event or condition the occurrence of which would,
with the passage of time or the giving of notice, or both, constitute an Event
of Default.
"Domestic Rate" means, for any day, the greater of (i) the rate of
interest announced by the Agent from time to time as its prime commercial rate,
as in effect on such day (it being understood and agreed that such rate may not
be the Agent's best or lowest rate); and (ii) the sum of (x) the rate determined
by the Agent to be the average (rounded upwards, if necessary, to the next
higher 1/100 of 1%) of the rates per annum quoted to the Agent at approximately
10:00 a.m. (Chicago time) (or as soon thereafter as is practicable) on such day
(or, if such day is not a Business Day, on the immediately preceding Business
Day) by two or more Federal funds brokers selected by the Agent for the sale to
the Agent at face value of Federal funds in an amount equal or comparable to the
principal amount owed to the Agent for which such rate is being determined, plus
(y) 3/8 of 1%.
"Domestic Rate Portions" is defined in Section 2.1(a) hereof.
"EBIT" means, with reference to any period, Net Income for such period
plus all amounts deducted in arriving at such Net Income amount in respect of
(i) Interest Expense for such period, plus (ii) federal, state and local income
taxes for such period.
"EBITDA" means, with reference to any period, Net Income for such
period plus all amounts deducted in arriving at such Net Income amount in
respect of (i) Interest Expense for such period, plus (ii) federal, state and
local income taxes for such period, plus (iii) all amounts properly charged for
depreciation of fixed assets and amortization of intangible assets during such
period on the books of the Company and its Subsidiaries.
"Eligible Account" means each account receivable of the Company that:
(a) arises out of the sale by the Company of finished goods inventory
delivered to and accepted by, or out of the rendition of services fully
performed by the Company and accepted by, the account debtor on such account
receivable, and such account receivable otherwise represents a final sale;
(b) the account debtor on such account receivable is located within the
United States of America or, if such right has arisen out of the sale of such
goods shipped to an account debtor located in any other country, such right is
secured by a valid and irrevocable letter of credit pursuant to which any of the
Company or its transferee may draw on a lender reasonably acceptable to the
Agent for the full amount thereof;
(c) is the valid, binding and legally enforceable obligation of the
account debtor obligated thereon and such account debtor is not (i) a Subsidiary
or an Affiliate of the Company, (ii) a shareholder, director, officer or
employee of the Company or any Subsidiary, (iii) the United States of America,
or any state or political subdivision thereof, or any department, agency or
instrumentality of any of the foregoing unless the Company has complied with the
Assignment of Claims Act or any similar state or local statute, as the case may
be, to the satisfaction of the Agent, (iv) a debtor under any proceeding under
the United States Bankruptcy Code, as amended, or any other comparable
bankruptcy or insolvency law, or (v) an assignor for the benefit of creditors;
(d) is not evidenced by an instrument or chattel paper unless the same
has been endorsed and delivered to the Agent;
(e) is an asset of the Company to which it has good and marketable
title, is freely assignable, and is free and clear of any Lien;
(f) is net of any credit or allowance given by the Company to such
account debtor;
(g) is not owing from an account debtor who is also creditor or supplier
of the Company, is not subject to any offset, counterclaim or other defense with
respect thereto and, with respect to said account receivable or the contract or
purchase order out of which the same arose, no surety bond was required or given
in connection therewith;
(h) is not unpaid more than 60 days after the due date (which due date
must be not more than 35 days subsequent to the shipment date or the date
services were fully performed by the Company);
(i) is not owed by an account debtor who is obligated on accounts
receivable owed to the Company more than 10% of the aggregate unpaid balance of
which have been past due for longer than the relevant period specified in
subsection (h) above unless the Agent has approved the continued eligibility
thereof;
(j) would not cause the total accounts receivable owing from any one
account debtor and its Affiliates to exceed 25% of all Eligible Accounts; and
(k) does not arise from a sale to an account debtor on a bill-and-hold,
guaranteed sale, sale-or-return, sale-on-approval, consignment or any other
repurchase or return basis.
"Eligible Inventory" means all raw material inventory of the Company
(other than packaging, crating and supplies inventory), provided that such
inventory:
(a) is an asset of the Company to which it has good and marketable
title, is freely assignable and is free and clear of any Lien;
(b) is located at the Company's facilities in Eden Prairie, Minnesota,
Broomfield, Colorado, Redwood Falls, Minnesota or Lincoln, California or such
other locations as are approved in writing by the Agent;
(c) is not so identified to a contract to sell that it constitutes an
account; and
(d) is not obsolete or slow moving, and is of good and merchantable
quality free from any defects which might adversely affect the market value
thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute thereto.
"Event of Default" means any event or condition identified as such in
Section 8.1 hereof.
"Funded Debt" means, at any time the same is to be determined, the
aggregate of all Indebtedness for Borrowed Money of the Company and its
Subsidiaries at such time, plus all Indebtedness for Borrowed Money of any other
Person which is directly or indirectly guaranteed by the Company or any of its
Subsidiaries or which the Company or any of its Subsidiaries has agreed
(contingently or otherwise) to purchase or otherwise acquire or in respect of
which the Company or any of its Subsidiaries has otherwise assured a creditor
against loss.
"GAAP" means generally accepted accounting principles as in effect from
time to time, applied by the Company and its Subsidiaries on a basis consistent
with the preparation of the Company's most recent financial statements furnished
to the Lenders pursuant to Section 5.5 hereof.
"Indebtedness for Borrowed Money" means for any Person (without
duplication) (i) all indebtedness created, assumed or incurred in any manner by
such Person representing money borrowed (including by the issuance of debt
securities), (ii) all indebtedness for the deferred purchase price of property
or services (other than trade accounts payable arising in the ordinary course of
business which are not more than 60 days past due), (iii) all indebtedness
secured by any Lien upon Property of such Person, whether or not such Person has
assumed or become liable for the payment of such indebtedness, (iv) all
Capitalized Lease Obligations of such Person and (v) all obligations of such
Person on or with respect to letters of credit, bankers' acceptances and other
extensions of credit whether or not representing obligations for borrowed money.
"Interest Expense" means, with reference to any period, the sum of all
interest charges (including imputed interest charges with respect to Capitalized
Lease Obligations and all amortization of debt discount and expense) of the
Company and its Subsidiaries for such period determined in accordance with GAAP.
"Interest Period" means, with respect to any LIBOR Portion, the period
commencing on, as the case may be, the creation, continuation or conversion date
with respect to such LIBOR Portion and ending 1, 2, 3 or 6 months thereafter as
selected by the Company in its notice as provided herein; provided that, all of
the foregoing provisions relating to Interest Periods are subject to the
following:
(i) if any Interest Period would otherwise end on a day which
is not a Business Day, that Interest Period shall be extended to the
next succeeding Business Day, unless the result of such extension would
be to carry such Interest Period into another calendar month in which
event such Interest Period shall end on the immediately preceding
Business Day;
(ii) no Interest Period may extend beyond the final maturity
date of the relevant Notes;
(iii) the interest rate to be applicable to each Portion for
each Interest Period shall apply from and including the first day of
such Interest Period to but excluding the last day thereof; and
(iv) no Interest Period may be selected if after giving effect
thereto the Company will be unable to make a principal payment
scheduled to be made during such Interest Period without paying part of
a LIBOR Portion on a date other than the last day of the Interest
Period applicable thereto.
For purposes of determining an Interest Period, a month means a period starting
on one day in a calendar month and ending on a numerically corresponding day in
the next calendar month, provided, however, if an Interest Period begins on the
last day of a month or if there is no numerically corresponding day in the month
in which an Interest Period is to end, then such Interest Period shall end on
the last Business Day of such month.
"Lender" means Harris Trust and Savings Bank, the other signatories
hereto (other than the Company) and all other lenders becoming parties hereto
pursuant to Section 10.10 hereof.
"Letter of Credit" is defined in Section 1.3 hereof.
"LIBOR Portions" means and includes LIBOR Portions and CD Portions,
unless the context in which such term is used shall otherwise require. "LIBOR
Portions" is defined in Section 2.1(a) hereof.
"Lien" means any mortgage, lien, security interest, pledge, charge or
encumbrance of any kind in respect of any Property, including the interests of a
vendor or lessor under any conditional sale, Capital Lease or other title
retention arrangement.
"Loan Documents" means this Agreement, the Notes, the Applications, the
Assignment Agreements, and each other instrument or document to be delivered
hereunder or thereunder or otherwise in connection therewith.
"Loan" is defined in Section 1.2 hereof.
"Net Income" means, with reference to any period, the net income (or
net loss) of the Company and its Subsidiaries for such period as computed on a
consolidated basis in accordance with GAAP, and, without limiting the foregoing,
after deduction from gross income of all expenses and reserves, including
reserves for all taxes on or measured by income, but excluding any extraordinary
profits and also excluding any taxes on such profits.
"Net Worth" means, at any time the same is to be determined, the total
shareholders' equity (including capital stock, additional paid-in capital and
retained earnings after deducting treasury stock, but excluding minority
interests in Subsidiaries) which would appear on the balance sheet of the
Company and its Subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Note" is defined in Section 1.2 hereof.
"Obligations" means all obligations of the Company to pay principal and
interest on the Loans, all reimbursement obligations owing under the
Applications, all fees and charges payable hereunder, and all other payment
obligations of the Company arising under or in relation to any Loan Document, in
each case whether now existing or hereafter arising, due or to become due,
direct or indirect, absolute or contingent, and howsoever evidenced, held or
acquired.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to any or all of its functions under ERISA.
"Percentage" means, for each Lender, the percentage of the relevant
Commitments represented by such Lender's Commitment or, if the Commitments have
been terminated, the percentage held by such Lender (including through
participation interest in Letters of Credit pursuant to Section 1.3 hereof) of
the aggregate principal amount of all outstanding Obligations.
"Person" means an individual, partnership, corporation, association,
trust, unincorporated organization or any other entity or organization,
including a government or agency or political subdivision thereof.
"Plan" means any employee pension benefit plan covered by Title IV of
ERISA or subject to the minimum funding standards under Section 412 of the Code
that either (i) is maintained by a member of the Controlled Group for employees
of a member of the Controlled Group, or (ii) is maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which a member of the Controlled Group
is then making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions.
"Portion" is defined in Section 2.1(a) hereof.
"Pricing Date" means, for any fiscal quarter of the Company ended after
the date hereof, the latest date by which the Company is required to deliver a
compliance certificate for such fiscal quarter pursuant to Section 7.5. The
Applicable LIBOR Margin established on a Pricing Date shall remain in effect
until the next Pricing Date. Subject to the next succeeding sentence, if the
Company has not delivered a compliance certificate by the date such compliance
certificate is required to be delivered under Section 7.5, until a compliance
certificate is delivered before the next Pricing Date, the Applicable LIBOR
Margin currently in effect shall remain in effect until the delivery of the new
compliance certificate. If the Company subsequently delivers such a compliance
certificate, the Applicable LIBOR Margin established by such late delivered
compliance certificate shall take effect from the Pricing Date applicable to
such late delivered compliance certificate until the next Pricing Date. In all
other circumstances, the Applicable LIBOR Margin established by a compliance
certificate shall be in effect from the Pricing Date that occurs immediately
after the end of the Company's fiscal quarter covered by such compliance
certificate until the next Pricing Date.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Required Lenders" means, as of the date of determinations thereof,
those Lenders holding more than 70% of the Commitments or, in the event that no
Commitments are outstanding hereunder, holding more than 70% in aggregate
principal amount of the Loans and credit risk on the Letters of Credit
outstanding hereunder.
"Revolving Credit" is defined in Section 1.1 hereof.
"Subsidiary" means any corporation or other Person more than 50% of the
outstanding ordinary voting shares or other equity interests of which is at the
time directly or indirectly owned by the Company, by one or more of its
Subsidiaries, or by the Company and one or more of its Subsidiaries.
"Termination Date" means May 30, 1999, or such earlier date on which
the Commitments are terminated in whole pursuant to Section 3.4, 8.2 or 8.3
hereof or such later date to which the Commitments are extended pursuant to
Section 3.7 hereof.
"Total Liabilities" means, at any time the same is to be determined,
the aggregate of all indebtedness, obligations, liabilities, reserves and any
other items which would be listed as a liability on a balance sheet of the
Company and its Subsidiaries determined on a consolidated basis in accordance
with GAAP, and in any event including all indebtedness and liabilities of any
other Person which the Company or any Subsidiary may guarantee or otherwise be
responsible or liable for (other than any liability arising out of the
endorsement of commercial paper for deposit or collection received in the
ordinary course of business), all indebtedness and liabilities secured by any
Lien on any Property of the Company or any Subsidiary, whether or not the same
would be classified as a liability on a balance sheet, the liability of the
Company or any Subsidiary in respect of banker's acceptances and letters of
credit, and the aggregate amount of rentals or other consideration payable by
the Company or any Subsidiary in accordance with GAAP over the remaining
unexpired term of all Capital Leases, but excluding all general contingency
reserves and reserves for deferred income taxes and investment credit.
"Unfunded Vested Liabilities" means, for any Plan at any time, the
amount (if any) by which the present value of all vested nonforfeitable accrued
benefits under such Plan exceeds the fair market value of all Plan assets
allocable to such benefits, all determined as of the then most recent valuation
date for such Plan, but only to the extent that such excess represents a
potential liability of a member of the Controlled Group to the PBGC or the Plan
under Title IV of ERISA.
"Welfare Plan" means a "welfare plan" as defined in Section 3(1) of
ERISA.
"Wholly-Owned Subsidiary" means a Subsidiary of which all of the issued
and outstanding shares of capital stock (other than directors' qualifying shares
as required by law) or other equity interests are owned by the Company and/or
one or more Wholly-Owned Subsidiaries within the meaning of this definition.
Section 4.2. Interpretation. The foregoing definitions are equally
applicable to both the singular and plural forms of the terms defined. The words
"hereof", "herein", and "hereunder" and words of like import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. All references to time of day herein are references
to Chicago, Illinois time unless otherwise specifically provided. Where the
character or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, it shall be done in
accordance with GAAP except where such principles are inconsistent with the
specific provisions of this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Agent and the Lenders as
follows:
Section 5.1. Organization and Qualification. The Company is duly
organized, validly existing and in good standing as a corporation under the laws
of the State of Minnesota, has full and adequate corporate power to own its
Property and conduct its business as now conducted, and is duly licensed or
qualified and in good standing in each jurisdiction in which the failure to so
license or qualify would have a material adverse effect on the financial
condition, Properties, business or operation of the Company or any Subsidiary.
Section 5.2. Subsidiaries. Each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, as the case may be, has full and adequate power to
own its Property and conduct its business as now conducted, and is duly licensed
or qualified and in good standing in each jurisdiction in which the nature of
the business conducted by it or the nature of the Property owned or leased by it
requires such licensing or qualifying. Schedule 5.2 hereto identifies each
Subsidiary, the jurisdiction of its incorporation or organization, as the case
may be, the percentage of issued and outstanding shares of each class of its
capital stock or other equity interests owned by the Company and the
Subsidiaries and, if such percentage is not 100% (excluding directors'
qualifying shares as required by law), a description of each class of its
authorized capital stock and other equity interests and the number of shares of
each class issued and outstanding. All of the outstanding shares of capital
stock and other equity interests of each Subsidiary are validly issued and
outstanding and fully paid and nonassessable and all such shares and other
equity interests indicated on Schedule 5.2 as owned by the Company or a
Subsidiary are owned, beneficially and of record, by the Company or such
Subsidiary free and clear of all Liens. There are no outstanding commitments or
other obligations of any Subsidiary to issue, and no options, warrants or other
rights of any Person to acquire, any shares of any class of capital stock or
other equity interests of any Subsidiary.
Section 5.3. Corporate Authority and Validity of Obligations. The
Company has full right and authority to enter into this Agreement and the other
Loan Documents, to make the borrowings herein provided for, to issue its Notes
in evidence thereof, and to perform all of its obligations hereunder and under
the other Loan Documents. The Loan Documents delivered by the Company have been
duly authorized, executed and delivered by the Company and constitute valid and
binding obligations of the Company enforceable in accordance with their terms
except as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance or similar laws affecting creditors' rights generally and general
principles of equity (regardless of whether the application of such principles
is considered in a proceeding in equity or at law); and this Agreement and the
other Loan Documents do not, nor does the performance or observance by the
Company of any of the matters and things herein or therein provided for,
contravene or constitute a default under any provision of law or any judgment,
injunction, order or decree binding upon the Company or any provision of the
charter, articles of incorporation or by-laws of the Company or any covenant,
indenture or agreement of or affecting the Company or any of its Properties, or
result in the creation or imposition of any Lien on any Property of the Company.
Section 5.4. Use of Proceeds; Margin Stock. The Company shall use the
proceeds of the Loans and other extensions of credit made available hereunder
solely for its general working capital purposes and for such other legal and
proper purposes as are consistent with all applicable laws. Neither the Company
nor any Subsidiary is engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
U of the Board of Governors of the Federal Reserve System), and no part of the
proceeds of any Loan or any other extension of credit made hereunder will be
used to purchase or carry any such margin stock or to extend credit to others
for the purpose of purchasing or carrying any such margin stock.
Section 5.5. Financial Reports. The consolidated balance sheet of the
Company and its Subsidiaries as at December 31, 1995, and the related
consolidated statements of income, retained earnings and cash flows of the
Company and its Subsidiaries for the fiscal year then ended, and accompanying
notes thereto, which financial statements are accompanied by the audit report of
Coopers & Lybrand, independent public accountants, and the unaudited interim
consolidated balance sheet of the Company and its Subsidiaries as at March 31,
1996, and the related consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiaries for the three (3) months then
ended, heretofore furnished to the Lenders, fairly present the consolidated
financial condition of the Company and its Subsidiaries as at said dates and the
consolidated results of their operations and cash flows for the periods then
ended in conformity with generally accepted accounting principles applied on a
consistent basis. Neither the Company nor any Subsidiary has contingent
liabilities which are material to it other than as indicated on such financial
statements or, with respect to future periods, on the financial statements
furnished pursuant to Section 7.5 hereof.
Section 5.6. No Material Adverse Change. Since March 31, 1996, there has
been no change in the condition (financial or otherwise) or business prospects
of the Company or any Subsidiary except those occurring in the ordinary course
of business, none of which individually or in the aggregate have been materially
adverse.
Section 5.7. Full Disclosure. The statements and information furnished
to the Lenders in connection with the negotiation of this Agreement and the
other Loan Documents and the commitments by the Lenders to provide all or part
of the financing contemplated hereby do not contain any untrue statements of a
material fact or omit a material fact necessary to make the material statements
contained herein or therein not misleading, the Lenders acknowledging that as to
any projections furnished to Lenders, the Company only represents that the same
were prepared on the basis of information and estimates the Company believed to
be reasonable.
Section 5.8. Good Title. The Company and its Subsidiaries each have good
and defensible title to their assets as reflected on the most recent
consolidated balance sheet of the Company and its Subsidiaries furnished to the
Lenders (except for sales of assets by the Company and its Subsidiaries in the
ordinary course of business), subject to no Liens other than such thereof as are
permitted by Section 7.16 hereof.
Section 5.9. Litigation and Other Controversies. There is no litigation
or governmental proceeding or labor controversy pending, nor to the knowledge of
the Company threatened, against the Company or any Subsidiary which if adversely
determined would (a) impair the validity or enforceability of, or impair the
ability of the Company to perform its obligations under, this Agreement or any
other Loan Document or (b) result in any material adverse change in the
financial condition, Properties, business or operations of the Company or any
Subsidiary.
Section 5.10. Taxes. All tax returns required to be filed by the Company
or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes,
assessments, fees and other governmental charges upon the Company or any
Subsidiary or upon any of their respective Properties, income or franchises,
which are shown to be due and payable in such returns, have been paid. The
Company does not know of any proposed additional tax assessment against it or
its Subsidiaries for which adequate provision in accordance with GAAP has not
been made on its accounts. Adequate provisions in accordance with GAAP for taxes
on the books of the Company and each Subsidiary have been made for all open
years, and for its current fiscal period.
Section 5.11. Approvals. No authorization, consent, license, or
exemption from, or filing or registration with, any court or governmental
department, agency or instrumentality, nor any approval or consent of the
stockholders of the Company or any other Person, is or will be necessary to the
valid execution, delivery or performance by the Company of this Agreement or any
other Loan Document.
Section 5.12. Affiliate Transactions. Neither the Company nor any
Subsidiary is a party to any contracts or agreements with any of its Affiliates
on terms and conditions which are less favorable to the Company or such
Subsidiary than would be usual and customary in similar contracts or agreements
between Persons not affiliated with each other.
Section 5.13. Investment Company; Public Utility Holding Company.
Neither the Company nor any Subsidiary is an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, or a "public utility holding company" within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 5.14. ERISA. The Company and each other member of its Controlled
Group has fulfilled its obligations under the minimum funding standards of and
is in compliance in all material respects with ERISA and the Code to the extent
applicable to it and has not incurred any liability to the PBGC or a Plan under
Title IV of ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA. Neither the Company nor any Subsidiary has any contingent
liabilities with respect to any post-retirement benefits under a Welfare Plan,
other than liability for continuation coverage described in article 6 of Title I
of ERISA.
Section 5.15. Compliance with Laws. The Company and each of its
Subsidiaries are in compliance with the requirements of all federal, state and
local laws, rules and regulations applicable to or pertaining to their
Properties or business operations (including, without limitation, the
Occupational Safety and Health Act of 1970, the Americans with Disabilities Act
of 1990, and laws and regulations establishing quality criteria and standards
for air, water, land and toxic or hazardous wastes and substances),
non-compliance with which could have a material adverse effect on the financial
condition, Properties, business or operations of the Company or any Subsidiary.
Neither the Company nor any Subsidiary has received notice to the effect that
its operations are not in compliance with any of the requirements of applicable
federal, state or local environmental, health and safety statutes and
regulations or are the subject of any governmental investigation evaluating
whether any remedial action is needed to respond to a release of any toxic or
hazardous waste or substance into the environment, which non-compliance or
remedial action could have a material adverse effect on the financial condition,
Properties, business or operations of the Company or any Subsidiary.
Section 5.16. Other Agreements. Neither the Company nor any Subsidiary
is in default under the terms of any covenant, indenture or agreement of or
affecting the Company, any Subsidiary or any of their Properties, which default
if uncured would have a material adverse effect on the financial condition,
Properties, business or operations of the Company or any Subsidiary.
Section 5.17. No Default. No Default or Event of Default has occurred
and is continuing.
SECTION 6. CONDITIONS PRECEDENT.
The obligation of the Lenders to make any Loan or of the Agent to issue
any Letter of Credit under this Agreement is subject to the following conditions
precedent:
Section 6.1. All Advances. As of the time of the making of each
extension of credit (including the initial extension of credit) hereunder:
(a) each of the representations and warranties set forth in Section 5
hereof and in the other Loan Documents shall be true and correct as of such
time, except to the extent the same expressly relate to an earlier date;
(b) the Company shall be in full compliance with all of the terms and
conditions of this Agreement and of the other Loan Documents, and no Default or
Event of Default shall have occurred and be continuing or would occur as a
result of making such extension of credit;
(c) after giving effect to such extension of credit the aggregate
principal amount of all Loans and Letters of Credit outstanding under this
Agreement shall not (A) during such periods the Borrowing Base Condition has not
been satisfied exceed the lesser of (i) the Commitments and (ii) the Borrowing
Base and (B) during such time as the Borrowing Base Condition has been
satisfied, exceed the Commitments;
(d) in the case of the issuance of any Letter of Credit, the Agent shall
have received a properly completed Application therefor together with the fees
called for hereby; and
(e) such extension of credit shall not violate any order, judgment or
decree of any court or other authority or any provision of law or regulation
applicable to the Agent or any Lender (including, without limitation, Regulation
U of the Board of Governors of the Federal Reserve System) as then in effect.
The Company's request for any Loan or Letter of Credit shall constitute its
warranty as to the facts specified in subsections (a) through (d), both
inclusive, above.
Section 6.2. Initial Advance. At or prior to the making of the initial
extension of credit hereunder, the following conditions precedent shall also
have been satisfied:
(a) the Agent shall have received the following for the account of the
Lenders (each to be properly executed and completed) and the same shall have
been approved as to form and substance by the Agent:
(i) the Notes;
(ii) copies (executed or certified, as may be appropriate) of
all legal documents or proceedings taken in connection with the
execution and delivery of this Agreement and the other Loan Documents
to the extent the Agent or its counsel may reasonably request;
(iii) an incumbency certificate containing the name, title and
genuine signatures of each of the Company's Authorized Representatives;
(iv) evidence of insurance required by Section 7.4 hereof; and
(b) each Lender shall have received such valuations and certifications
as it may require in order to satisfy itself as to the financial condition of
the Company and its Subsidiaries, and the lack of material contingent
liabilities of the Company and its Subsidiaries;
(c) legal matters incident to the execution and delivery of this
Agreement and the other Loan Documents and to the transactions contemplated
hereby shall be satisfactory to each Lender and its counsel; and the Agent shall
have received for the account of the Lenders the favorable written opinion of
counsel for the Company in form and substance satisfactory to the Lender and its
counsel;
(d) the Agent shall have received for the account of the Lenders a
Borrowing Base certificate in the form attached hereto as Exhibit C showing the
computation of the Borrowing Base in reasonable detail as of the close of
business on April 28, 1996;
(e) the Agent shall have received for the account of the Lenders a good
standing certificate for the Company (dated as of the date no earlier than 30
days prior to the date hereof) from the office of the secretary of state of the
state of its incorporation and each state in which it is qualified to do
business as a foreign corporation;
(f) the Agent shall have received for the account of the Lenders such
other agreements, instruments, documents, certificates and opinions as the Agent
or the Lenders may reasonably request; and
(g) the Agent shall have received a duly completed "Environmental
Checklist" in the form customarily prescribed by the Agent.
Section 6.3. Use of Initial Loan. The initial Loan hereunder shall be
in an amount sufficient to, and the Company hereby irrevocably authorizes and
directs the Lenders to apply such Loans to, pay and discharge all indebtedness
of the Company owing to Firstar (other than the Existing Letter of Credit).
SECTION 7. COVENANTS.
The Company agrees that, so long as any credit is available to or in use
by the Company hereunder, except to the extent compliance in any case or cases
is waived in writing by the Required Lenders:
Section 7.1. Maintenance of Business. The Company shall, and shall cause
each Subsidiary to, preserve and maintain its existence. The Company shall, and
shall cause each Subsidiary to, preserve and keep in force and effect all
licenses, permits and franchises necessary to the proper conduct of its
business.
Section 7.2. Maintenance of Properties. The Company shall maintain,
preserve and keep its property, plant and equipment in good repair, working
order and condition (ordinary wear and tear excepted) and shall from time to
time make all needful and proper repairs, renewals, replacements, additions and
betterments thereto so that at all times the efficiency thereof shall be fully
preserved and maintained, and shall cause each Subsidiary to do so in respect of
Property owned or used by it.
Section 7.3. Taxes and Assessments. The Company shall duly pay and
discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes,
rates, assessments, fees and governmental charges upon or against it or its
Properties, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings which prevent enforcement of the
matter under contest and adequate reserves are provided therefor.
Section 7.4. Insurance. The Company shall insure and keep insured, and
shall cause each Subsidiary to insure and keep insured, with good and
responsible insurance companies, all insurable Property owned by it which is of
a character usually insured by Persons similarly situated and operating like
Properties against loss or damage from such hazards and risks, and in such
amounts, as are insured by Persons similarly situated and operating like
Properties; and the Company shall insure, and shall cause each Subsidiary to
insure, such other hazards and risks (including employers' and public liability
risks) with good and responsible insurance companies as and to the extent
usually insured by Persons similarly situated and conducting similar businesses.
The Company shall upon request furnish to the Agent and any Lender a certificate
setting forth in summary form the nature and extent of the insurance maintained
pursuant to this Section.
Section 7.5. Financial Reports. The Company shall, and shall cause each
Subsidiary to, maintain a standard system of accounting in accordance with GAAP
and shall furnish to the Agent, each Lender and each of their duly authorized
representatives such information respecting the business and financial condition
of the Company and its Subsidiaries as the Agent or such Lender may reasonably
request; and without any request, shall furnish to the Lenders:
(a) as soon as available, and in any event within 15 days
after the last day of each calendar month, a Borrowing Base certificate
in the form attached hereto as Exhibit B showing the computation of the
Borrowing Base in reasonable detail as of the close of business on the
last day of such month, prepared by the Company and certified to by its
President or chief financial officer;
(b) as soon as available, and in any event within 45 days
after the close of each fiscal quarter accounting period of the
Company, a copy of the consolidated and consolidating balance sheet of
the Company and its Subsidiaries as of the last day of such period and
the consolidated and consolidating statements of income, retained
earnings and cash flows of the Company and its Subsidiaries for the
quarter and for the fiscal year-to-date period then ended, each in
reasonable detail showing in comparative form the figures for the
corresponding date and period in the previous fiscal year, prepared by
the Company in accordance with GAAP and certified to by its President
or chief financial officer;
(c) as soon as available, and in any event within 120 days
after the close of each annual accounting period of the Company, a copy
of the consolidated and consolidating balance sheet of the Company and
its Subsidiaries as of the last day of the period then ended and the
consolidated and consolidating statements of income, stockholders'
equity and cash flows of the Company and its Subsidiaries for the
period then ended, and accompanying notes thereto, each in reasonable
detail showing in comparative form the figures for the previous fiscal
year, accompanied by an unqualified opinion thereon of Coopers &
Lybrand or another firm of independent public accountants of recognized
national standing, selected by the Company and satisfactory to the
Required Lenders, to the effect that the consolidated financial
statements have been prepared in accordance with GAAP and present
fairly in accordance with GAAP the consolidated financial condition of
the Company and its Subsidiaries as of the close of such fiscal year
and the results of their operations and cash flows for the fiscal year
then ended and that an examination of such accounts in connection with
such financial statements has been made in accordance with generally
accepted auditing standards and, accordingly, such examination included
such tests of the accounting records and such other auditing procedures
as were considered necessary in the circumstances;
(d) within the period provided in subsection (c) above, the
written statement of the accountants who certified the audit report
thereby required that in the course of their audit they have obtained
no knowledge of any Default or Event of Default, or, if such
accountants have obtained knowledge of any such Default or Event of
Default, they shall disclose in such statement the nature and period of
the existence thereof;
(e) promptly after receipt thereof, any additional written
reports, management letters or other detailed information contained in
writing concerning significant aspects of the Company's or any
Subsidiary's operations and financial affairs given to it by its
independent public accountants;
(f) as soon as available, and in any event within fifteen (15)
days prior to the end of each fiscal year of the Company, a copy of the
Company's consolidated and consolidating business plan for the
following fiscal year, such business plan to show the Company's
projected consolidated and consolidating revenues, expenses, and
balance sheet on month-by-month basis, such business plan to be in
reasonable detail prepared by the Company and in form reasonably
satisfactory to the Required Lenders; and
(g) promptly after knowledge thereof shall have come to the
attention of any responsible officer of the Company, written notice of
any threatened or pending litigation or governmental proceeding or
labor controversy against the Company or any Subsidiary which, if
adversely determined, would adversely effect the financial condition,
Properties, business or operations of the Company or any Subsidiary or
of the occurrence of any Default or Event of Default hereunder.
Each of the financial statements furnished to the Lenders pursuant to
subsections (b) and (c) of this Section shall be accompanied by a written
certificate in the form attached hereto as Exhibit C signed by the President or
chief financial officer of the Company to the effect that to the best of such
officer's knowledge and belief no Default or Event of Default has occurred
during the period covered by such statements or, if any such Default or Event of
Default has occurred during such period, setting forth a description of such
Default or Event of Default and specifying the action, if any, taken by the
Company to remedy the same. Such certificate shall also set forth the
calculations supporting such statements in respect of Sections 7.7, 7.8, 7.9,
7.10, 7.11, 7.12, 7.13 and 7.14 of this Agreement.
Section 7.6. Inspection. The Company shall, and shall cause each
Subsidiary to, permit the Agent, each Lender and each of their duly authorized
representatives and agents to visit and inspect any of the Properties, corporate
books and financial records of the Company and each Subsidiary, to examine and
make copies of the books of accounts and other financial records of the Company
and each Subsidiary, and to discuss the affairs, finances and accounts of the
Company and each Subsidiary with, and to be advised as to the same by, its
officers, employees and independent public accountants (and by this provision
the Company hereby authorizes such accountants to discuss with the Agent and
such Lenders the finances and affairs of the Company and of each Subsidiary) at
Ssuch reasonable times and reasonable intervals as the Agent or any such Lender
may designate.
Section 7.7. Minimum Net Worth. The Company shall not as of the last day
of each fiscal quarter of the Company permit Net Worth to be less than the sum
of (i) $21,367,000 plus (ii) 90% of positive Net Income of the Company and its
Subsidiaries for each fiscal year commencing on or after January 1, 1996 (but
without subtraction for any negative Net Income for any such period) plus (iii)
75% of the net proceeds of the sale of equity securities issued by the Company.
Section 7.8. Leverage Ratio. The Company shall not as of the last day of
each fiscal quarter of the Company occurring during the periods specified below,
permit the ratio of Total Liabilities to Net Worth (the "Leverage Ratio") to be
more than:
LEVERAGE RATIO SHALL
FROM AND INCLUDING TO AND INCLUDING NOT BE MORE THAN
The date hereof August 31, 1996 2.80 to 1.00
September 1, 1996 March 31, 1997 2.50 to 1.00
April 1, 1997 March 31, 1998 2.00 to 1.00
April 1, 1998 Thereafter 1.50 to 1.00
Section 7.9. Interest Coverage Ratio. The Company shall not as of the
last day of each fiscal quarter of the Company permit the ratio of EBIT for the
four fiscal quarters of the Company then ended to Interest Expense for the same
four fiscal quarters then ended (the "Interest Coverage Ratio") to be less than
3.00 to 1.00.
Section 7.10. Current Ratio. The Company shall not as of the last day of
each fiscal quarter of the Company occurring during the periods specified below
permit the Current Ratio to be less than:
CURRENT RATIO SHALL
FROM AND INCLUDING TO AND INCLUDING NOT BE LESS THAN
The date hereof August 31, 1996 1.10 to 1.00
September 1, 1996 Thereafter 1.25 to 1.00
Section 7.11. Net Income. The Company and its Subsidiaries on a
consolidated basis, shall have for each fiscal quarter Net Income of at least
$1, and the Company shall not permit Zytec Corporation GmbH to have net income
(as determined in accordance with GAAP) of less than $1 for any two consecutive
fiscal quarters.
Section 7.12. Funded Debt to EBITDA Ratio. The Company shall not as of
the last day of each fiscal quarter of the Company ending during the periods
specified below, permit the ratio of Funded Debt to EBITDA for the four fiscal
quarters of the Company then ended (the "Funded Debt to EBITDA Ratio") to be
more than:
FUNDED DEBT TO
FROM AND INCLUDING TO AND INCLUDING EBITDA RATIO
The date hereof March 31, 1997 3.00 to 1.00
April 1, 1997 Thereafter 2.50 to 1.00
Section 7.13. Rental Expense. The Company will not, nor will it permit
any Subsidiary to, acquire the use or possession of any real or personal
property under a lease or similar arrangement if after giving effect thereto,
the aggregate amount of fixed rentals and other consideration payable by the
Company and its Subsidiaries under all such leases or arrangements would exceed
$3,000,000 in the aggregate for any fiscal year of the Company. Capital Leases
shall not be included in computing compliance with this Section to the extent
the Company's and its Subsidiaries' liability in respect of the same is
permitted under Section 7.15(a) hereof.
Section 7.14. Capital Expenditures. The Company will not, nor will it
permit any Subsidiary to, expend or become obligated for capital expenditures
(as determined in accordance with GAAP) in an aggregate amount in excess of
$13,500,000 during any fiscal year.
Section 7.15. Indebtedness for Borrowed Money. The Company shall not,
nor shall it permit any Subsidiary to, issue, incur, assume, create or have
outstanding any Indebtedness for Borrowed Money; provided, however, that the
foregoing shall not restrict nor operate to prevent:
(a) purchase money indebtedness and Capitalized Lease
Obligations of the Company secured by Liens permitted by Section
7.16(d) hereof in an aggregate amount not to exceed $6,000,000 at any
one time outstanding;
(b) the Obligations of the Company owing to the Agent and the
Lenders under this Agreement;
(c) obligations of Zytec Corporation in connection with the
City of Redwood Falls, Minnesota Variable Rate Demand Industrial
Development Revenue Refunding Bonds, Series 1994 (Zytec Corporation);
and
(d) obligations of Zytec GmbH in an aggregate principal amount
not to exceed U.S. $11,000,000.
Section 7.16. Liens. The Company shall not, nor shall it permit any
Subsidiary to, create, incur or permit to exist any Lien of any kind on any
Property owned by the Company or any Subsidiary; provided, however, that the
foregoing shall not apply to nor operate to prevent:
(a) Liens arising by statute in connection with worker's
compensation, unemployment insurance, old age benefits, social security
obligations, taxes, assessments, statutory obligations or other similar
charges, good faith cash deposits in connection with tenders, contracts
or leases to which the Company or any Subsidiary is a party or other
cash deposits required to be made in the ordinary course of business,
provided in each case that the obligation is not for borrowed money and
that the obligation secured is not overdue or, if overdue, is being
contested in good faith by appropriate proceedings which prevent
enforcement of the matter under contest and adequate reserves have been
established therefor;
(b) mechanics', workmen's, materialmen's, landlords',
carriers', or other similar Liens arising in the ordinary course of
business with respect to obligations which are not due or which are
being contested in good faith by appropriate proceedings which prevent
enforcement of the matter under contest; provided that the aggregate
obligations secured by such Liens shall not at any time exceed
$100,000;
(c) the pledge of assets for the purpose of securing an
appeal, stay or discharge in the course of any legal proceeding,
provided that the aggregate amount of liabilities of the Company and
its Subsidiaries secured by a pledge of assets permitted under this
subsection, including interest and penalties thereon, if any, shall not
be in excess of $500,000 at any one time outstanding; and
(d) Liens on Property of the Company or any Subsidiary created
solely for the purpose of securing indebtedness permitted by Section
7.15(a) and (d) hereof, representing or incurred to finance, refinance
or refund the purchase price of Property, provided that no such Lien
shall extend to or cover other Property of the Company or any
Subsidiary other than the respective Property so acquired, and the
principal amount of indebtedness secured by any such Lien shall at no
time exceed the original purchase price of such Property.
Section 7.17. Investments, Acquisitions, Loans, Advances and Guaranties.
The Company shall not, nor shall it permit any Subsidiary to, directly or
indirectly, make, retain or have outstanding any investments (whether through
purchase of stock or obligations or otherwise) in, or loans or advances (other
than for travel advances and other similar cash advances made to employees in
the ordinary course of business) to, any other Person, or acquire all or any
substantial part of the assets or business of any other Person or division
thereof, or be or become liable as endorser, guarantor, surety or otherwise for
any debt, obligation or undertaking of any other Person, or otherwise agree to
provide funds for payment of the obligations of another, or supply funds thereto
or invest therein or otherwise assure a creditor of another against loss, or
apply for or become liable to the issuer of a letter of credit which supports an
obligation of another, or subordinate any claim or demand it may have to the
claim or demand of any other Person; provided, however, that the foregoing shall
not apply to nor operate to prevent:
(a) investments in direct obligations of the United States of
America or of any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America, provided that any such obligations shall mature within one
year of the date of issuance thereof;
(b) investments in commercial paper rated at least P-1 by
Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's
Corporation maturing within 270 days of the date of issuance thereof;
(c) investments in certificates of deposit issued by any
United States commercial bank having capital and surplus of not less
than $100,000,000 which have a maturity of one year or less;
(d) endorsement of items for deposit or collection of
commercial paper received in the ordinary course of business; and
(e) inter-company loans and advances not aggregating more than
$6,000,000 at any one time outstanding.
In determining the amount of investments, acquisitions, loans, advances and
guarantees permitted under this Section, investments and acquisitions shall
always be taken at the original cost thereof (regardless of any subsequent
appreciation or depreciation therein), loans and advances shall be taken at the
principal amount thereof then remaining unpaid, and guarantees shall be taken at
the amount of obligations guaranteed thereby.
Section 7.18. Mergers, Consolidations and Sales. The Company shall not,
nor shall it permit any Subsidiary to, be a party to any merger or
consolidation, or sell, transfer, lease or otherwise dispose of all or any
substantial part of its Property, including any disposition of Property as part
of a sale and leaseback transaction, or in any event sell or discount (with or
without recourse) any of its notes or accounts receivable; provided, however,
that (i) this Section 7.19 shall not apply to nor operate to prevent the Company
or any Subsidiary from selling its inventory in the ordinary course of its
business; and (ii) the Company may consolidate or merge with any other Person if
(A) the Company is the surviving or continuing corporation, (B) at the time of
such consolidation or merger, and after giving effect thereto, no Default or
Event of Default shall have occurred and be continuing and (C) the Company shall
have delivered to the Agent (I) a certificate of an Authorized Representative
demonstrating, after giving effect to such consolidation or merger, a projected
Funded Debt to EBITDA Ratio for each of the next four fiscal quarters of the
Company of not less than that required for such periods by Section 7.13 hereof
and (II) a statement of the relevant assumptions upon which the projected
statements used in determining such projected Funded Debt to EBITDA Ratio are
based. The term "substantial" as used herein shall mean the sale, transfer,
lease or other disposition in any fiscal year of five percent (5%) or more of
the Properties of the Company and its Subsidiaries taken as a whole.
Section 7.19. Maintenance of Subsidiaries. The Company shall not assign,
sell or transfer, or permit any Subsidiary to issue, assign, sell or transfer,
any shares of capital stock of a Subsidiary; provided that the foregoing shall
not operate to prevent the issuance, sale and transfer to any person of any
shares of capital stock of a Subsidiary solely for the purpose of qualifying,
and to the extent legally necessary to qualify, such person as a director of
such Subsidiary.
Section 7.20. Dividends and Certain Other Restricted Payments. The
Company will not during any fiscal year (a) declare or pay any dividends on or
make any other distributions in respect of any class or series of its capital
stock (other than dividends payable solely in its capital stock) or (b) directly
or indirectly purchase, redeem or otherwise acquire or retire any of its capital
stock (all of the foregoing non-excepted declarations, payments, distributions,
purchases, redemptions, acquisitions and retirements being referred to
collectively herein as "Restricted Payments"); provided, however, that the
Company may make Restricted Payments if and only if (y) at the time each such
Restricted Payment is made and after giving effect thereto, no Default or Event
of Default occurs and is continuing and (z) the aggregate principal amount of
Restricted Payments by the Company in any single fiscal year shall not exceed
10% of positive Net Income for the immediately preceding fiscal year.
Section 7.21. ERISA. The Company shall, and shall cause each Subsidiary
to, promptly pay and discharge all obligations and liabilities arising under
ERISA of a character which if unpaid or unperformed might result in the
imposition of a Lien against any of its Properties. The Company shall, and shall
cause each Subsidiary to, promptly notify the Agent and each Lender of (i) the
occurrence of any reportable event (as defined in ERISA) with respect to a Plan,
(ii) receipt of any notice from the PBGC of its intention to seek termination of
any Plan or appointment of a trustee therefor, (iii) its intention to terminate
or withdraw from any Plan, and (iv) the occurrence of any event with respect to
any Plan which would result in the incurrence by the Company or any Subsidiary
of any material liability, fine or penalty, or any material increase in the
contingent liability of the Company or any Subsidiary with respect to any
post-retirement Welfare Plan benefit.
Section 7.22. Compliance with Laws. The Company shall, and shall cause
each Subsidiary to, comply in all respects with the requirements of all federal,
state and local laws, rules, regulations, ordinances and orders applicable to or
pertaining to their Properties or business operations, non-compliance with which
could have a material adverse effect on the financial condition, Properties,
business or operations of the Company or any Subsidiary or could result in a
Lien upon any of their Property.
Section 7.23. Burdensome Contracts With Affiliates. The Company shall
not, nor shall it permit any Subsidiary to, enter into any contract, agreement
or business arrangement with any of its Affiliates (other than with Wholly-Owned
Subsidiaries) on terms and conditions which are less favorable to the Company or
such Subsidiary than would be usual and customary in similar contracts,
agreements or business arrangements between Persons not affiliated with each
other.
Section 7.24. Negative Pledges; Subsidiary Payments. The Company will
not, nor will it permit any Subsidiary to, enter into any agreement (excluding
this Agreement) (a) prohibiting the creation or assumption of any Lien upon
their respective properties, revenues, or assets, whether now owned or hereafter
acquired; (b) which would restrict the ability of any Subsidiary to pay or make
dividends or distributions in cash or kind, to make loans, advances or other
payments of whatsoever nature, or to make transfers or distributions of all or
any part of its assets, in each case to the Company or to any corporation as to
which such Subsidiary is a Subsidiary; or (c) which would require the consent or
waiver of any third party to any amendment to this Agreement or any other Loan
Document.
Section 7.25. No Changes in Fiscal Year. Neither the Company nor any
Subsidiary shall change its fiscal year from its present basis without the prior
written consent of the Required Lenders.
Section 7.26. Formation of Subsidiaries. Except for existing
Subsidiaries designated on Schedule 5.2 hereto, the Company shall not, nor shall
it permit any Subsidiary to, form or acquire any Subsidiary without the prior
written consent of the Required Lenders.
Section 7.27. Change in the Nature of Business. The Company shall not,
and shall not permit any Subsidiary to, engage in any business or activity if as
a result the general nature of the business of the Company or any Subsidiary
would be changed in any material respect from the general nature of the business
engaged in by the Company or such Subsidiary on the date of this Agreement.
Section 7.28. Issuance of Replacement Letter of Credit. Within 90 days
from the date hereof, the Company (i) will request that the Agent deliver to the
beneficiary of the Existing Letter of Credit a Letter of Credit to be issued to
replace the Existing Letter of Credit and (ii) will deliver to Firstar the
Existing Letter of Credit marked "cancelled".
SECTION 8. EVENTS OF DEFAULT AND REMEDIES.
Section 8.1. Events of Default. Any one or more of the following shall
constitute an "Event of Default" hereunder:
(a) default in the payment when due of all or any part of the
principal of or interest on any Note (whether at the stated maturity
thereof or at any other time provided for in this Agreement) or of any
reimbursement obligation owing under any Application or of any fee or
other Obligation payable by the Company hereunder or under any other
Loan Document; or
(b) default in the observance or performance of any covenant
set forth in Sections 7.1, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14,
7.15, 7.16, 7.18, 7.20 or 7.24; or
(c) default in the observance or performance of any other
provision hereof or of any other Loan Document which is not remedied
within thirty (30) days after the earlier of (i) the date on which such
failure shall first become known to any officer of the Company or (ii)
written notice thereof is given to the Company by the Agent or any
Lender; or
(d) any representation or warranty made by the Company herein
or in any other Loan Document, or in any statement or certificate
furnished by it pursuant hereto or thereto, or in connection with any
extension of credit made hereunder, proves untrue in any material
respect as of the date of the issuance or making thereof; or
(e) any event occurs or condition exists (other than those
described in subsections (a) through (d) above) which is specified as
an event of default under any of the other Loan Documents, or any of
the Loan Documents shall for any reason not be or shall cease to be in
full force and effect or any of the Loan Documents is declared to be
null and void; or
(f) default shall occur under any Indebtedness for Borrowed
Money issued, assumed or guaranteed by the Company or any Subsidiary,
or under any indenture, agreement or other instrument under which the
same may be issued, and such default shall continue for a period of
time sufficient to permit the acceleration of the maturity of any such
Indebtedness for Borrowed Money (whether or not such maturity is in
fact accelerated), or any such Indebtedness for Borrowed Money shall
not be paid when due (whether by lapse of time, acceleration or
otherwise); or
(g) any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or processes in an
aggregate amount in excess of $500,000 shall be entered or filed
against the Company or any Subsidiary or against any of their Property
and which remains unvacated, unbonded, unstayed or unsatisfied for a
period of 30 days; or
(h) the Company or any member of its Controlled Group shall
fail to pay when due an amount or amounts aggregating in excess
$500,000 which it shall have become liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or notice of intent to terminate a Plan
or Plans having aggregate Unfunded Vested Liabilities in excess of
$500,000 (collectively, a "Material Plan") shall be filed under Title
IV of ERISA by the Company or any other member of its Controlled Group,
any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate or to
cause a trustee to be appointed to administer any Material Plan or a
proceeding shall be instituted by a fiduciary of any Material Plan
against the Company or any member of its Controlled Group to enforce
Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have
been dismissed within 30 days thereafter; or a condition shall exist by
reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or
(i) dissolution or termination of the existence of the Company
or any Subsidiary; or
(j) (i) any Person or two or more Persons acting in concert
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934), directly or indirectly, of securities of the
Company (or other securities convertible into such securities)
representing 10% or more of the combined voting power of all securities
of the Company entitled to vote in the election of directors, other
than securities having such power only by reason of the happening of a
contingency; or (ii) during any period of up to 24 consecutive months,
commencing before or after the date of this Agreement, individuals who
at the beginning of such 24-month period were directors of the Company
shall cease for any reason to constitute a majority of the board of
directors of the Company; or
(k) the Company or any Subsidiary shall (i) have entered
involuntarily against it an order for relief under the United States
Bankruptcy Code, as amended, (ii) not pay, or admit in writing its
inability to pay, its debts generally as they become due, (iii) make an
assignment for the benefit of creditors, (iv) apply for, seek, consent
to, or acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any substantial part
of its Property, (v) institute any proceeding seeking to have entered
against it an order for relief under the United States Bankruptcy Code,
as amended, to adjudicate it insolvent, or seeking dissolution, winding
up, liquidation, reorganization, arrangement, adjustment or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed
against it, (vi) take any corporate action in furtherance of any matter
described in parts (i) through (v) above, or (vii) fail to contest in
good faith any appointment or proceeding described in Section 8.1(l)
hereof; or
(l) a custodian, receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Company or any Subsidiary
or any substantial part of any of their Property, or a proceeding
described in Section 8.1(k)(v) shall be instituted against the Company
or any Subsidiary, and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of 60 days.
Section 8.2. Non-Bankruptcy Defaults. When any Event of Default
described in subsection (a) through (j), both inclusive, of Section 8.1 has
occurred and is continuing, the Agent shall, upon the request of the Required
Lenders, by notice to the Company, take one or more of the following actions:
(a) terminate the obligations of the Lenders to extend any
further credit hereunder on the date (which may be the date thereof)
stated in such notice;
(b) declare the principal of and the accrued interest on the
Notes to be forthwith due and payable and thereupon the Notes,
including both principal and interest and all fees, charges and other
Obligations payable hereunder and under the other Loan Documents, shall
be and become immediately due and payable without further demand,
presentment, protest or notice of any kind; and
(c) enforce any and all rights and remedies available to it
under the Loan Documents or applicable law.
Section 8.3. Bankruptcy Defaults. When any Event of Default described in
subsection (k) or (l) of Section 8.1 has occurred and is continuing, then the
Notes, including both principal and interest, and all fees, charges and other
Obligations payable hereunder and under the other Loan Documents, shall
immediately become due and payable without presentment, demand, protest or
notice of any kind, and the obligations of the Lenders to extend further credit
pursuant to any of the terms hereof shall immediately terminate. In addition,
the Agent may exercise any and all remedies available to it under the Loan
Documents or applicable law.
Section 8.4. Collateral for Undrawn Letters of Credit. When any Event
of Default, other than an Event of Default described in subsection (k) or (l) of
Section 8.1, has occurred and is continuing, the Company shall, upon demand of
the Agent (which demand shall be made upon the request of the Required Lenders),
and when any Event of Default described in subsection (k) or (l) of Section 8.1
has occurred the Company shall, without notice or demand from the Agent,
immediately pay to the Agent the full amount of each Letter of Credit then
outstanding, the Company agreeing to immediately make such payment and
acknowledging and agreeing that the Agent and the Lenders would not have an
adequate remedy at law for failure of the Company to honor any such demand and
that the Agent and the Lenders shall have the right to require the Company to
specifically perform such undertaking whether or not any draws have been made
under any such Letters of Credit. SECTION 9. THE AGENT
SECTION 9. THE AGENT
Section 9.1. Appointment and Authorization. Each Lender hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers hereunder and under the other Loan Documents as are
designated to the Agent by the terms hereof and thereof together with such
powers as are reasonably incidental thereto. The Lenders expressly agree that
the Agent is not acting as a fiduciary of the Lenders in respect of the Loan
Documents, the Company or otherwise, and nothing herein or in any of the other
Loan Documents shall result in any duties or obligations on the Agent or any of
the Lenders except as expressly set forth herein. The Agent may resign at any
time by sending 20 days prior written notice to the Company and the Lenders. In
the event of any such resignation, the Required Lenders may appoint a new agent
after consultation with the Company, which shall succeed to all the rights,
powers and duties of the Agent hereunder and under the other Loan Documents. Any
resigning Agent shall be entitled to the benefit of all the protective
provisions hereof with respect to its acts as an agent hereunder, but no
successor Agent shall in any event be liable or responsible for any actions of
its predecessor. If the Agent resigns and no successor is appointed, the rights
and obligations of such Agent shall be automatically assumed by the Required
Lenders and the Company shall be directed to make all payments due each Lender
hereunder directly to such Lender.
Section 9.2. Rights as a Lender. The Agent has and reserves all of the
rights, powers and duties hereunder and under the other Loan Documents as any
Lender may have and may exercise the same as though it were not the Agent and
the terms "Lender" or "Lenders" as used herein and in all of such documents
shall, unless the context otherwise expressly indicates, include the Agent in
its individual capacity as a Lender.
Section 9.3. Standard of Care. The Lenders acknowledge that they have
received and approved copies of the Loan Documents and such other information
and documents concerning the transactions contemplated and financed hereby as
they have requested to receive and/or review. The Agent makes no representations
or warranties of any kind or character to the Lenders with respect to the
validity, enforceability, genuineness, perfection, value, worth or
collectibility hereof or of the Notes or any of the other Obligations or of any
of the other Loan Documents or of any other documents called for hereby or
thereby. The Agent may rely exclusively on reports of the Company in computing
the Borrowing Base. Neither the Agent nor any director, officer, employee, agent
or representative thereof (including any security trustee therefor) shall in any
event be liable for any clerical errors or errors in judgment, inadvertence or
oversight, or for action taken or omitted to be taken by it or them hereunder or
under the other Loan Documents or in connection herewith or therewith except for
its or their own gross negligence or willful misconduct. The Agent shall incur
no liability under or in respect of this Agreement or the other Loan Documents
by acting upon any notice, certificate, warranty, instruction or statement (oral
or written) of anyone (including anyone in good faith believed by it to be
authorized to act on behalf of the Company), unless it has actual knowledge of
the untruthfulness of same. The Agent may execute any of its duties hereunder by
or through employees, agents, and attorneys-in-fact and shall not be answerable
to the Lenders for the default or misconduct of any such agents or
attorneys-in-fact selected with reasonable care. The Agent shall be entitled to
advice of counsel concerning all matters pertaining to the agencies hereby
created and its duties hereunder, and shall incur no liability to anyone and be
fully protected in acting upon the advice of such counsel. The Agent shall be
entitled to assume that no Default or Event of Default exists unless notified to
the contrary by a Lender. The Agent shall in all events be fully protected in
acting or failing to act in accord with the instructions of the Required
Lenders. Upon the occurrence of an Event of Default hereunder, the Agent shall
take such action as it shall be directed to take by the Required Lenders but
unless and until the Required Lenders have given such direction the Agent shall
take or refrain from taking such actions as it deems appropriate and in the best
of interest of all Lenders. The Agent shall in all cases be fully justified in
failing or refusing to act hereunder unless it shall be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by the Agent by reason of taking or continuing to take any such
action. The Agent may treat the owner of any Note as the holder thereof until
written notice of transfer shall have been filed with the Agent signed by such
owner in form satisfactory to the Agent. Each Lender acknowledges that it has
independently and without reliance on the Agent or any other Lender and based
upon such information, investigations and inquiries as it deems appropriate made
its own credit analysis and decision to extend credit to the Company. It shall
be the responsibility of each Lender to keep itself informed as to the
creditworthiness of the Company and the Agent shall have no liability to any
Lender with respect thereto.
Section 9.4. Costs and Expenses. Each Lender agrees to reimburse the
Agent for all costs and expenses suffered or incurred by the Agent or any
security trustee in performing its duties hereunder and under the other Loan
Documents, or in the exercise of any right or power imposed or conferred upon
the Agent hereby or thereby, to the extent that the Agent is not promptly
reimbursed for same by the Company, all such costs and expenses to be borne by
the Lenders ratably in accordance with the amounts of their respective
Commitments. If any Lender fails to reimburse the Agent for such Lender's share
of any such costs and expenses, such costs and expenses shall be paid pro rata
by the remaining Lenders, but without in any manner releasing the defaulting
Lender from its liability hereunder.
Section 9.5. Indemnity. The Lenders shall ratably indemnify and hold the
Agent, and its directors, officers, employees, agents and representatives
(including as such any security trustee therefor) harmless from and against any
liabilities, losses, costs and expenses suffered or incurred by them hereunder
or under the other Loan Documents or in connection with the transactions
contemplated hereby or thereby, regardless of when asserted or arising, except
to the extent they are promptly reimbursed for the same by the Company and
except to the extent that any event giving rise to a claim was caused by the
gross negligence or willful misconduct of the party seeking to be indemnified.
If any Lender defaults in its obligations hereunder, its share of the
obligations shall be paid pro rata by the remaining Lenders, but without in any
manner releasing the defaulting Lender from its liability hereunder.
SECTION 10. MISCELLANEOUS.
Section 10.1. Withholding Taxes. (a) Payments Free of Withholding.
Except as otherwise required by law and subject to Section 10.1(b) hereof, each
payment by the Company under this Agreement and under any other Loan Document
shall be made without withholding for or on account of any present or future
taxes (other than overall net income taxes on the recipient) imposed by or
within the jurisdiction in which the Company is domiciled, any jurisdiction from
which the Company makes any payment, or (in each case) any political subdivision
or taxing authority thereof or therein. If any such withholding is so required,
the Company shall make the withholding, pay the amount withheld to the
appropriate governmental authority before penalties attach thereto or interest
accrues thereon and forthwith pay such additional amount as may be necessary to
ensure that the net amount actually received by each Lender and the Agent free
and clear of such taxes (including such taxes on such additional amount) is
equal to the amount which that Lender or the Agent (as the case may be) would
have received had such withholding not been made. If the Agent or any Lender
pays any amount in respect of any such taxes, penalties or interest, the Company
shall reimburse the Agent or such Lender for that payment on demand in the
currency in which such payment was made. If the Company pays any such taxes,
penalties or interest, it shall deliver official tax receipts evidencing that
payment or certified copies thereof to the Lender or Agent on whose account such
withholding was made (with a copy to the Agent if not the recipient of the
original) on or before the thirtieth day after payment.
(b) U.S. Withholding Tax Exemptions. Each Lender that is not a United
States person (as such term is defined in Section 7701(a)(30) of the Code) shall
submit to the Company and the Agent on or before the earlier of the date the
initial Borrowing is made hereunder and 30 days after the date hereof, two duly
completed and signed copies of either Form 1001 (relating to such Lender and
entitling it to a complete exemption from withholding under the Code on all
amounts to be received by such Lender, including fees, pursuant to the Loan
Documents and the Loans) or Form 4224 (relating to all amounts to be received by
such Lender, including fees, pursuant to the Loan Documents and the Loans) of
the United States Internal Revenue Service. Thereafter and from time to time,
each Lender shall submit to the Company and the Agent such additional duly
completed and signed copies of one or the other of such Forms (or such successor
forms as shall be adopted from time to time by the relevant United States taxing
authorities) as may be (i) requested by the Company in a written notice,
directly or through the Agent, to such Lender and (ii) required under
then-current United States law or regulations to avoid or reduce United States
withholding taxes on payments in respect of all amounts to be received by such
Lender, including fees, pursuant to the Loan Documents or the Loans.
(c) Inability of Bank to Submit Forms. If any Lender determines, as a
result of any change in applicable law, regulation or treaty, or in any official
application or interpretation thereof, that it is unable to submit to the
Company or the Agent any form or certificate that such Lender is obligated to
submit pursuant to subsection (b) of this Section 10.1 or that such Lender is
required to withdraw or cancel any such form or certificate previously submitted
or any such form or certificate otherwise becomes ineffective or inaccurate,
such Lender shall promptly notify the Company and Agent of such fact and the
Lender shall to that extent not be obligated to provide any such form or
certificate and will be entitled to withdraw or cancel any affected form or
certificate, as applicable.
Section 10.2. Non-Business Days. If any payment hereunder becomes due
and payable on a day which is not a Business Day, the due date of such payment
shall be extended to the next succeeding Business Day on which date such payment
shall be due and payable. In the case of any payment of principal falling due on
a day which is not a Business Day, interest on such principal amount shall
continue to accrue during such extension at the rate per annum then in effect,
which accrued amount shall be due and payable on the next scheduled date for the
payment of interest.
Section 10.3. No Waiver, Cumulative Remedies. No delay or failure on the
part of any Lender or on the part of any holder of any of the Obligations in the
exercise of any power or right shall operate as a waiver thereof or as an
acquiescence in any default, nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof or the exercise of
any other power or right. The rights and remedies hereunder of the Lenders and
any of the holders of the Obligations are cumulative to, and not exclusive of,
any rights or remedies which any of them would otherwise have.
Section 10.4. Waivers, Modifications and Amendments. Any provision
hereof or of any of the other Loan Documents may be amended, modified, waived or
released and any Default or Event of Default and its consequences may be
rescinded and annulled upon the written consent of the Required Lenders;
provided, however, that without the consent of all Lenders no such amendment,
modification or waiver shall increase the amount or extend the term of any
Lender's Commitment or reduce the amount of any principal of or interest rate
applicable to, or extend the maturity of, any Obligation owed to it or reduce
the amount of the fees to which it is entitled hereunder or change this Section
or change the definition of "Required Lenders" or change the number of Lenders
required to take any action hereunder or under any of the other Loan Documents.
No amendment, modification or waiver of the Agent's protective provisions shall
be effective without the prior written consent of the Agent.
Section 10.5. Costs and Expenses. The Company agrees to pay on demand
the costs and expenses of the Agent in connection with the negotiation,
preparation, execution and delivery of this Agreement, the other Loan Documents
and the other instruments and documents to be delivered hereunder or thereunder,
and in connection with the recording or filing of any of the foregoing, and in
connection with the transactions contemplated hereby or thereby, and in
connection with any consents hereunder or waivers or amendments hereto or
thereto, including the fees and expenses of Messrs. Chapman and Cutler, counsel
for the Agent, with respect to all of the foregoing (whether or not the
transactions contemplated hereby are consummated). In addition, at the time of
requesting any amendment hereof or consent or waiver hereunder, the Company must
negotiate with the Lenders a fee to the Lenders for engaging in and documenting
such action. The Company further agrees to pay to Agent and the Lenders and any
other holders of the Obligations all costs and expenses (including court costs
and attorneys' fees), if any, incurred or paid by the Agent, the Lenders or any
other holders of the Obligations in connection with any Default or Event of
Default or in connection with the enforcement of this Agreement or any of the
other Loan Documents or any other instrument or document delivered hereunder or
thereunder. The Company further agrees to indemnify and save the Lenders, the
Agent and any security trustee for the Lenders harmless from any and all
liabilities, losses, costs and expenses incurred by the Lenders or the Agent in
connection with any action, suit or proceeding brought against the Agent, or any
security trustee or any Lender by any Person (but excluding attorneys' fees for
litigation solely between the Lenders to which the Company is not a party) which
arises out of the transactions contemplated or financed hereby or out of any
action or inaction by the Agent, any security trustee or any Lender hereunder or
thereunder, except for such thereof as is caused by the gross negligence or
willful misconduct of the party seeking to be indemnified. The provisions of
this Section and the protective provisions of Section 2 hereof shall survive
payment of the Obligations.
Section 10.6. Documentary Taxes. The Company agrees to pay on demand any
documentary, stamp or similar taxes payable in respect of this Agreement or any
other Loan Document, including interest and penalties, in the event any such
taxes are assessed, irrespective of when such assessment is made and whether or
not any credit is then in use or available hereunder.
Section 10.7. Survival of Representations. All representations and
warranties made herein or in any of the other Loan Documents or in certificates
given pursuant hereto or thereto shall survive the execution and delivery of
this Agreement and the other Loan Documents, and shall continue in full force
and effect with respect to the date as of which they were made as long as any
credit is in use or available hereunder.
Section 10.8. Survival of Indemnities. All indemnities and other
provisions relative to reimbursement to the Agent and the Lenders of amounts
sufficient to protect the yield of the Agent and the Lenders with respect to the
Loans and Letters of Credit, including, but not limited to, Sections 1.3, 2.7,
and 2.9 hereof, shall survive the termination of this Agreement and the payment
of the Obligations.
Section 10.9. Participations. Any Lender may grant participations in its
extensions of credit hereunder to any other Lender or other lending institution
(a "Participant"), provided that (i) no Participant shall thereby acquire any
direct rights under this Agreement, (ii) no Lender shall agree with a
Participant not to exercise any of such Lender's rights hereunder without the
consent of such Participant except for rights which under the terms hereof may
only be exercised by all Lenders and (iii) no sale of a participation in
extensions of credit shall in any manner relieve the selling Lender of its
obligations hereunder.
Section 10.10. Assignment Agreements. Each Lender may, from time to time
upon at least 5 Business Days' prior written notice to the Agent, assign to
other commercial lenders part of its rights and obligations under this Agreement
(including without limitation the indebtedness evidenced by the Notes then owned
by such assigning Lender, together with an equivalent proportion of its
Commitments to make Loans hereunder) pursuant to written agreements executed by
such assigning Lender, such assignee lender or lenders, the Company and the
Agent, which agreements shall specify in each instance the portion of the
indebtedness evidenced by the Notes which is to be assigned to each such
assignee lender and the portion of the Commitments of the assigning Lender to be
assumed by it (the "Assignment Agreements"); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of the
assigning Lender's rights and obligations under this Agreement and the
assignment shall cover the same percentage of such Lender's Commitments, Loans,
Notes and credit risk with respect to Letters of Credit; (ii) unless the Agent
otherwise consents, the aggregate amount of the Commitments, Loans, Notes and
credit risk with respect to Letters of Credit of the assigning Lender being
assigned pursuant to each such assignment (determined as of the effective date
of the relevant Assignment Agreement) shall in no event be less than $1,500,000
and shall be an integral multiple of $500,000; (iii) the Agent and the Company
must each consent, which consent shall not be unreasonably withheld, to each
such assignment to a party which was not an original signatory of this
Agreement; and (iv) the assigning Lender must pay to the Agent a processing and
recordation fee of $5,000 and any out-of-pocket attorneys' fees and expenses
incurred by the Agent in connection with such Assignment Agreement. Upon the
execution of each Assignment Agreement by the assigning Lender thereunder, the
assignee lender thereunder, the Company and the Agent and payment to such
assigning Lender by such assignee lender of the purchase price for the portion
of the indebtedness of the Company being acquired by it, (i) such assignee
lender shall thereupon become a "Lender" for all purposes of this Agreement with
Commitments in the amounts set forth in such Assignment Agreement and with all
the rights, powers and obligations afforded a Lender hereunder, (ii) such
assigning Lender shall have no further liability for funding the portion of its
Commitments assumed by such other Lender and (iii) the address for notices to
such assignee Lender shall be as specified in the Assignment Agreement executed
by it. Concurrently with the execution and delivery of such Assignment
Agreement, the Company shall execute and deliver a Note to the assignee Lender
in the amount of its Commitment and a new Note to the assigning Lender in the
amount of its Commitment after giving effect to the reduction occasioned by such
assignment, all such Notes to constitute "Notes" for all purposes of this
Agreement and of the other Loan Documents.
Section 10.11. Notices. Except as otherwise specified herein, all
notices hereunder shall be in writing (including, without limitation, notice by
telecopy) and shall be given to the relevant party at its address or telecopier
number set forth below, in the case of the Company, or on the appropriate
signature page hereof, in the case of the Lenders and the Agent, or such other
address or telecopier number as such party may hereafter specify by notice to
the Agent and the Company given by United States certified or registered mail,
by telecopy or by other telecommunication device capable of creating a written
record of such notice and its receipt. Notices hereunder to the Company shall be
addressed to:
Zytec Corporation
7575 Market Place Drive
Eden Prairie, Minnesota 55344
Attention: John B. Rogers, Treasurer
Telephone: (612) 941-1100
Telecopy: (612) 829-1837
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section; provided that any notice given pursuant
to Section 1 or Section 2 hereof shall be effective only upon receipt.
Section 10.12. Construction. The parties hereto acknowledge and agree
that this Agreement and the other Loan Documents shall not be construed more
favorably in favor of one than the other based upon which party drafted the
same, it being acknowledged that all parties hereto contributed substantially to
the negotiation of this Agreement and the other Loan Documents.
Section 10.13. Headings. Section headings used in this Agreement are
for convenience of reference only and are not a part of this Agreement for any
other purpose.
Section 10.14. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. All rights, remedies and powers provided in this Agreement and the
other Loan Documents may be exercised only to the extent that the exercise
thereof does not violate any applicable mandatory provisions of law, and all the
provisions of this Agreement and the other Loan Documents are intended to be
subject to all applicable mandatory provisions of law which may be controlling
and to be limited to the extent necessary so that they will not render this
Agreement or the other Loan Documents invalid or unenforceable.
Section 10.15. Counterparts. This Agreement may be executed in any
number of counterparts, and by different parties hereto on separate counterpart
signature pages, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
Section 10.16. Entire Understanding. This Agreement together with the
other Loan Documents constitute the entire understanding of the parties with
respect to the subject matter hereof and any prior agreements, whether written
or oral, with respect thereto are superseded hereby except for prior
understandings related to fees payable to the Agent upon the initial closing of
the transactions contemplated hereby.
Section 10.17. Binding Nature, Governing Law, Etc. This Agreement shall
be binding upon the Company and its successors and assigns, and shall inure to
the benefit of the Agent and the Lenders and the benefit of their successors and
assigns, including any subsequent holder of an interest in the Obligations. The
Company may not assign its rights hereunder without the written consent of the
Lenders. THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
Section 10.18. Submission to Jurisdiction; Waiver of Jury Trial. The
Company hereby submits to the non-exclusive jurisdiction of the United States
District Court for the Northern District of Illinois and of any Illinois State
court sitting in the City of Chicago for purposes of all legal proceedings
arising out of or relating to this Agreement, the other Loan Documents or the
transactions contemplated hereby or thereby. The Company irrevocably waives, to
the fullest extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such proceeding brought in such a court
and any claim that any such proceeding brought in such a court has been brought
in an inconvenient forum. THE COMPANY, THE AGENT, AND EACH LENDER HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
THEREBY.
Section 10.19. Sharing Set-Off. Each of the Lenders hereby agrees with
each other Lender that if it should receive or obtain any payment (whether by
voluntary payment, by realization upon collateral, by the exercise of rights of
set-off or banker's lien, by counterclaim or cross action, or by the enforcement
of any rights under this Agreement, any of the other Loan Documents or
otherwise) in respect of the Obligations in a greater amount than such Lender
would have received had such payment been made to the Agent and been distributed
among the Lenders as contemplated by Section 3.5 hereof then in that event the
Lender receiving such disproportionate payment shall purchase for cash without
recourse from the other Lenders an interest in the Obligations of the Company to
such Lenders in such amount as shall result in a distribution of such payment as
contemplated by Section 3.5 hereof. In the event any payment made to a Lender
and shared with the other Lenders pursuant to the provisions hereof is ever
recovered from such Lender, the Lenders receiving a portion of such payment
hereunder shall restore the same to the payor Lender, but without interest.
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 30th day of May, 1996.
ZYTEC CORPORATION
By /s/ Ronald D. Schmidt
Name: Ronald D. Schmidt
Title: President
Amount and Percentage of Commitments:
66.66666667%
Commitment: HARRIS TRUST AND SAVINGS BANK
$15,333,333.34
By /s/ Catherine C. Ciolek
Name: Catherine C. Ciolek
Title: Vice President
111 West Monroe Street
Chicago, Illinois 60603
Attention: Catherine C. Ciolek
Telephone: (312) 461-7009
Telecopy: (312) 461-2591
Amount and Percentage of Commitments:
33.33333333%
Commitment: FIRSTAR BANK OF MINNESOTA, NATIONAL
$7,666,666.66 ASSOCIATION
By /s/ Karen S. Paris
Name: Karen S. Paris
Title: Vice President
1550 East 79th Street
Bloomington, Minnesota 55425
Attention: Karen S. Paris
Telephone: 612-851-5698
Telecopy: 612-854-5376
EXHIBIT A
ZYTEC CORPORATION
NOTE
Chicago, Illinois
$____________________ ___________________, _____
On the Termination Date, for value received, the undersigned, ZYTEC
CORPORATION, a Minnesota corporation (the "Company"), hereby promises to pay to
the order of ________________ (the "Lender"), at the principal office of Harris
Trust and Savings Bank in Chicago, Illinois, the principal sum of (i)
_______________________ and no/100 Dollars ($___________), or (ii) such lesser
amount as may at the time of the maturity hereof, whether by acceleration or
otherwise, be the aggregate unpaid principal amount of all Loans owing from the
Company to the Lender under the Revolving Credit provided for in the Credit
Agreement hereinafter mentioned.
This Note evidences loans constituting part of a "Domestic Rate
Portion" and "LIBOR Portions" as such terms are defined in that certain Credit
Agreement dated as of May 30, 1996, between the Company, Harris Trust and
Savings Bank, individually and as Agent thereunder, and the other Lenders which
are now or may from time to time hereafter become parties thereto (said Credit
Agreement, as the same may be amended, modified or restated from time to time,
being referred to herein as the "Credit Agreement") made and to be made to the
Company by the Lender under the Revolving Credit provided for under the Credit
Agreement, and the Company hereby promises to pay interest at the office
described above on each loan evidenced hereby at the rates and at the times and
in the manner specified therefor in the Credit Agreement.
Each loan made under the Revolving Credit provided for in the Credit
Agreement by the Lender to the Company against this Note, any repayment of
principal hereon, the status of each such loan from time to time as part of the
Domestic Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion,
the interest rate and Interest Period applicable thereto shall be endorsed by
the holder hereof on a schedule to this Note or recorded on the books and
records of the holder hereof (provided that such entries shall be endorsed on a
schedule to this Note prior to any negotiation hereof). The Company agrees that
in any action or proceeding instituted to collect or enforce collection of this
Note, the entries so endorsed on a schedule to this Note or recorded on the
books and records of the holder hereof shall be prima facie evidence of the
unpaid principal balance of this Note, the status of each such loan from time to
time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of
any LIBOR Portion, the interest rate and Interest Period applicable thereto.
This Note is issued by the Company under the terms and provisions of
the Credit Agreement and this Note and the holder hereof are entitled to all of
the benefits and security provided for thereby or referred to therein, to which
reference is hereby made for a statement thereof. This Note may be declared to
be, or be and become, due prior to its expressed maturity, voluntary prepayments
may be made hereon, AND CERTAIN PREPAYMENTS ARE REQUIRED TO BE MADE HEREON, all
in the events, on the terms and with the effects provided in the Credit
Agreement. All capitalized terms used herein without definition shall have the
same meanings herein as such terms are defined in the Credit Agreement.
The Company hereby promises to pay all costs and expenses (including
attorneys' fees) suffered or incurred by the holder hereof in collecting this
Note or enforcing any rights in any collateral therefor. The Company hereby
waives presentment for payment and demand. THIS NOTE SHALL BE CONSTRUED IN
ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF ILLINOIS
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
ZYTEC CORPORATION
By _________________________________
Name: ______________________
Title: _____________________
EXHIBIT B
BORROWING BASE CERTIFICATE
To: Harris Trust and Savings Bank, as Agent under, and the Lenders party
to, the Credit Agreement described below.
Pursuant to the terms of the Credit Agreement dated as of May 30, 1996,
among us (the "Credit Agreement"), we submit this Borrowing Base Certificate to
you and certify that the information set forth below and on any attachments to
this Certificate is true, correct and complete as of the date of this
Certificate.
I. BORROWING BASE
A. ACCOUNTS IN BORROWING BASE
1. Gross Accounts ______________
Less
(a) Ineligible sales (i.e., ______________
not within the U.S.
or not supported by an
eligible letter of credit)
(b) Owed by an account ______________
debtor who is a Subsidiary or
an Affiliate
(c) Owed by an account ______________
debtor who is in an
insolvency or reorganization
proceeding
(d) Credits/allowances/ ______________
retainage
(e) Unpaid more than ______________
60 days
(f) Ineligible because of ______________
25% concentration factor
(g) Otherwise ineligible ______________
2. Total Deductions ______________
(sum of lines A1a - A1g)
3. Eligible Accounts ______________
(line A1 minus line A2)
4. Accounts in Borrowing Base ______________
(line A3 x .80)
B. INVENTORY IN BORROWING BASE
1. Gross inventory of Raw Materials ______________
Less
(a) Raw Materials not ______________
located at approved locations
(b) Obsolete, slow moving ______________
not merchantable
(c) Otherwise ineligible ______________
2. Total Deductions (sum of lines ______________
B1a - B1c)
3. Eligible Inventory ______________
(line B1 minus line B2)
4. Inventory in ______________
Borrowing Base (line B3 x .50)
C. PLANT AND EQUIPMENT IN BORROWING BASE
1. Net Value of Plant and Equipment ______________
2. Plant and Equipment in Borrowing
Base (line C1 x .50) ______________
D. TOTAL BORROWING BASE ______________
(sum of lines A4, B4 and C2)
E. REVOLVING CREDIT ADVANCES
1. Loans ______________
2. Letters of Credit ______________
TOTAL REVOLVING CREDIT ADVANCES ______________
(line E1 plus E2)
F. UNUSED AVAILABILITY ______________
(line D minus line E)
Dated as of this ___________ day of __________________, 19____.
_________________________________________
____________________, ___________________
(Print or Type Name) (Title)
EXHIBIT C
COMPLIANCE CERTIFICATE
To: Harris Trust and Savings Bank, as Agent under, and the Lenders party
to, the Credit Agreement described below
This Compliance Certificate is furnished to the Agent and the Lenders
pursuant to that certain Credit Agreement dated as of May 30, 1996, by and among
Zytec Corporation (the "Company") and you (the "Credit Agreement"). Unless
otherwise defined herein, the terms used in this Compliance Certificate have the
meanings ascribed thereto in the Credit Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected _________________________________ of the
Company;
2. I have reviewed the terms of the Credit Agreement and I have made,
or have caused to be made under my supervision, a detailed review of the
transactions and conditions of the Company and its Subsidiaries during the
accounting period covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I
have no knowledge of, the existence of any condition or the occurrence of any
event which constitutes a Default or Event of Default during or at the end of
the accounting period covered by the attached financial statements or as of the
date of this Certificate, except as set forth below;
4. The financial statements required by Section 7.5 of the Credit
Agreement and being furnished to you concurrently with this Certificate are
true, correct and complete as of the date and for the periods covered thereby;
and
5. The Attachment hereto sets forth financial data and computations
evidencing the Company's compliance with certain covenants of the Credit
Agreement, all of which data and computations are, to the best of my knowledge,
true, complete and correct and have been made in accordance with the relevant
Sections of the Credit Agreement.
Described below are the exceptions, if any, to paragraph 3 by listing,
in detail, the nature of the condition or event, the period during which it has
existed and the action which the Company has taken, is taking, or proposes to
take with respect to each such condition or event:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The foregoing certifications, together with the computations set forth
in the Attachment hereto and the financial statements delivered with this
Certificate in support hereof, are made and delivered this _________ day of
__________________ 19___.
_________________________________________
____________________, ___________________
(Print or Type Name) (Title)
ATTACHMENT TO COMPLIANCE CERTIFICATE
ZYTEC CORPORATION (USA)
Compliance Calculations for Credit Agreement
Dated as of May 30, 1996
Calculations as of _____________, 19___
- --------------------------------------------------------------------------------
A. NET WORTH (SECTION 7.7)
1. Shareholder's equity
Less
(a) Minority interests in Subsidiaries
2. Net Worth (Line 1 minus
Line (a))
3. Positive Net Income for each year
commencing on or after
January 1, 1995 x .90
4. Net proceeds of the sale of equity
securities issued by Company x .75
5. As listed in Section 7.7, for the
date of this Certificate, Net
Worth must not be less than
Line 3 plus Line 4
6. Company is in compliance?
(Circle yes or no) Yes/No
B. LEVERAGE RATIO (SECTION 7.8)
1. Total Liabilities as defined
2. Net Worth
(from Line A2 above)
3. Ratio of Total Liabilities (Line 1)
to Net Worth (Line 2)
("Leverage Ratio") :1
4. As listed in Section 7.8, for
the date of this Certificate,
the Leverage Ratio must not
be greater than :1
5. Company is in compliance?
(Circle yes or no) Yes/No
C. INTEREST COVERAGE (SECTION 7.9)
1. Net Income as defined for 4
fiscal quarters then ended
2. Amounts deducted in arriving
at Net Income from Line C1 in
respect of
(a) Interest Expense as defined
(b) Taxes imposed on or
measured by income or
excess profits
3. Sum of Lines 1, 2(a), (b)
("EBIT")
4. Interest Expense for 4 fiscal quarters
then ended (from Line C2a)
5. Ratio of EBIT (Line 3) to
Interest Expense (Line 4)
("Interest Coverage Ratio") :1
6. Interest Coverage Ratio must
not be less than 3.00:1
7. Company is in compliance?
(Circle yes or no) Yes/No
D. CURRENT RATIO (SECTION 7.10)
1. Consolidated current assets
2. Consolidated current liabilities
3. Ratio of Line 1 to Line 2
("Current Ratio") :1
4. As listed in Section 7.10, for the date of this Certificate,
Current Ratio must not be less than :1
5. Company is in compliance?
(Circle yes or no) Yes/No
E. NET INCOME (SECTION 7.11)
1. Net Income as defined for fiscal quarter then ended
2. Net Income must not be less than $1.00
3. Company is in compliance?
(Circle yes or no) Yes/No
4. Net income for Zytec Corporation GmbH for fiscal
quarter then ended
5. Net income for Zytec Corporation GmbH for
immediately preceding fiscal quarter
6. Net income for Zytec Corporation GmbH must not,
for 2 consecutive quarters, be less than $1.00
7. Company is in compliance?
(Circle yes or no) Yes/No
F. FUNDED DEBT TO EBITDA (SECTION 7.12)
1. Funded Debt as defined for 4 fiscal
quarters then ended
2. EBIT (from Line C3 above)
3. Amount deducted in arriving at
Net Income in respect of
(a) Depreciation of fixed assets
(b) Amortization of intangibles
4. Line 2 plus Lines 3(a) and (b)
("EBITDA")
5. Ratio of Line 1 to Line 4
("Funded Debt to EBITDA Ratio") :1
6. As set forth in Section 7.12, for the date of this
certificate, Funded Debt to EBITDA Ratio must
not be more than :1
7. Company is in compliance?
(Circle yes or no) Yes/No
G. RENTAL EXPENSE (SECTION 7.13)
1. Rentals payable under leases for
current fiscal year
2. Rentals must not be more than $3,000,000
3. Company is in compliance?
(Circle yes or no) Yes/No
H. CAPITAL EXPENDITURES (SECTION 7.14)
1. Capital Expenditures during
current fiscal year
2. Capital Expenditures must be more than $13,500,000
3. Company is in compliance?
(Circle yes or no) Yes/No
I. PURCHASE MONEY INDEBTEDNESS/CAPITALIZED
LEASE OBLIGATIONS (SECTION 7.15(a))
1. Purchase money indebedtness
2. Capitalized Lease Obligations
3. Sum of Lines 1 and 2
4. Line 3 amount must not be more than $6,000,000
5. Company is in compliance?
(Circle yes or no) Yes/No
SCHEDULE 5.2
SUBSIDIARIES
NAME JURISDICTION OF PERCENTAGE
INCORPORATION OWNERSHIP
Zytec GmbH Austria 100%
Zytec FISC, Inc. Minnesota 100%
Zytec Hungary Elektronikai 100% owned
Kft Hungary by Zytec GmbH
Zytec DISC, Inc. Minnesota 100%
Zytec Modular Power
Systems, Inc. Minnesota 100%
