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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended February 28, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 1-12680
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ORYX TECHNOLOGY CORP.
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(Name of Small Business Issuer as specified in its charter)
Delaware 22-2115841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Auburn Street, Fremont, California 94538
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including area code: (510) 492-2080
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
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Common Stock, $.001 par value NASDAQ
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Common Stock Purchase Warrants NASDAQ
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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(Title of class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
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Issuer's revenues from continuing operations for its most recent fiscal
year were $8,449,000.
As of May 15, 1998, 13,124,821 shares of Common Stock and Preferred Stock
convertible into 52,515 shares of Common Stock of Registrant were outstanding.
The aggregate market value of the shares of Common Stock held by non-affiliates
of Registrant, based on the average of the closing bid and asked prices on April
30, 1998: $1 and $1-1/32 quoted by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), was approximately $12,543,561.(1)
13,124,821 shares of the Company's Common Stock were outstanding as of
April 30, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the 1998 Annual Meeting of Stockholders are incorporated by
reference into Part III.
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(1) For purposes of this Report, shares held by non-affiliates were
determined by aggregating the number of shares held by officers and directors
of the Registrant, and by others who, to Registrant's knowledge, own 5% or
more of Registrant's Common Stock including shares of Preferred Stock
convertible into Common Stock, and subtracting those shares from the total
number of shares outstanding. The price quotations supplied by NASDAQ
represent prices between dealers and do not include retail mark-up, mark-down
or commission and do not represent actual transactions.
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SOME OF THE INFORMATION IN THIS REPORT, INCLUDING THE DISCUSSION OF THE
COMPANY'S STRATEGY, PRODUCTION PLANS, DISTRIBUTION STRATEGIES AND VARIOUS
STATEMENTS CONCERNING THE COMPANY'S PLANS FOR EXPANSION AND EXPECTATIONS FOR
GROWTH FOR BOTH THE COMPANY AND THE MARKETS IN WHICH THE COMPANY COMPETES
CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE CAPTION "RISK FACTORS" SET FORTH IN PART I OF
THIS REPORT AND THOSE IDENTIFIED BY THE COMPANY FROM TIME TO TIME IN OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), PRESS
RELEASES AND OTHER COMMUNICATIONS.
PART I
BUSINESS
Item 1. DESCRIPTION OF BUSINESS
Introduction
Oryx Technology Corp. ("Oryx" or the "Company") restructured its operations
during fiscal 1998. Through fiscal 1998, the Company designed, manufactured and
marketed specialized components, analytical equipment and instrumentation
products for original equipment manufacturers ("OEMs") in the information
technology industry. This industry includes office equipment, computers,
telecommunications and consumer electronics. During fiscal 1998, the Company
operated three majority owned subsidiaries, as depicted below, focusing in three
distinct market segments: (i) power conversion products (Oryx Power Products
Corporation), (ii) electrical surge protection products (SurgX), and (iii)
materials analysis and test equipment and specialized materials products (Oryx
Instruments and Materials Corporation). During fiscal 1998 the Company embarked
upon a major restructuring program which resulted in the sale on February 27,
1998 of the test equipment portion of the business of Oryx Instruments and
Materials Corporation ("Instruments and Materials") and the sale on March 2,
1998 of substantially all of the assets of Oryx Power Products Corporation.
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| Oryx Technology |
| Corp. |
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|
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| | |
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| Oryx | | SurgX | | Oryx Instruments |
| Power Products | | Corporation | | and Materals |
| Corporation | | | | Corporation |
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- Power Conversion - Surge Protection - Instruments (Test Equipment)
Products Components - Specialized Materials
- Contract Manufacturing - Contract R&D
Effective with the 1999 fiscal year (ending February 28, 1999), the Company
has now restructured itself as a materials based business. Today, Oryx designs,
licenses and sells its proprietary technologies to provide electrostatic
discharge (ESD) protection and to coat materials used in the disk drive industry
(with Intragene, a patented process, and other ceramic metallization and joining
system products).
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| Oryx Technology |
| Corp. |
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|
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| |
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| Materials | | SurgX Corporation |
| Division | | |
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- Specialized Materials - Surge Protection
- Contract R&D Components
Oryx' customer base for its current product lines includes the following
OEMs: Akashic Memories, Cooper/Bussmann Corporation ("Bussmann"), DAS Devices
Inc., IBM Corporation, Read Rite Corp., Seagate Technology, Inc., Trace Storage
Technology Corp., and Western Digital Media Corporation. The Company currently
plans to market its existing product lines to these and other OEMs during fiscal
1999. The Company has also undertaken research programs with the Department of
Defense ("DoD") and plans to pursue further joint research programs with major
companies in or supporting the information technology industry.
The Company's predecessor, Advanced Technology, Inc. ("ATI"), was
incorporated on April 21, 1976 in New Jersey. On July 25, 1993, ATI formed the
Company as a wholly-owned Delaware subsidiary, and on September 29, 1993, ATI
merged into the Company.
SURGX CORPORATION
SurgX Corporation ("SurgX") is currently the principal subsidiary through
which the Company designs, manufactures and sells its surge protection
technology. The underlying technologies developed by SurgX are licensed
exclusively to two licenses, Bussmann, a division of Cooper Industries
("Bussmann") and Iriso, a Japanese connector manufacturer. Products manufactured
by these licensees utilizing SurgX's proprietary technology, are sold to OEMs in
the computer and electronics industries to provide protection against ESD events
through connectors and discretes at the printed circuit board level.
BACKGROUND
As the information technology industry increases capacity, speed and
performance, it is simultaneously moving toward faster circuit performance,
smaller chip geometries and using lower operating voltages. These developments
have been accompanied by increases in both product susceptibility to failure
from over-voltage threats as well as more widespread incidences of such threats.
Failure to address these problems can result in the destruction of chips and
circuitry. These threats can originate from inside or outside the products and
can arise from such factors as human body electrostatic discharge, induced
lightning effects, spurious line transients and other complex over-voltage
sources. During the last decade, new products emerged to address this need to
protect integrated circuits from ESD. Related specialized products range from
wrist straps worn by electronics assembly workers, to special anti-static
packaging of both components and sub-assemblies and on board level protection
devices such as diodes, varistors and other surge protection devices.
The global market for all surge protection devices is predicted to reach
$1.9 billion in calendar 1998, and is comprised of some mature devices such as
gas discharge tubes, varistors, "TVS" (transient voltage suppression), diodes
and thyristors. The key markets using surge protection devices and technologies
are telecommunication, automotive and computers. Sales of surge protection
devices are split between 40% for varistors, 40% for diodes, and 20% for gas
discharge tubes and surge resistor networks. Though proven for performance and
reliability, each of these technologies has only a narrow range of application.
In addition, none achieves the desired combination of high speed, elevated power
handling capability, low clamping voltage and low capacitance. Furthermore,
present conventional devices and methodologies are expensive for use on all
signal lines on a given circuit board. The major suppliers for surge protection
products include General Instrument Corp., Harris Semiconductor, Inc., Motorola
Corp., Panasonic, Shinko, and Siemens Components, Inc.
BUSINESS
In 1993, the Company assembled a product design team for the development
and manufacture of a family of specialized components designed to protect
integrated circuits, integrated circuit modules, and assembled printed circuit
boards. The Company completed preliminary prototypes of its SurgX-TM- products
in fiscal 1995 with first production releases being shipped in beginning
calendar year 1998.
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The proprietary SurgX technology for over-voltage protection is comprised
of a specialized polymer formulation containing inorganic solids, metal
particles and adhesion-promoting agents which can be tailored for use against
surge threats with different voltage and power levels. The Company continues to
optimize the electrical performance of the technology to stay abreast of the
fast changing requirements of the industry. In 1996, the formulations designed
in 1994 were modified to fit unique requirements of the Bussmann manufacturing
process, and to improve response voltage performance.
As part of its efforts to establish brand name recognition for its SurgX
product line, the Company intends to register unique names for its products with
different applications. For instance, the trademark SurgX-TM- was registered
with the US Patent and Trademark Office on March 17, 1998. The company is in
the process of filing statements for SurgTape-TM- which are due by July 20,
1998. SurgTape-TM- should be registered two months thereafter. The SurgAid-TM-
trademark registration, intended for use on SurgTape-TM- labels for ESD
protection of flex circuit applications was abandoned in 1998 and replaced with
SurgFlex-TM-. The company will start the trademark application process for
SurgFlex-TM- in May 1998. In 1997, SurgX filed a service mark application for
the SurgX logo design which was favorably received by SurgX customers.
The original two patents filed by the company in 1995 on manufacturing
processes, methods of making the SurgX compositions, materials and on devices
have been divided up by the patent office into 11 different inventions for
filings as individual patents. To date three of these patents have been filed
and a fourth is drafted for filing. In May 1998, the company received notice
from the Patent Office that the patent on the method of manufacturing has been
approved and will issue in August 1998. In 1997, foreign filings were initiated
in 10 countries plus Europe on the two original patents. Except for the grant
of both applications by Singapore, all of the foreign patents are in process. A
third patent on surface mount devices and connector component designs was filed
in the US in 1996, and in Europe in 1997. In 1998, two additional patents on
overvoltage protection inside the IC package were prepared for filing. As SurgX
products are commercialized, the company plans to review for filing the relevant
invention disclosures from 1996 and 1997. These disclosures cover significantly
proprietary art in devices, processes and materials.
SurgX's approach to the market had consisted of two parallel paths. The
first product group was based on board-level ESD protection, incorporating
SurgX's liquid polymer-based material into discrete ESD protection devices.
These products are now being produced and sold in limited quantities by Bussmann
and IRISO. The second product group, SurgTape, was intended to provide on-chip
protection by placing SurgX-based tape inside the IC package on the leadframe.
This product has not been commercially developed and development efforts have
been shifted to develop SurgTape for use in board level protection by applying
it on discrete ESD protection devices.
The Company is directing substantially all of its development effort to
achieve lower response voltage performance and cost reductions in manufacturing
and packaging processes for the board level protection product. It is the
Company's belief that if these improvements can be realized, it will expand the
number of markets which SurgX's technology can address. Efforts to develop
SurgTape for on-board level protection and laser machining techniques are
methods the Company is pursuing to achieve these objectives. However, there can
no assurances these technologies can be commercially developed or that customers
will accept these products as solutions for ESD protection.
The discrete diode is the primary market addressed by SurgX. This market is
forecast to be approximately $700 million in 1998 with a growth rate predicated
between 9% to 10% annually. To a lesser extent, SurgX will seek to participate
in the varistor market, approximately the same size as the diode segment. The
low capacitance requirement of ESD protection devices in many circuit designs
will provide the initial entry into this market segment. With further product
development, SurgX intends to address the larger, overall ESD protection market.
SurgTape was conceived as an inexpensive, on-board surge protection device
for direct installation into the IC package. Due to inconclusive initial
development trials, insufficient funding and the need to develop a more easily
manufacturable version of SurgTape-TM- as an improved alternative to current
board-level protection techniques, efforts to develop SurgTape-TM- for on-chip
protection have been suspended. Management believes that the development of low
cost, small size, and easy to use SurgTape-TM- or variation of SurgTape-TM-,
for application inside the integrated circuit package remains a viable
alternative to existing ESD protection devices; however, given the Company's
resource constraints, the Company will continue this development effort only if
technology improvements are realized and development funds are available. There
can be no assurance that SurgX will be able to raise development funding, that
SurgTape can be commercially developed, or that IC manufacturers will embrace
this technology and replace or supplement existing on-chip ESD protection
devices with SurgTape-TM-.
PRODUCTS AND DISTRIBUTION
In fiscal year 1996, a strategic review of the SurgX business was
undertaken as part of the Company's overall business review. The Company
determined that it would be more efficient to establish a relationship with an
experienced corporate partner who could provide the necessary high volume
manufacturing and distribution channels.
In fiscal year 1997, an exclusive, world wide (except for Japan) license
was granted to Bussmann for the manufacture and marketing of SurgX surface mount
and connector array components. In consideration for this license, Bussmann
paid $750,000 in development funding, and, subject to terms of the license
agreement, will pay royalties for approximately 11 years to SurgX based upon
Bussmann's sales of surface mount components and connectors. In September of
1997, this license agreement was amended, extending the term of the agreement to
20 years, granting the rights to Bussmann for SurgTape for board-level ESD
protection and providing SurgX with
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$1,700,000 (in the form of non-refundable minimum royalties) of funding for
the development and commercialization of SurgTape. If SurgTape is
successfully commercialized, this product will be marketed by Bussmann under
the SurgX trademark.
Bussmann is a leading manufacturer of fuses, and, prior to entering the
license agreement with SurgX, was seeking new circuit protection technology.
Bussmann's target market for SurgX is the rapidly growing electronics market.
Since the signing of the license agreement in July 1996, Bussmann has taken on
the manufacturing of SurgX components using liquid SurgX manufactured by SurgX
and the product launch with the Bussmann sales and marketing organization was
initiated in early calendar year 1998 with limited quantities currently being
shipped.
In November 1997, Iriso made an equity investment of $500,000 in SurgX in
exchange for an ownership interest of approximately 3%. In conjunction with this
equity investment, Iriso received a 15 year co-license to manufacture and sell
the Company's SurgX technology for board level ESD protection exclusively in
Japan. These products will be marketed under the SurgX trademarks. Iriso is
currently providing samples to prospective customers and plans the market launch
of SurgX surface mount and connector components in mid calendar year 1998.
In fiscal 1997, SurgX entered into two SurgTape milestone-based product
development agreements with two manufacturers of integrated circuits. While
SurgX completed the electrical proof of concept milestone with one such
manufacturer, the Company was unable to repeat this success with the second
manufacturers. Subsequently, these manufacturers did not commit additional
funding for any further development and substantially all development efforts
for SurgTape for on-chip protection have been abandoned. The two manufacturers
who funded the initial development expressed interest in testing and evaluating
SurgTape when the performance and design parameters are improved to the levels
required by their proprietary integrated circuits and their package
requirements.
After development efforts for the board level protection products are
successfully completed, management will renew efforts to investigate new
development contracts for on-chip protection with integrated circuit
manufacturers. However, there can be no assurance that SurgX will be able to
consummate any of these relationships, that any such relationship will be on
commercially advantageous terms to SurgX, or that any of the products will be
ultimately developed.
ORYX INSTRUMENTS AND MATERIALS CORPORATION
Prior to February 27, 1998 Oryx Instruments and Materials Corporation
("Instruments and Materials") designed, manufactured and marketed test
equipment, specialized materials and electromagnet systems for the hard disk
drive and semiconductor industries. On February 27, 1998, a third party acquired
8,000,000 shares of Class A Common Stock of Oryx Instruments and Materials
Corporation for a purchase price of $500,000. As part of the sale transaction,
Oryx Instruments and Materials then redeemed 8,000,000 shares of the Company's
10,000,000 share holdings of Class A Common Stock for an aggregate price of
$1,500,000. Terms of the 8,000,000 share stock redemption include $500,000 paid
on the closing, and $333,000 payable on February 27, 1999 and $667,000
payable on February 27, 2000, memorialized via a promissory note and stock
pledge agreement. As part of the sale, Oryx Instruments & Materials
distributed all the assets and liabilities of the Materials business segment
and certain other assets of Instruments business segment to the Company. The
Company retains an ownership interest of 19.9% in Instruments and Materials.
MATERIALS BUSINESS UNIT BACKGROUND
The Company currently owns and operates the former materials division of
Instruments and Materials. This division offers specialized materials assemblies
based upon the patented Intragene-TM- ceramic metallization and joining system.
The materials division product line consists of Intragene-TM--based
sputtering target assemblies and electromagnent systems. The sputtering target
assemblies have been sold into the rigid disk market since 1986 and are
considered one of the most reliable such assemblies in the market today.
Sputtering target assemblies are manufactured by materials companies and
sold to end-users as source materials for coating other materials via a vacuum
based process called sputtering. Sputtering is employed as the primary method
for depositing thin film functional and protective layers on rigid magnetic
media (hard disks), as well as in many semiconductor manufacturing operations.
Once a target is made, it must usually be incorporated into the sputtering
apparatus by joining it to a backing plate to make sound electrical, thermal and
mechanical contact. The bonding of a target to the backing plate, which is
usually made of copper, forms what is known as the "bonded target assembly."
The materials division manufactures these high quality sputtering target
assemblies based primarily on its patented Intragene-TM- metal to non-metal and
metal to metal joining process. The Intragene-TM- process is a proprietary
methodology developed by metallurgists and materials scientists at the Company
and has been granted six U.S. patents as well as national phase patents based on
two European patent applications and three Japanese patents. The Intragene-TM-
process facilitates the ability to metallize, solder or braze a wide range of
engineering ceramics, graphite and refractory metals. The materials division
also manufactures electromagnet systems which produce very accurate and high
level electromagnet fields. These products are sold to magnetic recording head
manufacturers who often utilize these systems for wafer plating.
The materials division employs personnel with extensive backgrounds in
engineering materials and joining. This has allowed it to develop several
approaches to bonding brittle solids of low to intermediate thermal expansion to
typical high-expansion backing plate
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materials such as copper and aluminum. The Company's experience in assembly,
design and stress reduction, combined with the ability to produce bonded target
assemblies, has enabled it to become a supplier of such products selling
directly to the thin-film magnetic media manufacturers.
The materials division's primary customers of the bonded targets are Fuji
Electric, Hyundai Electronics America (Max Media Corp.), Seagate Recording
Media, Inc. (formerly, Conner Peripherals and Seagate Magnetics), StorMedia
Corporation, Trace Technology, and Western Digital Media Corporation. Materials'
primary customers for the materials division's electromagnet system are DAS
Devices Inc, and Read Rite Corp.
The materials division derives substantially all of its revenue from rigid
magnetic media manufacturers. During the fourth quarter of fiscal 1998 the disk
drive industry experienced a significant slow down which had a direct impact on
the Company's sales. Demand for bonded sputtering target assemblies continues
to be suppressed as world-wide demand for rigid magnetic media are at low
levels. Management currently believes that demand for product will increase
toward the end of fiscal 1999 as the disk drive industry itself recovers.
Magnetic media manufacturers are presently working on new technologies
which could significantly reduce the demand for the Company's sputtering target
assemblies. Currently, magnetic media manufacturers are exploring Chemical Vapor
Deposition ("CVD") techniques as alternatives to the sputtering target assembly
due to expected superior product performance and reduced cost. The company is
exploring the feasibility of being a supplier of this new technology as well as
offering new synergistic products to its current customer base. There can be no
assurances that the Company will be able to develop and supply new products or
that its current products will not be rendered obsolete by new technologies.
The Company's operations in the ESD and materials businesses have been
partially funded through government contracts.
The Company has also undertaken research programs with the DoD, and has
been the recipient of four Phase I and two Phase II SBIR (Small Business
Innovative Research) contracts from NASA, two Phase I contracts from the DoD,
and one Phase I contract from the National Science Foundation during its
1992-1997 fiscal years, most of which involve applications of its Intragene-TM-
and related core technology. The contracts represent grants totaling over $2
million.
The Company recently was awarded two Phase II SBIR research and development
contracts. One such contract with the US Army Tank Automotive Comma in Warren,
Michigan, is valued at $600,000 and is for development of impact absorbing
materials. The other, from BMDO, monitored through the Office of Naval
Research, is geared toward the development of a fabrication protocol for the
high volume manufacturing of the Company's SurgX devices for ESD surge
suppression. This contract is valued at approximately $1.5 million with
one-half being provided as matching funds from Oryx or partner companies.
ORYX POWER PRODUCTS CORPORATION (DISCONTINUED OPERATION)
Oryx Power Products Corporation ("Power Products") designed, manufactured
and marketed custom and standard AC/DC switching power supplies and high density
DC/DC power conversion products for various electronics products, and provided
contract manufacturing services to OEMs. On March 2, 1998, Oryx's Power
Products business was sold in its entirety through a disposition of
substantially all of its assets and liabilities to Todd Power Products.
REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, and the use and disposal of hazardous
or potentially hazardous substances. The Company believes that its facilities
and practices for controlling and disposing of the limited amount of waste
and potentially hazardous materials it produces comply with applicable
environmental laws and regulations. While the Company has not experienced any
material adverse effect on its operations from compliance with government
regulations, the development of any additional manufacturing operations by
the Company may require the Company to comply with government regulations
designed to protect the environment from wastes and emissions and from
hazardous substances, particularly with respect to the emission of air
pollutants, the discharge of cooling water, the disposal of residues and the
storage of hazardous substances resulting in the expenditure of additional
funds by the Company to comply with those government regulations. The extent
of government regulation which might result from any future legislation or
administrative action cannot be accurately predicted.
PATENTS AND PROPRIETARY RIGHTS
Proprietary protection for the Company's products, processes and know-how
is important to its business. The Company currently has numerous patents issued
and in process. The Company's policy is to file patent applications to protect
its technology, inventions and improvements as soon as practicable. The Company
also relies upon trade secrets, know-how and continuing technological innovation
to develop and maintain its competitive position.
The Company owns and will maintain six patents, which are associated with
the Intragene process. The Intragene patents expire in 1999 and 2000. The
Company plans to file improvement patent applications which may effectively
broaden proprietary protection. There can be no assurances, however, that such
improvement patent applications will be granted. The Company does not believe
that the expiration of such patents will have a materially adverse effect on its
competitive position relative to the marketing of its ceramic metallization and
bonding system products.
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EMPLOYEES
As of April 30, 1998, the Company employed 17 people on a full-time basis.
Included among full time employees are 2 executive officers, 2 managers and
executive personnel, 4 engineering personnel, 3 administrative personnel and 6
manufacturing personnel. The Company's employees are not covered by any
collective bargaining agreements, and the Company believes its employee
relations are satisfactory.
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RISK FACTORS
HISTORY OF UNPROFITABILITY; SUBSTANTIAL RECENT OPERATING LOSSES AND
ACCUMULATED DEFICIT
Since its initial public offering in April 1994, the Company has not been
profitable on a quarterly or annual basis except for the quarters ended May 31,
1996, August 31, 1996 and November 30, 1996. At February 28, 1998, the Company
had an accumulated deficit of $17,384,000. The Company expects that it will not
be profitable for the fiscal year ending February 28, 1999 and there can be no
assurance that the Company will be profitable thereafter.
RESTRUCTURING
In fiscal 1998, the Company undertook substantial restructuring of its
operations, such that the majority of the Company's activities may properly be
deemed "developmental." In the course of selling various business units
described above, the Company disposed of operations which had accounted for a
substantial majority of its revenues. While the Company believes that this
downsizing will substantially reduce its losses and enable it to focus on key
strategic businesses, the actual impact cannot be certain. In the absence of
increased sales from its remaining businesses, and key technology developments,
such restructuring may have sharply reduced the Company's revenues while not yet
creating opportunities to offset the lost revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $7,406,000 at February 28,
1997 to $1,501,000 at February 28, 1998 primarily due to operating losses. The
Company's ratio of current assets to current liabilities was 3.7:1 at February
28, 1997 and 1.6:1 at February 28, 1998. At February 28, 1998 the Company had
$129,000 outstanding under its Inventory credit line related to continuing
operations. In February 1998 and March 1998 the Company sold the business of its
Power Products subsidiary and its majority interest in Instruments and
Materials. These two actions substantially reduced the Company's on-going
operating losses and provided sufficient capital to meet its current fiscal 1999
operating plan. However, in the event the Company does not meet its current
operating plan and it requires additional equity or attempts to raise capital
through an asset sale or development contract, there can be no assurance that
such transactions can be effected in a timely manner to meet all of the
Company's needs, or at all, or that any such transaction will be on terms
acceptable to the Company or in the interest of its stockholders.
RISKS OF NEW PHASE OF DEVELOPMENT
During fiscal 1998, the Company amended its licensing agreement with
Bussmann, in addition to other considerations, to fund $1,700,000 for continued
development activities for SurgX's board level ESD protection technology. Prior
to fiscal 1999, the Company has invested substantially in the development of its
proprietary ESD surge protection. These funds were primarily exhausted in
February 1998 and the Company revamped its development efforts to bring its
operating costs in line with projected available funds. As a result of these
steps, substantially all development activities related to on-chip ESD
protection was halted. The Company believes it is employing adequate resources
to support product enhancements for on-board ESD and will increase development
efforts if development funds become available. To the extent additional
development is required, there can be no assurance that the Company will be able
to successfully raise the necessary development funds or that these enhancements
can be commercialized or developed into financially viable businesses.
Development results in the future will be influenced by numerous factors,
including the availability of funding, technological developments by the
Company, its customers and competitors, increases in expenses associated with
product development, market acceptance of the Company's products, the ability of
the Company successfully to control its costs of development, overhead and other
costs, the capacity of the Company to develop and manage the introduction of new
products, and competition.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH; INTERNAL CONTROL
DEFICIENCIES
In connection with the audit of fiscal year 1995, a reportable condition
was identified with respect to the Company's record keeping for equity
financing and share issuance transactions. In connection with the Company's
audit for the fiscal year ended February 29, 1996, the Company's independent
accountants identified a further reportable condition relating to physical
inventory procedures specifically with regard to substantial adjustments that
resulted from physical inventories taken during the fiscal year ended
February 29, 1996. The resulting adjustments were reflected in the fiscal
year 1996 financial statements. A reportable condition indicates that a
material error or irregularity may occur in the Company's quarterly and
year-end financial statements and may not be detected on a timely basis by
the Company's employees, thereby possibly resulting in a misstatement of the
Company's financial statements. Management has taken actions to resolve these
conditions and there have been no reportable conditions for the period ended
February 28, 1997 and February 28, 1998, respectively.
SIGNIFICANT CUSTOMER DEPENDENCE
The Company entered into two exclusive license agreements for use of its
SurgX technology for ESD protection on discrete components and connector arrays.
The Company receives a royalty equal to a percentage of each licensee's gross
profit on sales of products utilizing the SurgX technology. While the Company
has and will assist the licensees in their efforts to exploit this technology,
the Company's future royalties are based solely upon the successful sales,
marketing and manufacturing efforts of its licenses. While the license
agreements contains minimum annual royalty payment requirements for the licenses
to maintain their exclusive rights, there can be no assurances that the licenses
will pay the minimum royalty or that these minimum payments will provide enough
liquidity to continue to support the Company's operations. In the case of
Bussmann, minimum royalty payments through 2001 have been satisfied to maintain
exclusivity, and
7
<PAGE>
there can be no assurances that the Company will receive any royalty payments
from Bussmann through this time period since Bussmann would have to be
successful in selling products using SurgX to exceed the minimum royalty
payments, and at present, such sales have not yet been material.
RELIANCE ON THIRD PARTY MANUFACTURERS MAY DISRUPT OPERATIONS
The Company relies on third-party manufacturers for the supply of
substantially all key components for its products. In the case of the materials
division, it relies on one supplier for its raw materials for sputtering target
assemblies. While reliance on a single supplier, involves several risks,
including without limitation, a potential inability to obtain an adequate supply
of required components and reduced control over pricing, quality, cost, and
timely delivery of components, the Company believes its sole source arrangement
has provided a lower cost, higher quality product then sourcing material from
multiple sources. However, any inability to obtain adequate deliveries or any
other circumstances that would require the Company to seek alternative sources
of supply could lead to disruption of the operations of the Company, product
deficiencies, unanticipated and fluctuating expenses, unpredictable revenues,
and may have a material adverse effect on the Company's business and operations.
TECHNOLOGICAL CHANGES AFFECTING PRODUCTS AND PRODUCT DEVELOPMENT RISKS
The development design and manufacture of technology constantly undergoes
rapid and significant change. The Company's success will depend upon its
ability to maintain a competitive position with respect to its proprietary and
other enhanced technology and to continue to attract and retain qualified
personnel in all phases of its operations. The Company's business is, to a
large degree, dependent upon the enhancement of SurgX's current technology.
Critical to the Company's success and future profitability will be its capacity
to improve these technologies. Product development and enhancement involve
substantial research and development expenditures and a high degree of risk, and
there is no assurance that the Company's product development efforts will be
successful, will be accepted by the market, or that such development efforts can
be completed on a cost-effective or timely basis, or that there will be
sufficient funds to support development efforts. There can be no assurance that
future technological developments will not render existing or proposed products
of the Company uneconomical obsolete or that the Company will not be adversely
affected by competition or by the future development of commercially viable
products by others.
QUARTERLY FLUCTUATIONS OF OPERATING RESULTS
The Company's quarterly operating results have in the past been, and will
in the future be, subject to significant fluctuation. The Company's operating
results are impacted by numerous factors, such as, market acceptance of the
Company's SurgX' products; Bussmann's continued marketing, sales and financial
support of SurgX technology, containment of development costs, the level of
activity of the disk drive industry, purchasing patterns of OEMs and other
customers, delays in, or failure to receive, orders due to customer financial
difficulties, and overall economic trends. In addition, customer orders may
involve design in requirements, thus making the timing of customer orders
difficult to predict and uneven. Any delay or failure to receive anticipated
orders, or any deferrals or cancellation of existing orders, would adversely
affect the Company's financial performance. The Company's expense levels are
based in part on its expectations as to future revenues and, in particular, the
successful launch of SurgX products by Bussmann and the recovery of the disk
drive industry. The Company may be unable to adjust spending in a timely manner
to compensate for any delay in product development, or revenue shortfall, or the
recovery of the disk drive industry. Accordingly, operating results in any one
quarter could be materially adversely affected by, among other factors, a
failure to receive, ship or obtain customer acceptance of sufficient orders in
that quarter and any weakening in demand for the Company's products or delays in
acceptance of the SurgX's technology could have a material adverse effect on the
Company's operating results.
BACKLOG AND INVENTORY
Backlog at the beginning of a quarter typically does not include all sales
required to achieve the Company's sales and operating targets for a quarter,
which targets depend on the Company's shipping orders scheduled to be sold
during that quarter. The terms of customer purchase orders generally provide
that the customer may delay a substantial portion of the order with limited
notice and with little or no penalty. The Company has experienced rescheduling
in the past and expects that it will experience such changes in the future.
Moreover, as the Company transitions to a licensing operation for the majority
of its revenues, it will have far less direct control over shipments of products
resulting in revenues to it, and hence, less visibility as to financial
performance and projected earnings, if any. In such case, the Company will have
to rely on the success of its licensees, Bussmann and Iriso, in selling products
incorporating the Company's technology.
COMPETITION
The Company is engaged in certain highly competitive and rapidly changing
segments of the electronic components industry in which technological advances,
costs, consistency and reliability of supply are critical to competitive
position. In addition, the competition for recruitment of personnel in the
technologically-advanced manufacturing industry is continuous and highly
intense. The Company competes or may subsequently compete, directly or
indirectly, with a large number of companies which may provide products or
components comparable to those provided by the Company. In addition, many
present or prospective competitors are larger, better capitalized, more
established and have greater access to resources necessary to produce a
competitive advantage.
NO ASSURANCES OF PROTECTION FOR PATENTS AND PROPRIETARY RIGHTS; RELIANCE
ON TRADE SECRETS
8
<PAGE>
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. There can be no
assurance that any existing or subsequently obtained patents will provide the
Company with substantial competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patents owned by the
Company, or if initiated, that such challenges will not be successful. To the
extent the Company wishes to assert its patent rights, there can be no assurance
that any claims of the Company's patents will be sufficient to protect the
Company's technology, and the cost of any litigation to uphold the validity of a
patent and prevent infringement can be substantial even if the Company prevails.
In addition, there can be no assurance that others will not independently
develop similar technologies, duplicate the Company's technology, or
legitimately design around the patented aspects of the Company's technology.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
technology competitive with that of the Company. Furthermore, if additional
patents do not issue from present or future patent applications, the Company may
be subject to greater competition.
In certain cases, the Company also relies on trade secrets to protect
proprietary technology and processes which it has developed or may develop in
the future. There can be no assurance that secrecy obligations will be honored
or that others will not independently develop similar or superior technology.
The protection of proprietary technology through claims of trade secrets status
has been the subject of increasing claims and litigation by various companies,
both in order to protect proprietary rights, and for competitive purposes, even
where proprietary claims are unsubstantiated. The prosecution of proprietary
claims or the defense of such claims is costly and uncertain given the rapid
development of the principles of law pertaining to this area.
NO DIVIDENDS ON COMMON STOCK
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. The future payment of dividends is directly dependent
upon future earnings of the Company, its financial requirements and other
factors to be determined by the Company's Board of Directors, as well as the
possible consent of lenders, underwriters or others. For the foreseeable
future, it is anticipated that any earnings which may be generated from the
Company's operations will be used to finance the growth of the Company and will
not be paid to holders of Common Stock.
RISK OF SIGNIFICANT DILUTION
The Company retained Yorkton Securities, Inc. ("Yorkton") to act as
placement agent pursuant to that certain Agency Agreement dated as of December
4, 1996 and amended as of January 23, 1997 (the "Agency Agreement"). Under the
terms of the Agency Agreement, the Company issued Yorkton warrants to purchase
90,730 and 72,800 shares of Common Stock for a per share exercise price of $1.90
(the "Yorkton Warrants"). The Yorkton Warrants are exercisable for a period of
five years from the date of each closing of the Regulation S offering.
On February 27, 1998 the Company entered into a financing arrangement which
provided the Company with a six month bridge loan for an amount up to
$1,000,000. In consideration for this loan, the Company issued warrants to
purchase 174,546 shares of Common Stock at a per share price of $1.15. The
Warrants are exercisable for a period of three years from the inception date of
the bridge loan agreement.
As a result of these and various other transactions previously entered by
the Company, as of February 28, 1998, there were convertible securities and
warrants and options of the Company currently outstanding for the conversion and
purchase of up to approximately 6,838,648 shares of Common Stock. These
represent significant additional potential dilution for existing stockholders of
the Company. These underlying shares of Common Stock are not included in
currently outstanding shares. In addition, as a result of the anti-dilution
provisions included in certain of these derivative securities, there may be
further dilution based on the price that the Company issues other securities in
the future.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated substantially
since the Company's initial public offering in April 1994. The Company believes
that a variety of factors could cause the price of the Company's Common Stock to
continue to fluctuate substantially, including, for example, announcements of
developments related to the Company's business, liquidity and financial
viability, fluctuations in the Company's operating results and order levels,
general conditions in the industries served by the Company, the technology
industry in general or the United States or worldwide economy, announcements of
technological innovations, new products or product enhancements by the Company
or its competitors, developments in patents or other intellectual property
rights, and developments in the Company's relationships with its customers,
distributors and suppliers. In addition, in recent years, the stock market in
general and the market for shares of small capitalization stocks in particular
has experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Securities and ability to
obtain additional financing.
AUTHORIZATION OF PREFERRED STOCK
9
<PAGE>
The Board of Directors is authorized to issue shares of preferred stock and
to fix the dividend, liquidation, conversion, redemption and the rights,
preferences and limitation of such shares without any further vote or action of
the stockholders. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
of other rights of the holder of the Company's Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging and delaying or preventing a change of control of the
Company. As of February 28, 1998, the Company had 4,500 shares of Preferred
Stock outstanding with an obligation to pay dividends thereon at the rate of
$0.25 per share. Although the Company has no present intention to issue any
additional shares of its preferred stock, there can be no assurance that the
Company will not do so in the future.
Item 2. DESCRIPTION OF PROPERTY
The Company presently operates its material business in two separate
facilities and SurgX and Corporate have been consolidated into one building. On
July 12, 1995, the Company entered into a lease agreement with SCI Limited
Partnership, for 3,600 square feet of manufacturing space located in Fremont,
California. The term of the lease is three years and lease payments are $3,510
per month including operating expenses. month, and the lease continues for a
period of five years. On August 12, 1996, SurgX entered into an agreement with
E.B.J. Partners LP to lease a 22,000 square foot facility in Fremont,
California. The monthly rental fee is $18,151 and the term of the lease expires
August 30, 2001. The Company also leases another smaller manufacturing space on
a short term basis.
Each of the properties described above is in satisfactory condition for the
purpose for which it is used.
Item 3. LEGAL PROCEEDINGS
The Company knows of no material litigation or claims pending, threatened
or contemplated to which the Company is or may become a party.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year ended February 28,
1998, no matters were submitted to a vote of security holders.
PART II
Item 5. MARKET FOR THE COMPANY'S UNITS, COMMON STOCK AND WARRANTS AND RELATED
STOCKHOLDER MATTERS
Since the Company's initial public offering of the Common Stock and
Warrants on April 6, 1994, the Company's Common Stock and Warrants have traded
principally on the NASDAQ Small Cap Market under the symbols "ORYX" AND "ORYXW,"
respectively. Prior to April 6, 1994, there was no public market for the
Company's securities. From April 6, 1994 through June 6, 1994, the Company had
Units which were also traded on NASDAQ, at which time the Company requested
withdrawal of such listing. The following table sets forth the high and low bid
quotations for the Common Stock and Warrants for the periods indicated, as
reported by NASDAQ. These quotations reflect prices between dealers, do not
include retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997 Fiscal Year
- ----------------
1st Quarter $3-11/16 $1-1/4 $2-11/16 $0-1/2
2nd Quarter $4-1/16 $2-5/16 $3-5/8 $1-7/8
3rd Quarter $3-3/16 $2-1/8 $2-19/32 $1-1/2
4th Quarter $2-15/16 $2-1/16 $2-7/8 $1-9/16
1998 Fiscal Year
- ----------------
1st Quarter $2-7/16 $0-3/4 $2-1/4 $1-3/32
2nd Quarter $1-9/16 $0-13/16 $1-15/32 $0-3/16
3rd Quarter $2-3/16 $1-1/8 $2 $0-3/4
4th Quarter $1-17/32 $0-15/16 $1-13/32 $0-19/32
</TABLE>
On May 20, 1998, the per share closing price for the Common Stock was
$1.31, and for the Warrants was $0.56.
The Company's Common Stock and Warrants are also listed for trading on the
Pacific Exchange under the symbols "ORYX" and "ORYXW," respectively. Prior to
June 6, 1994, the Company's Units were also traded on the Pacific Exchange, at
which time the Company requested withdrawal of the listing for the Units. On
May 20, 1998, the closing sales prices for the Common Stock and Warrants, as
reported on the Pacific Exchange were the same as on NASDAQ.
10
<PAGE>
As of April 30, 1998 the number of record holders of the Company's Common
Stock and Warrants were approximately 107 and 12, respectively.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. The Company is also substantially restricted from the
payment of dividends under the terms of its Underwriting Agreement with J.W.
Charles, Inc. Future dividend policy will depend on the Company's earnings,
capital requirements, expansion plans, financial condition and other relevant
factors as well as the possible need to obtain the consent of any of its
lenders, J. W. Charles and placement agents, for its recent private offerings.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION IN THE SECTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" CONTAINS TREND
ANALYSIS AND OTHER FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF RISK FACTORS,
INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH ABOVE IN THE SECTION "RISK
FACTORS."
BUSINESS SEGMENTS
Through fiscal year 1998, the Company operated in three main business
segments through its subsidiaries: Power Products, Instruments and Materials,
and SurgX. In addition, a corporate segment included certain activities that
were not directly related to any other operations. The businesses were
segregated and operated separately. As noted above in Part I, during fiscal
year 1998, the Company embarked upon a major restructuring program. This
resulted in the sale on February 27, 1998 of most of the Company's majority
interest in Oryx Instruments and Materials Corporation and the sale on March 2,
1998 of substantially all of the assets of Power Products Corporation. As part
of the sale of its majority position in Instruments and Materials, the Company
retained certain assets from Instruments and Materials relating to sputtering
targets assembly. Management believes that the effect of these steps was to
staunch the flow of losses of these subsidiaries to enable the Company to
concentrate on its ESD protection business.
<TABLE>
<CAPTION>
Segment/Subsidiary Businesses
------------------ ----------
<S> <C>
SurgX Corporation - Surge Protection Components
Oryx Instruments and Materials - Specialized Materials
Corporation Assemblies
- Contract R&D
- Instruments (Test Equipment):
Sold 2/27/98
Discontinued Operation:
Oryx Power Products - Power Conversion Products
Corporation - Contract Manufacturing
</TABLE>
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
For the fiscal year ended February 28, 1998, revenues from continuing
operations increased $1,979,000 or 30.6% from $6,470,000 for the year ended
February 28, 1997 to $8,449,000 for the year ended February 28, 1998. The
growth in revenues was primarily attributable to increased shipments of the
TTS-2000 process monitoring tool and sputtering target assemblies. Due to the
sale of the Company's instruments business, revenue for the 1999 fiscal year
will primarily be derived from the sale of sputtering target assemblies. Due to
the downturn in the disk drive industry, fiscal year 1999 target assemblies
revenues are anticipated to be lower than fiscal year 1998 levels of $4,678,000.
The Company also anticipates that royalty revenue from its SurgX technology for
fiscal year 1999 will be minimal since volume shipments from its licensees will
not occur until the end of fiscal year 1999.
The Company's gross profit increased $350,000 or 18.8 % from $1,865,000 for
the fiscal year ended February 28, 1997 to $2,215,000 for the year ended
February 28, 1998. Cost of sales as a percentage of revenues increased to 73.8%
for the year ended February 28, 1998 from 71.2% for the fiscal year ended
February 28, 1997. The increase in gross profit for the year ended February 28,
1997 was primarily attributable to reductions in manufacturing start-up costs at
SurgX and increases in shipments of sputtering target assemblies.
Funding recognized as revenue and cost of sales associated with
government contracts for the fiscal years ended February 28, 1998 was
$716,000 and $734,000, respectively. This compares to revenue and cost of
sales of $627,000 and $422,000, respectively, associated with government
contracts for the fiscal year ended February 28, 1997.
Operating expenses for the fiscal year ended February 28, 1998 increased
$516,000 or 8.3% from $6,205,000 for the fiscal year ended February 28, 1997 to
$6,721,000. This increase was primarily attributable to the funding of a
development project to commercialize SurgTape-TM- for use in on-chip ESD
protection. Due to inconclusive development results and the lack of available
development funds from potential customers, the Company suspended this effort
during the middle of the fiscal year 1998. In addition, the Company undertook
further reductions in development expenditures at the end of the fiscal year
1998. These resulted primarily in reductions in head count and outside
consulting services.
11
<PAGE>
Marketing and selling expenses increased $32,000 or 2.9%, from $1,109,000
for the fiscal year ended February 28, 1997 to $1,141,000 for the year ended
February 28, 1998. This increase is attributable to applications development
associated with the TTS-2000 process monitoring tool. The Company expects
selling and marketing expenses to decrease dramatically during fiscal year 1999
since primarily all of the Company's sales and marketing activities will be
carried out by SurgX's licensees.
General and administrative expenses decreased $28,000 or 1% from
$2,939,000 for the fiscal year ended February 28, 1997 to $2,911,000 for the
year ended February 28, 1998. This decrease in general and administrative
expenses primarily reflects the Company's reduced use of outside consultants.
The Company anticipates further reductions in general and administrative costs
during fiscal year 1999 as the Company's new corporate structure will not
require the same level of general and administrative support.
Research and development expenses increased $512,000 or 23.7% from
$2,157,000 for the fiscal year ended February 28, 1997 to $2,669,000 for the
year ended February 28, 1998. The increase in expenses was attributable to
costs associated with attempts to commercialize SurgTape-TM- for on-chip ESD
protection. Since these efforts have been suspended, the Company expects
research and development expenditures to decrease significantly in fiscal year
1999. In fiscal year 1998, SurgX recognized development funding of $1,307,000
received from third parties to assist in the development and commercialization
of certain products, as an offset to its R&D expenses. This compares to
$1,107,000 of development funding recorded in fiscal year 1997. The Company
expects research and development expenses will be at lower levels in fiscal year
1999 than in fiscal 1998 due to the cancellation of the on-chip development
program and recent cost reductions in general development expenditures. However,
if development-funding contracts can be obtained, the Company will increase its
research and development efforts to focus on alternative uses and additional
market opportunities for the SurgX technology. SurgX is currently exploring
various funding opportunities, however, there can be no assurances that SurgX
will be able to secure additional development funding.
Net interest expense increased $360,000 from $10,000 of interest income for
the fiscal year ended February 28, 1997 to $350,000 of net interest expense for
the year ended February 28, 1998, or 3,600%. This increase consisted of
interest expense, loan origination fees and the fair market value of issued
warrants attributable to obligations under the Accounts Receivable Batch
Facility and Inventory Line of Credit executed May 1997 and the Bridge Loan
Facility executed in February 1998.
During fiscal year 1998, the Company recorded a $1,383,000 gain on the sale
of part of its equity investment in DAS Devices, Inc. versus a recorded loss
of $20,000 in fiscal year 1997. During fiscal year 1997, DAS Devices, Inc.
completed a plan of recapitalization under new management involving the sale of
additional securities which reduced the Company's ownership interest in DAS
Devices, Inc. from 40% to approximately 5% on a fully diluted basis. During
fiscal year 1998, the Company sold, to qualified private investors, 2,000,000
shares of its Series A Preferred Stock holdings in DAS Devices for $1,400,000.
As of February 28, 1998 the Company retained ownership of 2,000,000 shares of
Series A Preferred Stock and 800,000 shares of Common Stock of DAS Devices, Inc.
During the 1999 fiscal year, the Company anticipates that it will
experience additional operating losses. The Company anticipates that its
materials business segment operating profits will not cover the operating losses
of SurgX and corporate expenses although these expenses have been reduced. The
Company anticipates being profitable in fiscal year 2000 as royalty revenue from
its SurgX technology is expected to increase with its licensees shipping
SurgX-TM- discrete devices and connectors in volume. However, there can be no
assurances that the Company's licensees will be able to successfully launch
SurgX-TM- products, that certain technology enhancements by SurgX currently
under development, will be realized, or that target assemblies will not be
rendered obsolete as a result of the adoption of new technologies by customers.
SEGMENT RESULTS
SURGX CORPORATION
<TABLE>
<CAPTION>
February 28, February 28,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 83 $ 36
Cost of sales 0 282
Operating Expenses 2,705 1,741
Development Funding* (1,307) (1,107)
------ ------
*(Offset against R &D)
Operating Income (Loss) $(1,315) $(880)
------ ------
------ ------
</TABLE>
Cost of sales for fiscal year ended February 28, 1997 represents the costs
associated with establishing and testing the manufacturing process to sell SurgX
material to Bussmann pursuant to a license agreement executed in fiscal year
1997 as well as the costs associated with the sale of specialized test
equipment. Since start-up manufacturing costs were incurred in fiscal year 1997,
and the Bussmann product launch was delayed until the beginning of fiscal year
1999, there were no costs of sales recorded in fiscal year 1998. The Company
anticipates at the present time that there will be minimal, if any, costs of
sale incurred in fiscal year 1999 attributable to SurgX-TM--based product.
12
<PAGE>
Operating expenses increased $964,000 or 55.4% from $1,741,000 for the
fiscal year ended February 28, 1997 to $2,705,000 for the year ended February
28, 1998. The increase in operating expenses primarily reflects the costs
associated with SurgX development efforts for on-chip ESD protection. As noted
above, this development project was suspended during the 1998 fiscal year.
During fiscal year 1998, SurgX received $1,307,000 in development funding from
third parties compared to $1,107,000 of such funding in fiscal year 1997, an
increase of $200,000 or 18.1%. Due to the higher level of research and
development expenses associated with the on-chip ESD protection program, the
loss from operations increased $435,000 or 49.4% from $880,000 for the fiscal
year ended February 28, 1997 to $1,315,000 for the fiscal year ended February
28, 1998. While SurgX is looking to its customers, or to potential joint venture
partners, to continue to fund development efforts, there can be no assurance
that those efforts will be successful. In the event that SurgX is unable to
secure additional development funding, there can be no assurance that the
current or proposed level of development efforts for fiscal year 1998 can
continue or that any product, other than the Bussmann product, will be made
commercially available.
ORYX INSTRUMENTS AND MATERIALS CORPORATION
On February 27, 1998, a third party acquired 8,000,000 shares of Class A
Common Stock of Oryx Instruments and Materials Corporation for a purchase price
of $500,000. As part of the sale transaction, Oryx Instruments and Materials
then redeemed 8,000,000 shares of the Company's 10,000,000 share holdings of
Class A Common Stock for an aggregate price of $1,500,000. Terms of the
8,000,000 share stock redemption include $500,000 paid on the closing, and
$333,000 payable on February 27,1999 and $667,000 payable on February 27, 2000,
memorialized via a promissory note and stock pledge agreement. As part of the
sale, Oryx Instruments & Materials distributed all the assets and liabilities of
the materials business segment and certain other assets to the Company. A
deferred gain of approximately $646,000 was recorded by the Company on this
transaction. As a result of the transaction, the Company has fully reserved its
remaining 19.9% ownership investment in Oryx Instruments and Materials at
February 28, 1998.
For segment reporting purposes, Oryx Instruments and Materials will be
split between the instruments business segment (sold February 1998) and the
materials business segment (on going).
Material Business Segment
- Specialized Materials
- Contract R&D
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 4,678 $ 4,240
Cost of Sales 3,300 2,900
----- -----
Gross Profit 1,378 1,340
----- -----
Operating Income(Loss) $ 1,378 $ 1,340
----- -----
----- -----
</TABLE>
Revenues for fiscal year 1998 increased $438,000 or 10.3% to $4,678,000 for
the year ended February 28, 1998 from $4,240,000 for the year ended February
28, 1997. The increase in revenue was primarily attributable to growth in the
sputtering target assemblies business which experienced increased demand as the
hard disk drive industry expanded manufacturing capacity.
Gross profit increased $38,000 or 2.8% from $1,340,000 for the year ended
February 28, 1997 to $1,378,000 for the year ended February 28, 1998. The
improvement in gross profit was primarily due to increased revenues.
Because the hard disk drive industry is experiencing a cyclical downturn in
calendar year 1998, the Company expects that the results of operations for
sputtering target assemblies in fiscal year 1999 will be adversely affected and
consequently that its gross profits and gross profit margins are likely to
decline in fiscal year 1999.
Instruments Business Segment (sold February 27, 1998)
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 3,688 $ 2,194
Cost of Sales 2,934 1,423
----- -----
Gross Profit 754 771
Operating Expenses 3,073 3,422
----- -----
Operating Income(Loss) $(2,319) $( 2,651)
----- -----
----- -----
</TABLE>
Revenues for fiscal year 1998 increased $1,494,000 or 68.1% to $3,688,000
for the year ended February 28, 1998 from $2,194,000 for the year ended February
28, 1997. The increase in revenue was primarily attributable to growth in sales
volume of the TTS-2000 process monitoring tool.
13
<PAGE>
Gross profit decreased $17,000 or 2.2% from $771,000 for the fiscal year
ended February 28, 1997 to $754,000 for the fiscal year ended February 28, 1998.
The decrease in gross profit was primarily due to higher manufacturing costs
associated with creating a manufacturing infrastructure to support increased
systems sales, higher material costs, and increased warranty expense.
Operating expenses decreased $349,000 or 10.2% to $3,073,000 for the fiscal
year ended February 28, 1998 from $3,422,000 for the year ended February 28,
1997. This decrease was primarily a result of reduced development expenses for
such items as prototype materials and outside consultants.
The loss from operations for the year decreased $332,000 or 12.5% from
$2,651,000 for the fiscal year ended February 28, 1997 to $2,319,000 for the
year ended February 28, 1998.
CORPORATE
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Expenses $ 2,250 $ 2,149
----- -----
Operating Income(Loss) $(2,250) $(2,149)
----- -----
----- -----
</TABLE>
The increase in operating expenses and loss from corporate operations of
$101,000 or 4.7% from $2,149,000 for the fiscal year ended February 28, 1997 to
$2,250,000 for the fiscal year ended February 28, 1998 primarily relates to
one-time severance costs associated with changes in management personnel.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $5,905,000 or 79.7% from a surplus
of $7,406,000 at February 28, 1997, to a surplus of $1,501,000 at February 28,
1998. The Company's ratio of current assets to current liabilities was 3.7:1 at
February 28, 1997, and 1.6:1 at February 28, 1998.
Net cash used in operations for the year the ended February 28, 1998 was
$4,513,000 consisting of $3,687,000 from continuing operations and $826,000 from
discontinued operations. Net cash used in operations consists primarily of
operating losses offset by an increase in accrued liabilities. Net cash used in
operations for the fiscal year ended February 28, 1997, was $4,394,000
consisting of $6,645,000 from continuing operations offset by $2,251,000 of
funds provided by discontinued operations.
Net cash provided by investing activities was $1,062,000 from the fiscal
year ended February 28, 1998, primarily attributable to the Company's sale of
securities of DAS Devices, Inc. Net cash used in investing activities was
$956,000 for the fiscal year ended 1997 and consisted primarily of capital
expenditures. The Company does not expect to have material capital expenditures
for the year ended February 28, 1999.
Net cash provided by financing activities was $1,784,000 for the fiscal
year ended February 28, 1998. Cash provided by financing activities was
primarily from the sale of securities in SurgX to Iriso, the Company's Japanese
partner, and the accounts receivable financing pursuant to the Accounts
Receivable Revolving Batch Facility. This represents a decline of $2,040,000 or
53.3% from the net cash raised through financing activities in fiscal 1997.
Net cash provided by financing activities for fiscal year ended February
28, 1997 was $3,824,000 primarily from the issuance of common stock. In the
fiscal year ended February 28, 1997, the Company raised additional capital of
$4,143,000, net of issuance costs of $681,000, pursuant to private placement
offerings in which it issued and sold an aggregate of 2.8 million shares of its
common stock to certain qualified institutional investors under Regulation S of
the Securities Act of 1933, as amended. In consideration for these offerings,
the Company also issued warrants to its placement agent to purchase 32,000
shares of common stock at $1.375 per share and 163,530 shares of Common stock at
$1.90 per share. In September 1996, the placement agent exercised 100,000
warrants issued in connection with prior Regulation S financings, resulting in
proceeds to the Company of $137,500. In September 1996, the Company's
underwriters in its initial public offering exercised 100,000 unit purchase
warrants resulting in net proceeds of $371,000. Subject to terms of the unit
purchase warrant, 200,000 common shares and 100,000 warrants to purchase 190,000
shares of common stock at $3.50 per warrant were issued to the underwriters. In
December 1996, the Company repurchased and retired from the underwriters the
remaining 223,961 unit purchase warrants for $475,000 and 40,000 warrants to
purchase 76,000 common shares at $3.50 per warrant.
On December 4, 1996, the Company entered into a credit facility with
Texas State Bank for borrowings of $530,000 bearing interest at 10.5%. The
credit facility is payable over 48 monthly payments of principal and interest
and is collaterized by specified manufacturing equipment. At February 28,
1998, the Company has borrowings of $360,000 under this facility which was
included in net assets of discontinued operations.
In May 1997, the Company entered into a facility which included an
Accounts Receivable Revolving Batch Facility and an Inventory Line of Credit
with KBK Financial, Inc. The Inventory Line of Credit provides for borrowings
of up to $1.5 million ($750,000 of which is subject to an inventory
appraisal). The Accounts Receivable Revolving Batch Facility allows the
Company to factor up to a maximum of $4 million, provided that any amount in
excess of $3.5 million is supported by an equal amount of unused availability
under the Inventory Line of Credit. Under the facility, the Company is
required to sell on an undiscounted, non recourse basis all accounts
receivable. In exchange, advances are available to the Company up to 85% of
the face amount of eligible accounts receivable (as defined) up to a maximum
amount of $4 million. Accounts receivable in the amount of $1,100,000 at
February 28, 1998 were due from lender. Financing costs under the arrangement
are equal to the greater of the lender's base rate plus 1.25% or not less than
7.0%. In March 1998, the agreement was amended to reduce the Account
Receivable Revolving Batch Facility and the Inventory Credit Line to a
maximum borrowings of $500,000 each. Under the amended agreement, the
Accounts Receivable Revolving Batch Facility expires in March 1999 and the
Inventory Line of Credit expires in May 1999.
At February 28, 1998, the Company had borrowings outstanding of
$465,000 under the Inventory Line of Credit of which $336,000 was included in
net assets of discontinued operations and advances of $1,691,000 under the
Accounts Receivable Revolving Batch Facility of which $691,000 related to
discontinued operations.
In February 1998, the Company entered into a bridge loan facility with
KBK Financial, Inc. for borrowings of amounts up to $1,000,000 bearing
interest at the lender's base rate plus 4% with a minimum of 7% per annum.
The facility expires on September 15, 1998. As consideration upon signing
the facility, KBK Financial, Inc. received warrants to purchase 174,546
shares of common stock exercisable through February 2001 at an exercise price
of $1.15. The Company recorded an expense of $93,000 upon issuance of the
warrants. At February 28, 1998, there were no borrowings under this credit
facility.
14
<PAGE>
The Company believes that existing cash on hand will be sufficient to meet
its currently anticipated working capital requirements through fiscal year 1999.
However, in the event the Company fails to meet its fiscal year 1999 operating
plan, the Company will need to secure additional funding by selling assets,
raising additional equity, or taking other steps to obtain the financing
necessary to continue operations at their currently anticipated levels. If the
Company requires additional equity financing or attempts to raise capital
through an asset sale, there can be no assurance that such transactions can be
effected in time to meet the Company's needs, if at all, or that any such
transaction will be on terms acceptable to the Company or in the interest of its
stockholders.
YEAR 2000 ISSUE
Many currently installed computer systems, software products and other
equipment utilizing microprocessors are coded to accept only two digit
entries in the date code field. These date code fields will need to accept
four digit entries to distinguish twenty-first century dates from twentieth
century dates. This is commonly referred to as the "Year 2000 issue."
The Company is aware of the Year 2000 issue and has commenced a program
to identify, remediate, test and develop plans to address the Year 2000
issue. The Company has no legacy mainframe or mini-computer systems.
Corporate networks and computing hardware operate exclusively on Novell
Netware and MicroSoft Windows Operating Systems. The Company relies on its
fully integrated Macola Progression MIS system for all accounting,
manufacturing, and procurement functions. The Company does not currently make
use of EDI or other forms electronic data exchange (other than e-mail) with
any of its customers, business partners, financial institutions or suppliers.
Further, the Company has no substantial data collection, automated
manufacturing, or automated testing systems which could be materially
adversely affected by Year 2000 problems.
As of February 28, 1998, the Company had completed several Year 2000
projects, including upgrade of the Novell Network Operating systems and tape
backup software, evaluation of workstations for Year 2000 compliance,
evaluation of the Company's MIS system and testing of beta software for the
MIS system, evaluation of the Company's email and servers, evaluation of
network routing, interconnect, and firewall hardware and software compliance
and evaluation of the Company's telephone and voicemail equipment. The
Company's review of the Year 2000 issue with respect to its internal systems
preliminarily indicates no material problems.
As of February 28, 1998, the following Year 2000 projects are in process:
completion of the new email system and the conversion of email from the old
system (expected completion date is December, 1998), installation of
Netcellent (MACOLA) V6.7 MIS system update to convert all databases to Year
2000 compliant formats (expected completion date is January, 1999),
development of a list of critical vendors and identification of any material
vendor problems (expected completion is March, 1999) and evaluation of
equipment containing embedded controllers (ongoing during 1998 and 1999). As
of October 31, 1998, the Company's aggregate expenditures (excluding employee
costs) in connection with Year 2000 compliance have been less than $10,000
and the Company estimates that the total cost of its Year 2000 projects will
be approximately $50,000.
The Company has also initiated discussions with Bussmann and Irisio, the
Company's primary licensees, with respect to their state of readiness for
year 2000. The Company has not yet completed its evaluation of Year 2000
compliance by Bussmann and Irisio and, upon completion of such review, will
develop contingency plans if Bussmann or Irisio is not Year 2000 compliant.
The Company currently does not anticipate that the cost of Year 2000
compliance will be material to its financial condition or results of
operations. However, satisfactorily addressing the Year 2000 issue is
dependent on many factors, some of which are not completely within the
Company's control. Should the Company's internal systems or the internal
systems of one or more significant vendors, manufacturers or suppliers fail
to achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected. The failure to correct a material
Year 2000 problem could result in an interruption in, or failure of, certain
normal business activities or operations. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of
the Year 2000 readiness of third-party suppliers and customers, the Company
is unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the Company's result's of operations,
liquidity or financial condition. However, in the event that the Company's
primary licensees, Bussmann and Irisio, or their respective customers or
vendors suffer a material interruption in business activity due to computer
malfunctions resulting from Year 2000 noncompliance, licensing revenues to
the Company from Bussmann and/or Irisio and the Company's financial condition
could be materially adversely affected. The Company's Year 2000 compliance
project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 issue and, in particular, about the Year 2000
compliance and readiness of third parties it deals with. The Company believes
that, with the implementation of new business systems and completion of the
project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
Readers are cautioned that forward-looking statements contained in the
Year 2000 Update should read in conjunction with the Company's disclosures
about forward-looking statements immediately proceeding "Part I-Business."
ORYX POWER PRODUCTS CORPORATION (Discontinued operations)
On March 7, 1998, Todd Power Corporation, a New York corporation, ("Todd")
acquired substantially all of the properties, assets, rights, business and
certain liabilities of Oryx Power Products Corporation ("Power Products") for a
purchase price of $2,000,000 in cash and a contingent additional amount of up to
$4,000,000 to be calculated based upon future sales of certain of Power
Products' specified products to certain named customers during the fourteen
month period immediately following the sale. See note 6 of the Consolidated
Financial Statements. The disposal of Power Products has been accounted for as a
discontinued operation and accordingly the net assets held for disposal and
operating results of Power Products were segregated and reported as discontinued
operations. As the Company has estimated a loss on disposal, all losses were
recognized as if the transaction was completed as of February 28, 1998. Prior
year financial statements have been restated to reflect the discontinuance of
the Power Products operations. Revenue from Power Products were $10,022,000 and
$20,390,000 for the years ended February 28, 1998 and 1997 respectively. Income
(loss) from discontinued operations, net of taxes, were $(3,666,000) and
$2,348,000 for the years ended February 28, 1998 and 1997, respectively.
Item 7. FINANCIAL STATEMENTS
The response to this item is submitted in a separate section of this
report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from the
information under the caption "Election of Directors," with respect to
Directors, and under the caption "Management," with respect to Executive
Officers, contained in the Company's definitive Proxy Statement which will be
filed with the Commission in connection with the solicitation of proxies for the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement").
Item 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" to be contained in the
Proxy Statement.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" to be contained in the Proxy Statement.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
15
<PAGE>
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" to be contained in the
Proxy Statement.
Item 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
<S> <C>
10.42 Term Promissory Note dated February 27, 1998 payable to KBK Financial, Inc.*
10.43 Loan Agreement dated May 29, 1997 with KBK Financial, Inc.*
</TABLE>
* Filed herewith.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized on this 4th day
of December, 1998.
ORYX TECHNOLOGY CORP.
By: /s/ Philip J. Micciche
----------------------
Philip J. Micciche,
President & CEO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant, and in the capacities and on
the date indicated.
Signature Title Date
- --------- ----- ----
President, CEO
/s/ Philip J. Micciche and Director December 4, 1998
- ---------------------- (Principal Executive
Philip J. Micciche Officer)
Secretary, Treasurer December 4, 1998
/s/ Andrew Intrater and Director
- ----------------------
Andrew Intrater
Chief Financial December 4, 1998
/s/ Mitchel Underseth Officer and Director
- ---------------------- (Principal Financial
Mitchel Underseth and Accounting Officer)
/s/ John H. Abeles Director December 4, 1998
- ----------------------
John H. Abeles
(signatures continued next page)
17
<PAGE>
(signatures continued from previous page)
Signature Title Date
- --------- ----- ----
/s/ Jay M. Haft Director December 4, 1998
- ----------------------
Jay M. Haft
/s/ Richard Hubbard Director December 4, 1998
- ----------------------
Richard Hubbard
/s/ Doug McBurnie Director December 4, 1998
- ----------------------
Doug McBurnie
/s/ Ted D. Morgan Director December 4, 1998
- ----------------------
Ted D. Morgan
18
<PAGE>
EXHIBIT 10.42
TERM PROMISSORY NOTE
$1,000,000.00 February 27, 1998
FOR VALUE RECEIVED, on or before September 15, 1998 ("Maturity Date"), the
undersigned and if more than one, each of them, jointly and severally
(hereinafter referred to as "Borrower"), promises to pay to the order of KBK
FINANCIAL, INC. ("KBK") at its offices in Tarrant County, Texas, at 301 Commerce
Street, Suite 2200, Fort Worth, Texas 76102, the principal amount of ONE MILLION
AND NO/100 DOLLARS ($1,000,000.00) ("Total Principal Amount"), or such amount
less than the Total Principal Amount which is outstanding from time to time if
the total amount outstanding under this Term Promissory Note ("Note") is less
than the Total Principal Amount together, with interest at the rate set forth
below on such portion of the Total Principal Amount which has been advanced to
Borrower from the date advanced until paid.
INTEREST RATE. The unpaid principal amount of this Note shall bear interest at
a fluctuating rate per annum which shall from day to day be equal to the lesser
of (a) the Maximum rate (as hereinafter defined), or (b) a rate ("Contract
Rate"), calculated on the basis of the actual days elapsed but computed as if
each year consisted of 360 days, equal to the sum of (i) the Base Rate of
interest ("Base Rate") as established from time to time by KBK (which may not be
the lowest, best or most favorable rate of interest which KBK may charge on
loans to its customers) plus (ii) four percent (4.0%), each change in the rate
to be charged on this Note to become effective without notice to Borrower on the
effective date of each change in the Maximum Rate or the Base Rate, as the case
may be; provided, however, in no event shall the Contract Rate be less than
seven percent (7.0%) per annum; provided, further that if at any time the
Contract Rate shall exceed the Maximum Rate, thereby causing the interest on
this Note to be limited to the Maximum Rate, then any subsequent reduction in
the Base Rate shall not reduce the rate of interest on this Note below the
Maximum Rate until the total amount of interest accrued on this Note equals the
amount of interest which would have accrued on this Note if the Contract Rate
had at all times been in effect. The term "Maximum Rate", as used herein, shall
mean at the particular time in question the maximum rate of interest which,
under applicable law, may then be charged on this Note. If such maximum rate of
interest changes after the date hereof, the Maximum Rate shall be automatically
increased or decreased, as the case may be, without notice to Borrower from time
to time as of the effective date of each change in such maximum rate.
REPAYMENT TERMS. The principal of and all accrued but unpaid interest on this
Note shall be due and payable as follows:
(a) interest shall be due and payable monthly as it accrues, commencing on
the 15th day of March, 1998 and continuing on the 15th day of each
successive month thereafter during the term of this Note; and
<PAGE>
(b) the outstanding principal balance of this Note, together with
accrued but unpaid interest, shall be due and payable on the Maturity
Date.
Borrower authorizes KBK to effect all payments due under this Note and to
collect all sums due hereunder (whether by acceleration or otherwise) by
debiting Borrower's account number 8501-06852-5 at Comerica Bank-California (the
"Debit Account") through the Automated Clearing House system ("ACH"). Such
authorization shall not affect the obligations of Borrower to make all payments
when due hereunder. If on any payment date there are insufficient funds in the
Debit Account to make such payments in full, Borrower agrees to pay KBK on
demand a $100.00 manual processing fee. All payments of principal of or
interest on this Note shall be made in lawful money of the United States of
America in immediately available funds, and, if such payments are not made via
ACH, shall be made at KBK's address indicated above, or such other place as the
holder of this Note shall designate in writing to Borrower. If any payment of
principal or interest on this Note shall become due on a day which is not a
Business Day (as hereinafter defined), such payment shall be made on the next
succeeding Business Day and any such extension of time shall be included in
computing interest in connection with such payment. As used herein, the term
"Business Day" shall mean any day other than a Saturday, Sunday or any other day
on which KBK's office in Fort Worth, Texas is closed. All regularly scheduled
payments of the indebtedness evidenced by this Note shall be applied first to
any accrued but unpaid interest then due and payable hereunder and then to the
principal amount then due and payable. The books and records of KBK shall be
prima facie evidence of all outstanding principal of and accrued and unpaid
interest on this Note. To the extent that any interest is not paid on or before
the fifth day after it becomes due and payable, KBK may, at its option, add such
accrued interest to the principal of this Note. Notwithstanding anything herein
to the contrary, upon an Event of Default (as hereinafter defined) or at
maturity, whether by acceleration or otherwise, all principal of this Note
shall, at the option of KBK, bear interest at a fixed rate equal to 18% per
annum until paid.
PREPAYMENT WITHOUT PENALTY. Borrower may from time to time prepay all or any
portion of the outstanding principal balance of this Note without premium or
penalty. Any partial prepayment shall be applied toward the payment of the
principal installments last maturing on this Note in the inverse order of
maturity, without reducing the amount or altering the due date of the remaining
installments.
LOAN DOCUMENTS. This Note is subject to the terms and conditions set forth in
that certain Loan Agreement dated May 29, 1997 by and between Borrower and KBK,
as amended from time to time (the "Loan Agreement). This Note, the Loan
Agreement and all other documents evidencing, securing, governing, guaranteeing
and/or pertaining to this Note are hereinafter collectively referred to as the
"Loan Documents". The holder of this Note is entitled to the benefits and
security provided in the Loan Documents.
PURPOSE. Borrower agrees that no advances under this Note shall be used for
personal, family or household purposes, and that all advances hereunder shall be
used solely for business, commercial, investment or other similar purposes.
<PAGE>
EVENT OF DEFAULT. Borrower agrees that upon the occurrence of any one or more
of the following events of default ("Event of Default"):
(a) failure of Borrower to pay when due any installment of principal of or
interest on this Note or on any other indebtedness now or hereafter
owing by Borrower to KBK (including, without limitation, that certain
Revolving Credit Promissory Note dated May 29, 1997 payable by
Borrower to the order of KBK in the stated principal amount of
$1,500,000,00); or
(b) the occurrence of any event of default specified in any of the other
Loan Documents; or
(c) the occurrence of an event of default or the breach of any term or
covenant under that certain Revolving Account Transfer and Purchase
Agreement (Batch) dated May 29, 1997 between KBK, Oryx Power Products
Corporation, Oryx Instruments and Materials Corporation, and Surgx
Corporation, as may be amended from time to time (the "Purchase
Agreement"), or
(d) the bankruptcy or insolvency of, the assignment for the benefit of
creditors by, or the appointment of a receiver for any of the property
of, or the liquidation, termination, dissolution or death or legal
incapacity of Borrower;
the holder of this Note may, at its option, without further notice or demand,
(i) declare the outstanding principal balance of and accrued but unpaid interest
on this Note at once due and payable, (ii) refuse to advance any additional
amounts under the Note, (iii) foreclose all liens securing payment hereof, (iv)
pursue any and all other rights, remedies and recourses available to the holder
hereof, including but not limited to any such rights, remedies or recourses
under the other Loan Documents, at law or in equity, or (v) pursue any
combination of the foregoing. The failure to exercise the option to accelerate
the maturity of this Note or any other right remedy or recourse available to the
holder hereof upon the occurrence of an Event of Default hereunder shall not
constitute a waiver of the right of the holder or this Note to exercise the same
at that time or at any subsequent time with respect to such Event of Default or,
any other Event of Default. The rights, remedies and recourses of the holder
hereof, as provided in this Note and in any of the other Loan Documents, shall
be cumulative and concurrent and may be pursued separately, successively or
together as often as occasion therefor shall arise, at the sole discretion of
the holder hereof. The acceptance by the holder hereof of any payment under
this Note which is less than the payment in full of all amounts due and payable
at the time of such payment shall not (i) constitute a waiver of or impair,
reduce, release or extinguish any right, remedy or recourse of the holder
hereof, or nullify any prior exercise or any such right, remedy or recourse, or
(ii) impair, reduce, release or extinguish the obligations of any party liable
under any of the other Loan Documents as originally provided herein or therein.
COMPLIANCE WITH USURY LAWS. This Note and the other Loan Documents are intended
to be performed in accordance with, and only to the extent permitted by, all
applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in this Note or any of the other Loan
<PAGE>
Documents, in no event whatsoever shall this Note or any of the other Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws which exceed the maximum amount permitted by such laws. If
any such excess interest is called for, contracted for, charged, taken,
reserved, or received in connection with this Note or any of the other Loan
Documents, or in any communication by KBK or any other person to Borrower or
any other person, or in the event all or part of the principal or interest
shall be prepaid or accelerated, so that under any of such circumstances or
under any other circumstance whatsoever the amount of interest contracted
for, charged, taken, reserved, or received on the amount of principal
actually outstanding from time to time under this Note or any of the other
Loan Documents shall exceed the maximum amount of interest permitted by
applicable usury laws, then in any such event it is agreed as follows: (i)
the provisions of this Section shall govern and control; (ii) neither
Borrower nor any other person or entity now or hereafter liable for payments
under this Note or any of the other Loan Documents shall be obligated to pay
the amount of such interest to the extent such interest is in excess of the
maximum amount of interest permitted by applicable usury laws; (iii) any such
excess which is or has been received notwithstanding this Section shall be
credited against the then unpaid principal balance of this Note and the other
Loan Documents or, if this Note or any of the other Loan Documents has been
or would be paid in full by such credit, refunded to Borrower, and (iv) the
provisions of this Note or any of the other Loan Documents, and communication
to Borrower, shall immediately be deemed reformed and such excess interest
reduced, without the necessity of executing any other document, to the
maximum lawful rate allowed under applicable laws as now or hereafter
construed by courts having jurisdiction hereof or thereof. Without limiting
the foregoing, all calculations of the rate of interest contracted for,
charged, taken, reserved, or received in connection herewith which are made
for the purpose of determining whether such rate exceeds the maximum lawful
rate shall be made to the extent permitted by applicable laws by amortizing,
prorating, allocating and spreading during the period of the full term of
this Note or any of the other Loan Documents, including all prior and
subsequent renewals and extensions, all interest at any time contracted for,
charged, taken, reserved, or received. The terms of this Section shall be
deemed to be incorporated into every other Loan Document.
Borrower and KBK agree that Chapter 346 of the Texas Finance Code, Formerly
Chapter 15 of the Texas Revised Civil Statutes (which regulates certain
revolving loan accounts and revolving tri-party accounts) shall not apply to any
revolving loan accounts created under this Note or maintained in connection
therewith.
To the extent that the interest rate laws of the State of Texas are applicable
to this Note, the applicable interest rate ceiling is the indicated (weekly)
ceiling determined in accordance with Article 5069-ID.002 of the Texas Revised
Civil Statutes, as amended, and, to the extent that this Note is deemed an open
end account as such term is defined in Article 5069-1B.002(14) of the Texas
Revised Civil Statutes, as amended, KBK retains the right to modify the interest
rate in accordance with applicable law. As used in this Note, the term
"applicable law" means the laws of the State of Texas or the United States of
America, whichever laws allow the greater interest, as such laws now exist or
may be changed or amended or come into effect in the future.
<PAGE>
COSTS OF COLLECTION: WAIVERS. If this Note is placed in the hands of an
attorney for collection, or is collected in whole or in part by suit or through
probate, bankruptcy or other legal proceedings of any kind, Borrower agrees to
pay, in addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys' fees. Borrower
and any and all endorsers and guarantors of this Note severally waive
presentment for payment, notice of nonpayment, protest, demand, notice of
protest, notice of intent to accelerate, notice of acceleration and dishonor,
diligence in enforcement and indulgences of every kind and without further
notice hereby agree to renewals, extensions, exchanges or releases of
collateral, taking of additional collateral indulgences or partial payments,
either before or after maturity.
GOVERNING LAW: VENUE SUBMISSION TO JURISDICTION. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. THIS
NOTE IS PERFORMABLE IN TARRANT COUNTY, TEXAS. BORROWER AGREES THAT TARRANT
COUNTY, TEXAS SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR
CLAIM ARISING UNDER OR RELATING TO THIS NOTE AND THAT SUCH COUNTY IS A
CONVENIENT FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER
CONSENTS TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN TARRANT COUNTY, TEXAS FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM.
BORROWER 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.
WAIVER OF JURY TRIAL. BORROWER HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM
EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR
IN CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY OR
ASSOCIATED HEREWITH.
FINAL AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN KBK AND BORROWER WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED
HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
<PAGE>
BORROWER:
ORYX TECHNOLOGY CORP.
By: /s/ Philip J. Micciche
-----------------------------------
Name: Philip J. Micciche
Title: Chief Executive Officer
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of this 29th day of May, 1997
by and between ORYX TECHNOLOGY CORP., a Delaware corporation ("Borrower") and
KBK FINANCIAL, INC., a Delaware corporation doing business as OTC/KBK
Acceptance Corporation ("KBK"). In connection with the mutual covenants and
agreements contained herein, the parties hereto agrees as follows:
I. DEFINITIONS. The following definitions shall apply throughout this
Agreement:
"AFFILIATE" means with respect to any person or entity in question, any
other person or entity owned or controlled by, or which owns or controls
or is under common control or is otherwise affiliated with such person or
entity in question.
"BORROWING BASE" means an amount equal to 40% of Eligible Inventory.
"COLLATERAL" has the meaning given it in SECTION 4.
"CREDIT FACILITIES" has the meaning given it in SECTION 2.
"DEBIT ACCOUNT" means the bank account of Borrower which Borrower
identifies to KBK in writing prior to any advances under the Line of
Credit over which KBK has express written authority to debit pursuant to
this Agreement.
"ELIGIBLE INVENTORY" means as of any date, the aggregate value of all
inventory of raw materials and finished goods (excluding work in progress
and packaging materials, supplies and any advertising costs capitalized
into inventory) then owned by any of the Obligors and held for sale, lease
or other disposition in the ordinary course of its business, in which KBK
has a first priority lien, excluding (i) inventory which is damaged,
defective, obsolete or otherwise unsaleable in the ordinary course of
business, (ii) inventory which has been returned or rejected, (iii)
inventory subject to any consignment arrangement between any of the
Obligors and any other person or entity, (iv) inventory which is in
transit, (v) inventory not located in the United States and (vi) inventory
which KBK in KBK's reasonable discretion deems ineligible. For purposes
of this definition, Eligible Inventory shall be valued at the lower of
cost or market value.
"ENVIRONMENTAL LAWS" means any and all federal, state and local laws,
regulations, rules, orders, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges or
releases of pollutants or industrial, toxic or hazardous substances into
the environment, or otherwise relating to the manufacture, processing,
treatment, transport or handling of pollutants or industrial, toxic or
hazardous substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations
promulgated with respect thereto.
<PAGE>
"ERISA PLAN" means any pension benefit plan subject to Title IV of ERISA
maintained by Borrower or any Affiliate thereof with respect to which
Borrower or any Affiliate has a fixed or contingent liability.
"GAAP" means those generally accepted accounting principles and practices
which are recognized as such by the Financial Accounting Standards Board
(or any generally recognized successor), consistently applied throughout
the period involved.
"GUARANTORS" means SURGX CORPORATION, ORYX INSTRUMENTS AND MATERIALS
CORPORATION, ORYX POWER PRODUCTS CORPORATION (whether one or more).
"INDEMNIFIED CLAIMS" means any and all claims, demands, actions, causes of
action, judgments, suits, liabilities, obligations, losses, damages and
consequential damages, penalties, fines, costs, fees, expenses and
disbursements (including without limitation, fees and expenses of
attorneys and other professional consultants and experts in connection
with any investigation or defense) of every kind or nature, known or
unknown, existing or hereafter arising, foreseeable or unforeseeable,
which may be imposed upon, threatened or asserted against or incurred or
paid by any Indemnified Person at any time and from time to time,
because of or resulting from, in connection with or in any way relating
to or arising out of any of the Credit Facilities, the Collateral or any
other transaction, act, omission, event or circumstance in any way
connected with or contemplated by this Agreement or the other Loan
Documents or any action taken or omitted by any such Indemnified Person
under or in connection with any of the foregoing (including but not
limited to any investigation, litigation, proceeding, enforcement of
KBK's rights or defense of KBK's actions related to or arising out of
this Agreement or the other Loan Documents), whether or not any
Indemnified Person is a party hereto.
"INDEMNIFIED PERSON" shall collectively mean KBK and its officers,
directors, shareholders, employees, attorneys, representatives, agents,
Affiliates, successors and assigns.
"LINE OF CREDIT AMOUNT" is $750,000.00; provided, however the Line of
Credit Amount shall be $1,500,000.00 once KBK receives the inventory
appraisal described in Subsection 9(c).
"LOAN DOCUMENTS" means this Agreement, the Notes and all other documents,
agreements and instruments required by KBK to be executed and delivered in
connection herewith (including, without limitation, all documents,
agreements and instruments evidencing, securing, governing, guaranteeing
and/or pertaining to the Notes and the Credit Facilities).
"NOTES" has the meaning given it in SECTION 3.
"OBLIGORS" means Borrower and the Guarantors.
"PURCHASE AGREEMENT" means that certain account transfer and purchase
agreement of even date herewith between Oryx Power Products Corporation,
Oryx Instruments and Materials Corporation and KBK, as may be amended from
time to time.
"SUBORDINATED DEBT" means indebtedness owing by any Obligor to a creditor
other than KBK which has been subordinated and subject in right of payment
to the prior payment of all indebtedness and obligations now or hereafter
owing by such Obligor to KBK, such
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subordination to be evidenced by a written agreement between KBK and the
subordinated creditor which is in form and substance satisfactory to KBK.
"TANGIBLE NET WORTH" means, as of any date, the amount by which the
total assets of Obligors on a consolidated basis exceeds the Obligors'
total liabilities, plus Subordinated Debt, less any intangible assets
(as defined by GAAP, including, without limitation, trademarks, patents,
copyrights, goodwill, covenants not to compete and customer lists), less
deferred charges.
2. CREDIT FACILITIES. Subject to the terms and conditions set forth in this
Agreement and the other Loan Documents, KBK hereby agrees to provide to
Borrower the following Credit Facility or Facilities (whether one or more,
the "Credit Facilities"):
a. LINE OF CREDIT. Subject to the terms and conditions set forth
herein, KBK agrees to provide to Borrower a revolving line of
credit (the "Line of Credit") during the period commencing on the
date hereof and continuing through the 30' day prior to the
maturity date of the promissory note evidencing the Line of
Credit from time to time. Borrower may request advances under
the Line of Credit; PROVIDED, HOWEVER, the total principal amount
outstanding at any time under the Line of Credit shall not exceed
the lesser of (i) an amount equal to the Borrowing Base, or (ii)
the Line of Credit Amount. If at any time the aggregate
principal amount outstanding under the Line of Credit shall
exceed an amount equal to the Borrowing Base, Borrower agrees to
immediately repay to KBK such excess amount, plus all accrued but
unpaid interest thereon. Borrower may request advances under the
Line of Credit no more often than once each business day.
Subject to the terms and conditions set forth in this Agreement
and in the promissory note evidencing the Line of Credit from
time to time, Borrower may borrow, repay and reborrrow under the
Line of Credit. The sums advanced under the Line of Credit shall
be used for working capital purposes.
3. PROMISSORY NOTE. Borrower agrees to execute, contemporaneously herewith,
a promissory note payable to the order of KBK, in form and substance
acceptable to KBK in KBK's sole and absolute discretion, for each Credit
Facility provided hereunder to evidence the indebtedness owing by Borrower
to KBK under each such facility (whether one or more, together with any
renewals, extensions and increases thereof, the "Notes"). Interest on the
Notes shall accrue at the rate set forth therein. The principal of and
interest on the Notes shall be due and payable and may be prepaid in
accordance with the terms and conditions set forth in the Notes and in
this Agreement.
4. COLLATERAL. As collateral and security for the indebtedness evidenced by
the Notes and any and all other indebtedness or obligations from time to
time owing by Borrower to KBK, Borrower and Guarantors shall each grant to
KBK, its successors and assigns, a first and prior lien and security
interest in and to the property described hereinbelow, together with any
and all PRODUCTS AND PROCEEDS thereof (the "Collateral"):
a. ACCOUNTS. All present and future accounts, contract rights, chattel
paper, documents, instruments, deposit accounts and general
intangibles (including, without limitation, all patents and patent
applications, and all trademarks and goodwill of the business related
to such trademarks, along with any divisions, renewals or reissues
thereof, and variations or modifications and new applications of the
technology covered by such patents and trademarks) now or hereafter
owned by any of the Obligors, all money and
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other funds of any of the Obligors which may now or hereafter come
into the possession, custody or control of Secured Party, all books
of account and customer lists, and in any case where an account
arises from the sale of goods, the interest of Obligors in such
goods.
b. INVENTORY. All present and hereafter acquired inventory (including
without limitation, all raw materials, work in process and finished
goods) owned by any of the Obligors wherever located.
c. EqUIPMENT. All equipment of whatsoever kind and character now or
hereafter owned by any of the Obligors and used or usable in any of
the Obligor's business, together with all replacements, accessories,
additions, substitutions and accessions to all of the foregoing.
The term "Collateral" shall also include all records and data relating to
any of the foregoing (including, without limitation, any computer software
on which such records and data may be located). Borrower agrees to
execute, and to cause the Guarantors to execute, such security agreements,
assignments, mortgages, deeds of trust and other agreements and documents
as KBK shall deem appropriate and otherwise require from time to time to
more fully create and perfect KBK's lien and security interests in the
Collateral.
5. GUARANTORS. As a condition precedent to KBK's obligation to provide the
Credit Facilities to Borrower, Borrower agrees to cause the Guarantors to
each execute and deliver to KBK contemporaneously herewith a guaranty
agreement, in form and substance acceptable to KBK in KBK's sole and
absolute discretion.
6. FEES.
a. COMMITMENT FEE. Borrower shall pay to KBKA a commitment fee in the
amount of $11,250.00. Such fee shall be payable as follows: (i)
$5,625.00 concurrently with the execution hereof, (ii) $2,812.50 on
or before the 30' day after the date of execution hereof, and (iii)
$2,812.50 on or before the 60' day after the date of execution
hereof, provided, however, the amount due in clause (ii) and (iii)
shall in no event be due unless and until the Line of Credit Amount
has been increased to $1,500,000.00. Borrower hereby authorizes
KBK, in KBK's sole discretion, to collect any such commitment fees
(i) by deducting such fees from the first advance under the subject
Credit Facility, (ii) by debiting the Debit Account, (iii) by
applying that portion of any up-front deposit delivered to KBK by
Borrower which is in excess of KBK's costs and expenses (including,
without limitation, attorneys' fees), or (iv) by using any
combination of the foregoing. This authorization does not affect
Borrower's obligation to pay such sums to KBK. Borrower and KBK
acknowledge and agree that the commitment fees are reasonable
compensation to KBK for making the Credit Facilities available to
Borrower and for no other purpose.
b. SERVICING FEE. Borrower agrees to pay KBK a servicing fee
("Servicing Fee") on the first day of each calendar month equal to
one tenth percent (.10%) per annum (computed on the basis of a year
consisting of 360 days and actual days elapsed) of the average
daily amount outstanding under the Line of Credit during the
immediately
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preceding calendar month. If the first calendar month covers less
than a full month, the Servicing Fee for such month shall be
prorated. Borrower hereby authorizes KBK, in KBK's sole
discretion, to collect such Servicing Fee (i) by deducting such fee
from the first advance, if any, under the subject Credit Facility
after such fee is due, (ii) by debiting the Debit Account, or (iii)
by using any combination of the foregoing. This authorization does
not affect Borrower's obligation to pay such sums to KBK when due.
Borrower and KBK acknowledge and agree that such fees are
reasonable compensation to KBK for making the Credit Facilities
available to Borrower and for no other purpose.
c. MONTHLY FEE. Borrower agrees to pay KBK a monthly fee ("Monthly
Fee") on the first day of each calendar month equal to $1,500.00,
the accrued interest under the Line of Credit and the Servicing
Fee which are collected by KBK in and for the prior calendar month.
Borrower hereby authorizes KBK, in KBK's sole discretion, to
collect such Monthly Fee (i) by deducting such fee from the first
advance, if any, under the subject Credit Facility after such fee
is due, (ii) by debiting the Debit Account, or (iii) by using any
combination of the foregoing. This authorization does not affect
Borrower's obligation to pay such sums to KBK when due. Borrower
and KBK acknowledge and agree that such fees are reasonable
compensation to KBK for making the Credit Facilities available to
Borrower and for no other purpose.
7. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants,
and upon each request for an advance under the Credit Facilities further
represents and warrants, to KBK as follows:
a. EXISTENCE. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and is duly licensed, qualified to do business and is
in good standing in all other states in which such licensing,
qualification and good standing are necessary. Borrower has all
requisite power and authority to execute and deliver this Agreement
and the other Loan Documents to which it is a party.
b. BINDING OBLIGATIONS. The execution, delivery, and performance of
this Agreement and all of the other Loan Documents by Borrower have
been duly authorized by all necessary action by Borrower, and
constitute legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, except as
limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and
except to the extent specific remedies may generally be limited by
equitable principles.
c. NO CONSENT. The execution, delivery and performance of this
Agreement and the other Loan Documents, and the consummation of the
transactions contemplated hereby and thereby, do not (i) conflict
with, result in a violation of, or constitute a default under (A)
any provision of Borrower's articles or certificate of
incorporation or bylaws, (B) any law, governmental regulation,
court decree or order applicable to Borrower, or (C ) any other
document or agreement to which Borrower is a party, or (ii) require
the consent, approval or authorization of any third party.
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d. FINANCIAL CONDITION. Each financial statement of Obligors supplied
to KBK fairly presents the financial condition as of the date of
each such statement. There has been no material adverse change in
such financial condition or results of operations of any of the
Obligors subsequent to the date of the most recent financial
statement supplied to KBK.
e. LITIGATION. There are no actions, suits or proceedings, pending or,
to the knowledge of Borrower, threatened against or affecting any of
the Obligors or the properties of any of the Obligors, before any
court or governmental department, commission or board, which, if
determined adversely to any of the Obligors, would have a material
adverse effect on the financial condition, properties, or operations
of any of the Obligors.
f. TAXES; GOVERNMENTAL CHARGES. The Obligors have filed all federal,
state and local tax reports and returns required by any law or
regulation to be filed by it and has either duly paid all taxes,
duties and charges indicated due on the basis of such returns and
reports, or made adequate provision for the payment thereof, and the
assessment of any material amount of additional taxes in excess of
those paid and reported is not reasonably expected. There is no tax
lien notice against any of the Obligors presently on file.
g. ERISA COMPLIANCE. The Obligors are in compliance with ERISA
concerning Borrower's ERISA Plan, if any, or is not required to
contribute to any "multi-employer plan" as defined in Section 401 of
ERISA.
h. COMPLIANCE WITH LAWS. The Obligors are each conducting its respective
business in material compliance with all statutes, rules, regulations
and/or ordinances imposed by any governmental unit upon each Obligor
or upon its businesses, operations and property (including, without
limitation, all Environmental Laws).
8. CONDITIONS PRECEDENT TO ADVANCES. KBK's obligation to make any advance
under this Agreement and the other Loan Documents shall be subject to the
conditions precedent that, as of the date of such advance and after giving
effect thereto (i) all representations and warranties made to KBK in this
Agreement and the other Loan Documents shall be true and correct, as of
and as if made on such date, except to the extent such representations and
warranties are with respect to financial statements which are delivered to
KBK that speak as of a particular date, (ii) no material adverse change in
the financial condition of any of the Obligors or their respective
business since the effective date of the most recent financial
statements furnished to KBK shall have occurred, (iii) no event has
occurred and is continuing, or would result from the requested advance,
which with notice or lapse of time, or both, would constitute an Event
of Default (as hereinafter defined), (iv) KBK's receipt of all Loan
Documents appropriately executed by Borrower, Guarantors and all other
proper parties, and (iv) KBK's receipt of all fees and expenses owing to
KBK under this Agreement and the other Loan Documents.
9. AFFIRMATIVE COVENANTS. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower agrees and covenants that it will, unless KBK
shall otherwise consent in writing:
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a. ACCOUNTS AND RECORDS. Maintain the Obligor's books and records in
accordance with generally accepted accounting principles.
b. RIGHT OF INSPECTION. Permit KBK to visit the Obligors' properties
and installations and to examine, audit and make and take away copies
or reproductions of the Obligor's books and records, at all
reasonable times. Borrower agrees to pay all costs associated with
any such audits, at a rate equal to $700.00 per person, plus
out-of-pocket expenses, but prior to an Event of Default, Borrower
shall not be required to pay for more than one such audit per fiscal
quarter.
c. INVENTORY APPRAISAL. Provide KBK with an appraisal satisfactory to
KBK of the forced liquidation value of the inventory of Oryx
Instruments and Materials Corporation and Oryx Power Products
Corporation by an appraiser acceptable to KBK within 30 days from the
date hereof.
d. LANDLORD'S WAIVER. Obligors will cause each landlord of real
property leased by the Obligors and where Collateral may be kept to
execute and deliver to KBK, within 60 days from the initial advance
under the Line of Credit, an agreement satisfactory in form and
substance to KBK which such landlord waives any lien or other
rights landlord may have in the Collateral and gives KBK access to
the leased premises.
e. RIGHT TO ADDITIONAL INFORMATION. Furnish KBK with such additional
information and statements, lists of assets and liabilities, tax
returns, and other reports with respect to each Obligor's financial
condition and business operations as KBK may request from time to
time.
f. COMPLIANCE WITH LAWS. Conduct its business, and cause Guarantors to
each conduct their businesses, in an orderly and efficient manner
consistent with good business practices, and perform and comply with
all statutes, rules, regulations and/or ordinances imposed by any
governmental unit upon their respective businesses, operations and
properties (including without limitation, all Environmental Laws).
g. TAXES. Pay and discharge when due all assessments, taxes,
governmental charges and levies, of every kind and nature, imposed
upon any of the Obligors or their properties, income or profits,
prior to the date on which penalties would attach, and all lawful
claims that, if unpaid, might become a lien or charge upon any of
Obligor's property, income or profits; provided, however, Obligors
will not be required to pay and discharge any such assessment, tax,
charge, levy or claim so long as (i) same shall be contested in
good faith by appropriate judicial, administrative or other legal
proceedings timely instituted, and (ii) Obligors shall have
established adequate reserves with respect to such contested
assessment, tax, charge, levy or claim in accordance with generally
accepted accounting principles, consistently applied.
h. INSURANCE. Maintain, and cause Guarantors to maintain, insurance,
including but not limited to, fire insurance, comprehensive property
damage, public liability, worker's compensation, business
interruption and other insurance deemed necessary or otherwise
required by KBK.
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i. NOTICE OF MATERIAL CHANGE/LITIGATION. Borrower shall promptly notify
KBK in writing (i) of any material adverse change in the financial
condition of any of the Obligors or their respective businesses, and
(ii) of any litigation or claims against any Obligor which is
reasonably likely to materially affect the financial condition of
such Obligor.
j. ADDITIONAL DOCUMENTATION. Execute and deliver, or cause to be
executed and delivered, any and all other agreements, instruments or
documents which KBK may reasonably request in order to give effect to
the transactions contemplated under this Agreement and the other Loan
Documents.
10. NEGATIVE COVENANTS. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower will not and will cause the Guarantors to not,
without the prior written consent of KBK:
a. NATURE OF BUSINESS. Make any material change in the nature of its
business as carried on as of the date hereof, except in connection
with the sale of substantially all of the assets or capital stock of
Oryx Power Products Corporation.
b. LIQUIDATIONS, MERGERS, CONSOLIDATIONS: ACQUISITIONS. Liquidate,
merge or consolidate with or into any other entity, or form or
acquire any new subsidiary or acquire by purchase or otherwise all or
substantially all of the assets of any other entity except a merger
of a subsidiary into Borrower or into any other subsidiary of
Borrower.
c. TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including,
without limitation, the purchase, sale or exchange of property or the
rendering of any service, with any Affiliate, except in the ordinary
course of and pursuant to the reasonable requirements of its business
and upon fair and reasonable terms no less favorable to it than would
be obtained in a comparable arm's-length transaction with a person or
entity not an Affiliate.
d. SALE OF ASSETS. Sell, lease, transfer or otherwise dispose of any of
its assets or properties, other than (i) inventory sold in the
ordinary course of business, (ii) as necessary to replace obsolete
equipment, and (iii) all of the stock of Oryx Power Products
Corporation, Borrower agreeing to give KBK 10 days prior written
notice of any such sale of stock.
e. LIENS. Create or incur any lien or encumbrance on any of its assets,
other than (i) liens and security interests securing indebtedness
owing to KBK, (ii) pledges or deposits to secure the payment of
obligations under any worker's compensation laws or similar laws,
(iii) deposits to secure the payment of public or statutory
obligations, (iv) mechanic's, carriers', workman's, repairman's or
other liens arising by operation of law in the ordinary course of
business which secure obligations that are not overdue or are being
contested in good faith and for which Borrower has established
adequate reserves in accordance with generally accepted accounting
principles, (v) liens securing purchase money indebtedness permitted
hereunder provided such lien does not extend beyond the property
purchased with such indebtedness, (vi) liens securing capital
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leases provided such lien does not extend beyond the property
subject to such lease, and (vii) liens and security interest
existing as of the date hereof which have been disclosed to and
approved by KBK in writing.
f. INDEBTEDNESS. Create, incur or assume any indebtedness for borrowed
money or issue or assume any other note, debenture, bond or other
evidences of indebtedness, or guarantee any such indebtedness or such
evidences of indebtedness of others, other than (i), borrowings from
KBK, (ii) current accounts payable and other current obligations
(other than for borrowed money), (iii) borrowings outstanding on the
date hereof which have been disclosed and approved in writing by KBK,
(iv) inter-company borrowings between the Obligors, (v) purchase
money indebtedness used to purchase equipment which is secured only
by the equipment so purchased, and (vi) capital lease obligations;
provided, however, Borrower agrees to give KBK prior notification
of any single purchase money transaction or capital lease in excess
of $50,000.00.
g. TRANSFER OF OWNERSHIP. Permit the sale, pledge or other transfer of
any of the ownership interest in any of the Guarantors (except all of
the capital stock of Oryx Power Products Corporation, Borrower
agreeing to give KBK 10 days prior written notice of any such sale).
h. CHANGE IN MANAGEMENT. Permit a change in the senior management of
any Obligor without giving KBK five (5) days prior written notice, if
possible.
II. FINANCIAL COVENANTS. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower will maintain the following financial covenant on
a consolidated basis with the Guarantors:
a. TANGIBLE NET WORTH. At the end of each fiscal quarter, its Tangible
Net Worth, calculated on a pro forma basis (i.e. add back accounts
purchased by KBK and the factored balance), of not less than
$4,250,000.00.
Borrower shall have an opportunity to cure any breach of this financial
covenant within 25 days from the earlier of (i) the date which KBK is due to
receive financial statements of Borrower hereunder which would indicate any
breach of this financial covenant, or (ii) the date KBK receives receipt of
financial statements indicating any breach of this financial covenant.
Unless otherwise specified, all accounting and financial terms and covenants
set forth above are to be determined according to generally accepted
accounting principles, consistently applied.
12. REPORTING REQUIREMENTS. Until (i) the Notes and all other obligations and
liabilities of Borrower under this Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) KBK has no further commitment to
lend hereunder, Borrower will, unless KBK shall otherwise consent in
writing, furnish to KBK:
a. FINANCIAL STATEMENTS. Borrower agrees to furnish to KBK (i) within
90 days after the last day of each fiscal year of Borrower a
consolidated statement of income and a consolidated statement of
cash flows of Borrower for such fiscal year, and a consolidated
balance sheet of Borrower as of the last day of such fiscal year,
together with an auditor's report thereon by an independent
certified public accountant, and (ii)
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within 30 days after the last day of each fiscal month of Borrower,
an unaudited consolidated statement of income and statement of cash
flows of Borrower for such fiscal month, and an unaudited
consolidated balance sheet of Borrower as of the last day of such
fiscal month. Borrower represents and warrants that each such
statement of income and statement of cash flows will fairly
present, in all material respects, the results of operations and
cash flows of Borrower for the period set forth therein, and that
each such balance sheet will fairly present, in all material
respects, the financial condition of Borrower as of the date set
forth therein, all in accordance with GAAP, (or, with respect to
unaudited financial statements, in the notes thereto and subject to
year-end review adjustments).
b. INVENTORY MAINTENANCE CERTIFICATE. An Inventory Maintenance
Certificate, in the form attached hereto as Schedule A, signed by an
officer of the Borrower, and an Inventory Maintenance Certificate in
the form attached hereto as Schedule B, from each Guarantor, each to
be delivered to KBK within three (3) business days after the end of
each week.
c. INVENTORY LISTING. A list of each of the Obligor's inventory by
location and type (to include the following: raw materials, work in
process and finished goods) within three (3) business days after the
end of each week of each fiscal year, in form and detail satisfactory
to KBK.
13. EVENTS OF DEFAULT. Each of the following shall constitute an "Event of
Default" under this Agreement:
a. FAILURE TO PAY INDEBTEDNESS. Borrower shall fail to pay as and when
due any part of the principal of, or interest on, the Notes or any
other indebtedness or obligations now or hereafter owing to KBK by
Borrower.
b. NON-PERFORMANCE OF COVENANTS. Any of the Obligors shall breach any
covenant or agreement made herein, in any of the other Loan
Documents, in the Purchase Agreement or in any other agreement now
or hereafter entered into between any of the Obligors and KBK.
c. FALSE REPRESENTATION. Any warranty or representation made herein, in
any of the other Loan Documents or in the Purchase Agreement shall be
false or misleading in any material respect when made.
d. DEFAULT UNDER OTHER LOAN DOCUMENTS. The occurrence of an event of
default under any of the other Loan Documents, the Purchase Agreement
or any other agreement now or hereafter entered into between any of
the Obligors and KBK.
e. UNTRUE FINANCIAL REPORT. Any report, certificate, schedule,
financial statement, profit and loss statement or other statement
furnished by Borrower or any Guarantor, or by any other person on
behalf of Borrower or any Guarantor, to KBK is not true and correct
in any material respect.
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