<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
---------- ------------
Commission File Number 33-95284
ZYCON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2348052
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
445 El Camino Real
Santa Clara, CA 95050
(408) 241-9900
(Address, including zip code, and telephone number, including area code, of
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 11,050,000 shares of Common Stock, $.001 Par Value, outstanding
at July 31, 1996.
-------------
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of June 30, 1996
and December 31, 1995............................................ 3
Consolidated Condensed Statements of Income for the three months
and for the six months ended June 30, 1996 and 1995,
respectively..................................................... 4
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1996 and 1995, respectively................ 5
Notes to Consolidated Condensed Financial Statements............... 6
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
Part II.Other Information
Item 1. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
Signatures.................................................................. 17
Exhibits.................................................................... 18
</TABLE>
<PAGE>
Part I: Financial Information
Item I: Condensed Financial Statements
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In thousands, except share data)
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,814 $ 11,264
Trade receivables 22,992 20,886
Inventories 8,963 6,131
Prepaid expenses and other current assets 2,017 1,734
---------- ----------
Total Current assets 42,786 40,015
Plant and equipment, net 69,321 52,130
Other assets 17,605 2,830
---------- ----------
$ 129,712 $ 94,975
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current Liabilities:
<S> <C> <C>
Current portion of long-term debt $ 6,470 $ 2,567
Accounts payable 20,330 17,624
Accrued liabilities 5,467 5,021
Income taxes payable - 1,770
---------- ----------
Total current liabilities 32,267 26,982
Bank borrowings 5,423 -
Long-term debt 22,788 5,458
Deferred income taxes 7,234 6,634
---------- ----------
Total liabilities 67,712 39,074
---------- ----------
Stockholders' equity:
Preferred stock; $0.001 par value; 20,000,000
shares authorized; none outstanding - -
Common stock; $0.001 par value; 25,000,000
shares authorized; 11,050,000 and 11,000,000
shares issued and outstanding respectively 11 11
Additional paid-in capital 32,969 32,369
Retained earnings 29,020 23,521
---------- ----------
Total stockholders' equity 62,000 55,901
---------- ----------
$ 129,712 $ 94,975
========== ==========
</TABLE>
See Accompanying Notes to the Consolidated Condensed Financial Statements
3
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 48,402 $ 42,311 $ 103,468 $ 80,678
Cost of sales 41,845 36,912 86,402 71,326
-------- -------- -------- --------
Gross profit 6,557 5,399 17,066 9,352
-------- -------- -------- --------
Selling, general and
administrative expenses 3,410 2,314 7,437 4,594
-------- -------- -------- --------
Income from operations 3,147 3,085 9,629 4,758
Interest expense, net 267 457 273 966
-------- -------- -------- --------
Income before income taxes 2,880 2,628 9,356 3,792
Income taxes 1,242 2 3,857 16
-------- -------- -------- --------
Net income $ 1,638 $ 2,626 $ 5,499 $ 3,776
======== ======== ======== ========
Net Income Per Share $ 0.15 $ 0.50
======== ========
Shares used in computing
net income per share 11,090 11,090
======== ========
Pro forma net income data:
Income before income taxes, as
reported $ 2,628 $ 3,792
Pro forma income tax expense 1,059 1,528
-------- --------
Pro forma net income $ 1,569 $ 2,264
======== ========
Pro forma net income per share $ 0.18 $ 0.26
======== ========
Shares used in computing pro
forma net income per share 8,650 8,650
======== ========
</TABLE>
See Accompanying Notes to the Consolidated Condensed Financial Statements
4
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,499 $ 3,776
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 5,073 4,490
Deferred income taxes 600 -
Changes in operating assets and
liabilities:
Receivables (99) (1,549)
Inventories (1,752) (57)
Prepaid expenses, deposits and
other assets 506 253
Accounts payable 1,401 6,369
Accrued liabilities (59) 325
Income taxes payable (1,770) -
------------ ------------
Net cash provided by
operating activities 9,399 13,607
------------ ------------
Cash flows from investing activities:
Purchase of ACT assets (net of cash) (8,650) -
Investment in Malaysia plant and
equipment (7,894) -
Malaysia equipment deposits and other
assets (9,622) -
Purchases of plant and equipment, net (8,991) (7,875)
------------ ------------
Net cash used for investing (35,157) (7,875)
activities
Cash flows from financing activities:
Bank borrowings, net 4,085 -
Proceeds from long-term debt 23,803 1,761
Repayment of long-term debt (4,580) (3,808)
Collections on stockholder notes - 303
Distribution paid to stockholders - (2,594)
------------ ------------
Net cash provided by
(used for) financing
activities 23,308 (4,338)
------------ ------------
(Decrease) Increase in cash and cash
equivalents (2,450) 1,394
Cash and cash equivalents at beginning
of period 11,264 8,217
------------ ------------
Cash and cash equivalents at end of
period $ 8,814 $ 9,611
============ ============
Supplemental disclosure of cash flow
information:
Interest paid $ 671 $ 1,226
============ ============
Taxes paid $ 5,190 $ 15
============ ============
Common stock issued in ACT aquisition $ 600 $ -
============ ============
</TABLE>
See Accompanying Notes to the Consolidated Condensed Financial Statements
5
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
NOTES TO THE FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
---------------------
In the opinion of management, these consolidated condensed financial
statements contain all normal recurring adjustments for fair
presentation. The results of operations for the six months ended June
30, 1996, are not necessarily an indication of the results to be expected
for the full year.
The accompanying consolidated condensed financial statements include
the accounts of Zycon Corporation and its wholly-owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
The unaudited pro forma amounts included in the accompanying
consolidated condensed statements of income for the six months ended June
30, 1995 reflect provisions for income taxes as if the Company had been
a C Corporation, fully subject to federal and state income taxes. On
September 26, 1995, the Company elected C Corporation status for federal
and state income tax reporting purposes.
For information as to the significant accounting policies followed by
the Company and other financial and operating information, see the
Company's Form S-1 or Form 10-K (File No. 33-95284), as filed with the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements included in those
filings.
(2) Balance Sheet Components
------------------------
Receivables
-----------
A summary of receivables follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- -------------
<S> <C> <C>
Trade accounts receivable $23,272 $21,136
Less allowance for doubtful accounts (280) (250)
------- -------
$22,992 $20,886
======= =======
<CAPTION>
Inventories
-----------
A summary of inventories follows (in
thousands):
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw materials $ 3,438 $ 1,392
Work in process 3,661 3,760
Finished Goods 1,864 979
------- -------
$ 8,963 $ 6,131
======= =======
</TABLE>
See Accompanying Notes to the Consolidated Condensed Financial Statements
6
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
NOTES TO THE FINANCIAL STATEMENTS (Continued)
---------------------------------
(unaudited)
(2) Balance Sheet Components (Continued)
------------------------------------
Property, Plant and Equipment
-----------------------------
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Machinery and equipment $ 73,906 $61,975
Leasehold improvements 36,769 23,704
Office furniture and equipment 717 520
Construction in progress 297 3,250
Other 605 580
-------- -------
112,294 90,029
Less accumulated depreciation
and amortization 42,973 37,899
-------- -------
$ 69,321 $52,130
======== =======
</TABLE>
(3) Income Taxes
------------
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liability as of June 30,
1996, are presented below (in thousands):
<TABLE>
<S> <C>
Deferred income tax assets:
Allowance and accruals $ 749
State income taxes 167
-------
Total deferred income tax assets 916
Deferred income tax liability:
Property and equipment, principally
due to differences in depreciation (7,234)
-------
Net deferred income tax liability
$(6,318)
=======
</TABLE>
7
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
--------------------------------
NOTES TO THE FINANCIAL STATEMENTS (Continued)
---------------------------------------------
(unaudited)
(4) Business Asset Acquisition
--------------------------
On June 18, 1996, the Company purchased substantially all of the
assets of Alternate Circuit Technology, Inc. (ACT), a quick-turn, prototype
and design printed circuit board manufacturer. The initial consideration
for the acquisition was approximately $8.7 million in cash, $600,000 worth
of the Company's common stock (50,000 shares valued at $12.00 per share),
and the assumption of approximately $5.0 million of liabilities. The
acquisition agreement also calls for payment of $200,000 after a three year
period if certain non-compete covenants are met. The cash payment was
financed from excess working capital. The acquisition has been recorded
using the purchase method of accounting. The excess of the aggregate
purchase price over the fair market value of net assets acquired of
approximately $5.4 million was recorded as goodwill and is being amortized
over ten years. The goodwill amortization will be accumulated into the
Company's selling, general and administrative expenses. The operating
results of ACT have been included in the Company's financial statements
since the date of acquisition.
The following unaudited pro forma results of operations assume the
acquisition occurred at the beginning of the year ended June 30, 1996 and
year ended December 31, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
6/30/96 12/31/95
---------------- ------------
<S> <C> <C>
Net sales $110,465 $ 196,304
-------- ---------
Net income $ 5,139 $ 8,027
-------- ---------
Net income per share $ .46 $ .86
-------- ---------
</TABLE>
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the ACT acquisition been
consummated as of January 1, 1995, nor are they necessarily indicative of future
operating results.
8
<PAGE>
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters
discussed below or elsewhere in this quarterly report are forward looking
statements that involve risks and uncertainties. Any forward-looking statements
should be considered in light of the factors described below under "Factors That
May Affect Future Results." Actual results may vary materially from those
projected, anticipated or indicated in any forward-looking statements.
Results of Operations
- ---------------------
Second Quarter
- --------------
Sales for the second quarter of 1996 increased 14% to $48.4 million
from $42.3 million for the second quarter of 1995, primarily due to a 20%
increase in average selling price per panel, partially offset by a 5% decline in
the volume of panels shipped. The increase in average selling price per panel
was caused by a shift in customer demand towards a greater percentage of higher
priced, higher layer count printed circuit boards. The decrease in the volume of
panels shipped resulted from slowing industry conditions. Compared to the first
quarter of 1996 units shipped declined by 12%.
The gross profit margin increased to 13.5% in the second quarter of
1996 from 12.8% for the same period in 1995, down from 19.1% in the first
quarter of 1996. The gross margin decline from the first quarter of 1996
resulted primarily from the drop in sales volume, with the majority of the
Company's overhead being relatively fixed. The product mix and average selling
price per panel remained virtually unchanged from the first quarter of 1996.
Selling, general and administrative expenses increased to 7.0% of
sales in the second quarter of 1996 as compared to 5.5% in the second quarter of
1995. This was primarily due to an increase in Malaysia related expenses of
$524,000, with employee related expenses and legal and professional fees
accounting for the difference.
Net interest expense for the second quarter of 1996 decreased to
$267,000 from $457,000 in the second quarter of 1995 due to a $17.5 million
paydown of debt in the fourth quarter of 1995, following the initial public
offering on September 28, 1995. Compared to the first quarter of 1996, net
interest expense increased by $261,000 in the second quarter as we added $19
million of debt during June to finance the purchase of plant and equipment for
the Santa Clara, California, facility, and investment in our Malaysia facility.
Year-to-Date
- ------------
For the six months ended June 30, 1996, sales increased 28% to $103.5
million from $80.7 million for the same period in 1995. The increase was due to
the strength of the data communications and contract manufacturing segments of
the Company's customer base combined with increases in the Company's
manufacturing capacity.
Gross profit margins improved to 16.5% from 11.6% in the same period a
year earlier. This improvement was mainly due to the spreading of fixed costs
over a larger sales base and the trend in customer demand toward more complex,
higher layer count, higher margin product.
Selling, general and administrative expenses increased to 7.2% of
sales for the six months ended June 30, 1996, compared to 5.7% during the same
period in 1995. This was mainly due to an increase in Malaysia related expenses
of $1.0 million, $0.9 million in employee bonuses, with legal and professional
fees and employee-related expenses making up the difference.
Net interest expense for the first six months of 1996 decreased to
$273,000 from $966,000 in the same period a year earlier due to a $17.5 million
paydown of debt in the fourth quarter of 1995, following the initial public
offering.
9
<PAGE>
Income Taxes
- ------------
Based on current tax laws, the Company estimates that it will incur an
effective income tax rate of approximately 40% in the current year. Accordingly,
it has provided for income taxes during the first six months of 1996 using this
estimate.
Since the Company was an S corporation during the first six months of
1995, pro forma net income data is presented which reflect income taxes as if
the Company had been a C corporation.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1996, the Company's working capital was $10.5 million
versus $13.0 million at December 31, 1995. Cash and cash equivalents were $8.8
million at June 30, 1996 compared with $11.3 million at December 31, 1995. In
the six months ended June 30, 1996 the Company generated cash from operations of
$9.4 million, and used $35.4 million for investments in the ACT acquisition and
plant and equipment for the Malaysia and Santa Clara facilities, which were
partially financed by $23.5 million in net borrowings. Receivables increased to
$23.0 million at June 30, 1996 from $20.9 million at December 31, 1995,
primarily due to the addition of the receivables from the Company's newly
acquired subsidiary.
As of June 30, 1996 the following lines of credit were available to the
Company:
Working Capital Revolver ($14 million maximum) $10 million
Foreign Credit Lines for Malaysia Plant and Working Capital $20 million
Domestic Credit Line for Malaysia Equipment $6 million
During June, 1996, the Company borrowed a total of $19 million, of which
$10 million in fixed assets lines of credit was used to finance equipment that
had been purchased and paid for during the last six months, and $9 million of a
domestic credit line was used for the building and equipment of the Company's
Malaysia facility.
On June 18, 1996, the Company purchased substantially all the assets of
Alternate Circuit Technology, Inc. (ACT), a quick-turn, prototype and design
printed circuit board manufacturer. The initial consideration for the
acquisition was approximately $8.7 million in cash, $600,000 worth of the
Company's common stock (50,000 shares valued at $12.00 per share), and the
assumption of approximately $5.0 million of liabilities. The acquisition
agreement also calls for payment of $200,000 after a three year period if
certain non-compete covenants are met. The acquisition was funded from excess
working capital.
The Company's total investment in its Malaysia plant and equipment to date
is approximately $23 million, and is expected to total approximately $31 million
when completed during the fourth quarter of 1996. One or portions of both of
the credit lines remaining for the building and equipment of the Company's
Malaysian facility will be used to fund the estimated start-up costs still
remaining of approximately $8 million over the next several months, leaving
unused credit lines of approximately $18 million for future expansion over the
next few years.
In July, 1996, the Company renewed its revolving bank line of credit for
another two years at an increased maximum limit of $28 million, up from $14
million previously. Borrowings under the line of credit incur interest at the
bank's prime rate (8.25% as of June 30, 1996) and are secured by trade
receivables and inventories.
Factors That May Affect Future Results
- --------------------------------------
The Company operates in a changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.
10
<PAGE>
Variability of Customer Requirements; Absence of Customer Commitments on
Orders. The level and timing of orders placed by the Company's customers vary
due to a number of factors, including customer attempts to manage inventory,
changes in customers' manufacturing strategy and variation in demand for their
products. Since the Company typically does not obtain long-term purchase orders
or commitments, it must anticipate the future volume of orders based on
discussions with its customers. The Company relies on its estimate of
anticipated future volumes when making commitments regarding the level of
business that it will seek and accept, the mix of products that it intends to
manufacture, the timing of production schedules and the levels and utilization
of personnel and other resources. A variety of conditions, both specific to the
individual customer and generally affecting the customer's industry, may cause
customers to cancel, reduce or delay orders that were previously made or
anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty, except for payment for work and materials
expended through the cancellation date. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The printed circuit board industry is characterized by
intense competition. Competition in this market is expected to increase in the
future. The Company competes principally in the market for complex multilayer
printed circuit boards. The Company's competitors in this market segment are
primarily large domestic manufacturers and, to a lesser degree, small or
regional producers. In addition, OEMs with captive printed circuit board
manufacturing operations may seek orders in the open market to fill excess
capacity, thereby increasing price competition. Some of the Company's
competitors are substantially larger and have greater financial resources than
the Company. The Company may be at a disadvantage in the lower technology
segments of the printed circuit board market when competing with manufacturers
with lower cost structures, particularly those with offshore facilities where
labor and other costs are lower. In the future, the printed circuit board
industry could encounter competition from new technologies, including multichip
modules and other technologies that may reduce the number of printed circuit
boards required in electronic equipment or may render existing technology less
competitive or obsolete.
Fluctuations in Operating Results. The Company has experienced significant
fluctuations in its operating results and anticipates that these fluctuations
will continue in the future. For example, the Company experienced a loss in the
fourth quarter of 1993 primarily as a result of a decrease in unit volume, and
its net income for the first and second quarters of 1994 was significantly below
the Company's net income for the comparable periods of 1993, reflecting, among
other things, a decline in average selling price. In addition, the Company's
gross profit margin decreased to 13.5% in the second quarter of 1996 from 19.1%
in the first quarter of 1996, primarily as a result of a drop in sales volume.
The Company's operating results are affected by a number of factors, including
the timing of orders from and shipments to major customers, the volume of orders
relative to the Company's capacity, the timing of expenditures in anticipation
of future sales, competitive pressures, variations in product mix and economic
conditions in the electronics industry. Many of these factors are outside the
control of the Company. Since a significant portion of the Company's operating
expenses are fixed, even a relatively small revenue shortfall can have a
disproportionate effect on the Company's results of operations.
Malaysia Facility. The Company has recently constructed a manufacturing
facility in Malaysia. The start-up costs of this facility, including working
capital for the Company's Malaysia subsidiary, are estimated to be approximately
$31 million, and the Company believes that the facility will be ready to
commence operations by late 1996. The start up costs for the Malaysia facility
will be funded primarily through bank loans. The Company's management has no
experience in establishing manufacturing facilities in foreign countries. Any
delays or cost overruns with respect to the Malaysia facility could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's management has no experience
in operating foreign manufacturing facilities, and there can be no assurance
that the Company will be able to operate the new facility on a profitable basis.
It is anticipated that the Malaysia facility will incur operating losses during
its initial years of operations, primarily as a result of start-up costs. The
Company expects that a substantial portion of the capacity of the Malaysia
facility will initially be dedicated to lower layer count segments of the
printed circuit board market, and it is possible that the Company could incur
losses even after the initial years of operations as a result of various factors
including intense price competition for the products which it intends to produce
at the new facility. Management believes that losses incurred in the Company's
Malaysia operations will not be deductible for
11
<PAGE>
United States income tax purposes. International operations are subject to a
number of risks, including unforeseen changes in regulatory requirements,
exchange rates, tariffs and other trade barriers, and political and economic
instability. These risks are particularly significant in the case of the
Company because of management's inexperience in foreign manufacturing or in
managing international operations.
Expansion of Manufacturing Capacity. The Company believes that its
competitive position depends in part on its ability to expand its manufacturing
capacity. The Company has made a significant investment in a major expansion of
space at its Northern California manufacturing facility and has expanded its
prototype manufacturing capabilities by its acquisition of the assets of an East
Coast quick turn prototype and design facility. In January 1996, the Company
entered into an additional facility lease for a 59,000 square foot building
which is expected to be constructed by the end of 1996. This building will be
immediately adjacent to the Company's three buildings leased in Santa Clara,
California. The Company's capital expenditure projects also include the
construction of a new manufacturing facility in Malaysia and the purchase of
additional equipment which is being installed at its Northern California and
Malaysia facilities. There can be no assurance that the Company will be able to
expand its manufacturing capacity in a timely manner or that the cost of such
expansion will not exceed management's current estimates. In addition, the
Company's expansion of its manufacturing capacity has and will continue to
significantly increase its fixed costs, and the future profitability of the
Company will depend on its ability to utilize its manufacturing capacity in an
effective manner. The Company's inability to generate the additional sales
necessary to utilize its additional capacity could have a material adverse
effect on the Company's business, financial condition and results of operations.
Technological Change. Printed circuit board manufacturing technology has
evolved from single and double sided printed circuit boards to include
multilayer printed circuit boards that require finer lines and spacing, smaller
drilled holes and incorporate surface mount technology ("SMT"). Technological
change is rapid and continuous, and in the future the manufacture of complex
printed circuit boards will require increased technological and manufacturing
expertise. There can be no assurance that the Company will be able to maintain
its current technological position. In addition, the introduction of new
technologies may require the Company to substantially increase its capital
expenditures. Although the Company has developed certain technological
processes, there can be no assurance that these technological processes will
become commercially viable or that there will be commercial applications for
these technologies.
Dependence on Electronics Industry. The Company's principal customers are
OEMs and contract manufacturers of data communication products,
telecommunications equipment, advanced storage systems, workstations, servers
and personal computers. These industry segments, and the electronics industry
as a whole, are subject to rapid technological change and product obsolescence.
Discontinuance or modifications of products containing components manufactured
by the Company could adversely affect the Company's business, financial
condition and results of operations. The Company's growth has resulted, in
part, from its ability to focus on customers in rapidly growing segments of the
electronics industry. There can be no assurance that the Company will continue
to be able to identify and attract customers with rapid growth rates or that
these industry segments will continue to grow at their historical rates or at
all. Moreover, pricing pressures within one or more of these industry segments
may lead to decreased margins on sales of the Company's products. The
electronics industry is subject to economic cycles and has in the past
experienced, and is likely in the future to experience, recessionary periods. A
recession or any other event leading to excess capacity in the electronics
industry would likely result in intensified price competition and a decrease in
unit volume, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Concentration of Customers. Since its inception, the Company's sales to a
small number of its top customers have accounted for a high percentage of the
Company's annual net sales. The composition of the Company's principal
customers changes over time, and some of the Company's current largest customers
have only been customers for a relatively short period of time. There can be no
assurance that the Company's relationships with any of its principal customers
will continue at current levels, if at all, and the loss of one or more of such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
12
<PAGE>
Process Failure. The Company's business involves highly complex
manufacturing processes that could be subject to periodic failure. In the past,
process failures have occurred, which have resulted in short delays in certain
product shipments. There can be no assurance that failures will not occur in
the future. The loss of revenue and earnings to the Company from such a failure
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Single Manufacturing Facility. The Company's current printed
circuit board manufacturing operations are centralized in three adjacent
buildings in Northern California. Since the Company does not currently operate
multiple facilities in difference geographic areas, a disruption of the
Company's manufacturing operations resulting from sustained process
abnormalities, human error, government intervention or a natural disaster such
as fire, earthquake or flood could cause the Company to cease or limit its
manufacturing operations and consequently have a material adverse effect on the
Company's business, financial condition and results of operations.
Management of Growth; Acquisitions. The Company has initiated significant
expansion, including geographic expansion, of its overall level of operations,
which has placed, and is expected to continue to place, significant demands on
the Company's managerial, technical, financial and other resources. This
expansion will require the Company to invest in its operations, including its
financial and management information systems, and to retain, motivate and
effectively manage its employees. If the Company's management is unable to
manage growth effectively and to retain key personnel, then the quality of the
Company's products and services, as well as its business, financial condition
and results of operations, could be materially and adversely affected.
The Company may from time to time pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
the Company's operating results, including the diversion of management's
attention, the assimilation of the operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees. No assurance can be given that any acquisition by the Company
will not materially and adversely affect the Company or that any such
acquisition will enhance the Company's business.
Availability of Materials and Components. Raw materials used by the
Company in producing printed circuit boards are purchased by the Company and, in
certain circumstances, the Company bears the risk of price fluctuations. In
addition, shortages of certain types of materials have occurred in the past and
may occur in the future.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of members of its senior
management, particularly its co-founder and President, Ronald H. Donati, as well
as other officers and key personnel, many of whom would be difficult to replace.
The future success of the Company also depends on its ability to identify,
attract and retain additional qualified technical and managerial personnel. The
loss of Mr. Donati or other officers and key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. None of these employees has entered into an employment agreement
with the Company, and there can be no assurance that the Company will be able to
retain these employees.
Intellectual Property. The Company's success depends in part on its
proprietary techniques and manufacturing expertise. The Company has few patents
for these proprietary techniques and chooses to rely principally on trade secret
protection. There can be no assurance that the Company will be able to protect
its technology or that competitors will not be able to develop similar
technology independently. In addition, there can be no assurance that the
claims allowed on any patents held by the Company will be sufficiently broad to
protect the Company's technology, that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company.
Environmental Matters. The Company uses certain materials in its
manufacturing process which are classified as hazardous substances. Proper
waste disposal and environmental regulation are major considerations for printed
circuit board manufacturers. Although the Company believes that its facilities
are currently in material
13
<PAGE>
compliance with all applicable environmental laws and monitors it operations to
avoid violations arising from human error or equipment failures, there can be no
assurance that violations will not occur. In the event of a future violation of
environmental laws, the Company could be held liable for damages and for the
costs of remedial actions and could also be subject to revocation of permits
necessary to conduct its business. Any such revocation could require the
Company to cease or limit production at its facilities, thereby causing a
material adverse effect on the Company's operations. Zycon is also subject to
environmental laws and air quality regulations relating to the storage, use and
disposal of chemicals, solid waste and other hazardous materials. As a
generator of hazardous materials, the Company is subject to financial exposure
even if it fully complies with such laws. In addition, there can be no
assurance that more stringent environmental laws will not be adopted over time,
imposing greater compliance costs and increasing risks and penalties associated
with a violation. The City of Santa Clara has adopted an ordinance that, as of
April 1, 1997, significantly reduces the amount of waste, including copper and
nickel, that companies such as Zycon may discharge into the city sanitary sewer.
The new ordinance provides for substantial penalties for intentional or
negligent violations. These penalties include fines ranging from $10,000 to
$50,000 per day, revocation of required business permits, the issuance of a
cease and desist order and, under certain circumstances, up to six months
imprisonment. Under the new ordinance, the Company is subject to stringent
requirements on the amount of water it can discharge and is required to
substantially reduce the concentrations of certain chemicals, including copper
and nickel, which it currently discharges. Under the new ordinance, the
concentration limit for the Company's copper discharge is reduced from 2.00
milligrams per liter to 1.02 milligrams per liter, and the concentration limit
for the Company's nickel discharge is reduced from 2.60 milligrams per liter to
0.02 milligrams per liter. The Company believes that by using a combination of
existing and developing technologies, including established methods for the
chemical removal of copper, it will be able to meet the concentration standards
by April 1, 1997, the required date of compliance. However, there can be no
assurance that the Company will be able to comply with the reduced discharge
levels mandated by the ordinance or that the costs of complying with the new
ordinance will not exceed the Company's current estimate. Furthermore, there
can be no assurance that compliance with the ordinance will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Possible Volatility of Stock Price. The Company believes that the trading
price of the Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results, developments in the
electronics industry, stock market conditions and other factors. In addition,
any variance or shortfall in revenue or earnings from levels expected by
securities analysts or the investment community at large could have an immediate
and significant adverse effect on the trading price of the Company's Common
Stock.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1993, the U.S. Environmental Protection Agency (EPA)
notified Zycon of its maintenance and remediation costs in connection
with a hazardous waste disposal facility operated by Casmalia
Resources in Santa Barbara County, California. The EPA identified
Zycon as one of the 65 generators which had disposed the greatest
amounts of materials at the site by weight during the period 1983 and
1989. There is no allegation that Zycon violated any law in sending
materials to the site, rather the EPA action was taken because
Casmalia Resources abandoned its efforts to close the site in 1991 and
because Zycon and others are "generators" of waste under Federal
Environmental laws. Approximately half of the largest generators
(including Zycon) formed the Casmalia Steering Committee and have
submitted a joint proposed plan to the EPA. A tentative agreement
between the EPA and the Casmalia Steering Committee members has been
reached. Court approval is required. Under this agreement, the
Casmalia Steering Committee members will be obligated to perform
certain work at the Casmalia site at their expense while being
released by the EPA from liability for the cost of other work. The
settlement does not attempt to allocate all potential long term
oversight and management costs. Currently Zycon's share of the
anticipated cost of work to be funded by the Casmalia Steering
Committee under the proposed amendment is estimated to be
approximately 0.5% based on the weight of material contributed to the
Casmalia site by those generators participating in the settlement.
However, there is no firm estimate of total investigation or
remediation costs at this time.
Based on the remediation study, the weight of materials
contributed to the site and the Company's expectations with respect to
an eventual agreement with the EPA, the Company has reserved $250,000
for its share of future remediation costs and the Company believes
such amount is a reasonable approximation of its potential loss, but
if certain of the Casmalia Steering Committee members are ultimately
unable to fund their allocated shares or if court approval for the
settlement does not occur and the EPA insists on a more expensive
approach, the Company could incur additional obligations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of Zycon Corporation was
held on May 7, 1996 (the "Annual Meeting").
(b) Pursuant to Instruction 3 of Item 4, no information is required
to be provided.
(c) The first proposal voted on at the Annual Meeting was the
election of directors. Management nominated Joseph V. Brechel
and Robert M. Wallace, two of the present directors of Zycon
Corporation. Both Joseph V. Brechel and Robert M. Wallace were
elected to the Board of Directors. 9,787,543 votes were cast in
favor of the election of Joseph V. Brechel as a director, and
43,412 votes were withheld. 9,783,241 votes were cast in favor
of the election of Robert M. Wallace as a director, and 47,714
votes were withheld.
The second proposal voted on at the Annual Meeting was the
approval of Zycon Corporation's Stock Option Plan for Directors
and the authorization of the issuance of 100,000 shares of Zycon
Corporation's Common Stock under the Plan. 9,420,986 votes were
cast in favor of this proposal, 18,275 votes abstained, and
55,677 votes were cast against it. Therefore, the Stock Option
Plan for Directors was approved and the issuance of 100,000
shares under the Plan was authorized.
15
<PAGE>
The third proposal voted on at the Annual Meeting was the
ratification of KPMG Peat Marwick LLP as Zycon Corporation's
independent public accountants. This proposal was ratified with
9,806,030 votes in favor of it, 9,725 abstaining votes and 15,200
votes against it.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the index to exhibits filed as part of this Form 10-Q on
page 19.
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 24, 1996, as amended by a
report on Form 8-K/A filed on July 29, 1996, to disclose the
acquisition of certain assets and liabilities of Alternate
Circuit Technology, Inc. The financial statements and proforma
financial information related to this acquisition will be filed
on or before August 23, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ZYCON CORPORATION
Date: August 7, 1996 By: /s/ Ronald H. Donati
---------------------
Ronald H. Donati
Chief Executive Officer,
President
By: /s/ Kenneth R. Shilling
------------------------
Kenneth R. Shilling
Chief Financial Officer
Vice President, Finance
17
<PAGE>
ZYCON CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description Page
-------------- ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation of *
Registrant
3.2 Bylaws of Registrant *
4 Specimen Common Stock Certificate *
10.1 Security Agreement dated June 20, 1996 and 19
related document by and between the Company
and Heller Financial
10.2 Supplemental Security Agreement No. 3 dated 40
June 21, 1996 to the Loan and Security
Agreement dated June 28, 1993, as amended by
Amendment No. One dated June 10, 1996, and
related document by and between the Company
and MetLife Capital
11 Computation of Net Income Per Share 51
27 Financial Data Schedule 52
</TABLE>
* Exhibits 3.1, 3.2, and 4 are incorporated by reference to Exhibits
3.3, 3.4, and 4.1, respectively, of Registrant's Registration Statement on
Form S-1, File No. 33-95284.
18
<PAGE>
Exhibit 10.1
- --------------------------------------------------------------------------------
[LOGO OF HELLER FINANCIAL]
Heller Financial
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT (hereinafter referred to as "Agreement" or "Security
Agreement"), is made this day of 1996, by and between
---- ----------------
Zycon Corporation, a Delaware corporation ("Debtor"), whose business address is
445 El Camino Real, Santa Clara, California 95050, and Heller Financial, Inc.,
a Delaware corporation ("Secured Party"), whose address is Commercial Equipment
Finance Division, 500 West Monroe Street, Chicago, Illinois 60661.
WITNESSETH:
1. Secure Payment. To secure payment of indebtedness in the principal sum of up
--------------
to Five Million and 00/100 Dollars ($5,000,000.00) as evidenced by a note or
notes (individually, a "Note," and collectively, the "Notes"), which Debtor has
executed and delivered or will execute and deliver to Secured Party and also to
secure any other indebtedness or liability of Debtor to Secured Party, direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising and no matter how acquired by Secured Party, including all
future advances or loans which may be made at the option of Secured Party (all
the foregoing hereinafter called the "Indebtedness"), Debtor hereby grants and
conveys to Secured Party a first, superior, continuing lien and security
interest in the property described below and/or on the Schedule(s) attached
hereto (the "Schedules"), all products and proceeds (including insurance
proceeds) thereof, if any, and all increases, substitutions, replacements,
attachments, additions, and accessions thereto, all or any of the foregoing
hereinafter called the "Collateral".
(Description of Collateral On Attached Schedules. The Schedules may be
supplemented from time to time to evidence the Collateral, subject to this
Agreement.)
2. Warranties, Representations and Covenants. Debtor warrants, represents,
-----------------------------------------
covenants and agrees as follows:
(a) Perform Obligations. Debtor shall pay as and when due all of the
-------------------
Indebtedness secured by this Agreement and perform all of the obligations
contained in this Agreement according to its terms. Debtor shall use the loan
proceeds primarily for business uses and not for personal, family, household, or
agricultural uses.
1
<PAGE>
(b) Defend the Collateral. Debtor shall defend the title to the Collateral
---------------------
against all persons and against all claims and demands whatsoever, which
Collateral, except for the security interest granted hereby, is lawfully owned
by Debtor and is now free and clear of any and all liens, security interests,
claims, charges, encumbrances, taxes, and assessments of any kind, except as may
be set forth on the Schedules. At the request of Secured Party, Debtor shall
furnish further assurance of title, execute any written agreement or do any
other acts necessary to effectuate the purposes and provisions of this
Agreement, execute any instrument or statement required by law or otherwise in
order to perfect, continue, or terminate the security interest of Secured Party
in the Collateral and pay all costs of filing in connection therewith.
(c) Keep Possession of the Collateral. Debtor shall retain possession of the
---------------------------------
Collateral until the Indebtedness is fully paid and performed (subject to
Secured Party's rights and remedies upon the occurrence of an Event of Default
(defined below)) and shall not sell, exchange, assign, loan, deliver, lease,
mortgage, or otherwise dispose of the Collateral or any part thereof without the
prior written consent of Secured Party. Debtor shall keep the Collateral at the
location[s] specified on the Schedules and shall not remove same (except in the
usual course of business for temporary periods) without the prior written
consent of Secured Party.
(d) Collateral Free and Clear. Debtor shall keep the Collateral free and
-------------------------
clear of all liens, charges, encumbrances , assessments, and other security
interests of any kind (other than the security interest granted hereby and as
may be set forth on the Schedules) and shall pay, when due, all taxes,
assessments, and license fees relating to the Collateral.
(e) Collateral in Good Operating Order. All of the Collateral is
----------------------------------
in good operating order, condition and repair and is used or useful in the
business of Debtor. Debtor shall keep the Collateral, at Debtor's sole cost and
expense, in good repair and condition and not misuse, abuse, waste, or allow it
to deteriorate except for normal wear and tear. Debtor shall make the Collateral
available for inspection by Secured Party at all reasonable times, and Debtor
will use and maintain the Collateral in a lawful manner in accordance with all
applicable laws, regulations, ordinances, and codes.
(f) Insurance. Debtor shall insure the Collateral against loss by fire
---------
(including extended coverage), theft and other hazards, for its full insurable
value including replacement costs, with a deductible not to exceed $50,000.00
per occurrence and without co-insurance. The insurance policy shall name Secured
Party as loss payee and shall contain such other terms as Secured Party may
require. In addition, Debtor shall obtain liability insurance, including
automobile if the Collateral includes motor vehicles, respecting the Collateral
covering liability for bodily injury, including death and property damage, in an
amount of at least $5,000,000 per occurrence or such greater amount as may
comply with general industry standards. Policies shall be in such form, amounts,
and with such companies as Secured Party may approve; shall provide for at least
thirty (30) days prior written notice to Secured Party prior to any modification
or cancellation
2
<PAGE>
thereof; shall be payable to Debtor and Secured Party as their interests may
appear; shall waive any claim for premium against Secured Party; and shall
provide that no breach of warranty or representation or act or omission of
Debtor shall terminate, limit or affect the insurers' liability to Secured
Party. Certificates of insurance or policies evidencing the insurance required
hereby along with satisfactory proof of the payment of the premiums therefor
shall be delivered to Secured Party who is authorized, but under no duty, to
obtain such insurance upon failure of Debtor to do so. Debtor shall give
immediate written notice to Secured Party and to insurers of loss or damage to
the Collateral and shall promptly file proofs of loss with insurers. Effective
immediately upon the occurrence of an Event of Default, Debtor hereby
irrevocably appoints Secured Party as Debtor's attorney-in-fact, coupled with an
interest, for the purpose of obtaining, adjusting and canceling any such
insurance and endorsing settlement drafts and hereby assigns to Secured Party,
as additional security for the Indebtedness, all sums which may become payable
under such insurance, including return premiums and dividends.
(g) Complete Information. No representation or warranty made by Debtor
--------------------
in this Agreement and no other document or statement furnished to Secured Party
by or on behalf of Debtor contains any material misstatement of a material fact
or omits to state any material fact necessary in order to make the statements
contained herein or therein not misleading. Except as expressly set forth in the
Schedules, there is no fact known to Debtor that will or could have a materially
adverse affect on the business, operation, condition (financial or otherwise),
performance, properties or prospects of Debtor or Debtor's ability to timely pay
all of the Indebtedness and perform all of its other obligations contained in or
secured by this Agreement.
(h) If Collateral Attaches to Real Estate. If the Collateral or any part
-------------------------------------
thereof has been attached to or is to be attached to real estate, an accurate
description of the real estate and the name and address of the record owner is
set forth on the Schedules. If said Collateral is attached to real estate prior
to the perfection of the security interest granted hereby, Debtor will, on
demand of Secured Party, shall use its best efforts to furnish Secured Party
with a disclaimer or waiver of any interest in the Collateral satisfactory to
Secured Party and signed by all persons having an interest in the real estate.
Notwithstanding the foregoing, the Collateral shall remain personal property and
shall not be affixed to realty without the prior written consent of Secured
Party.
(i) Financial Statements. Debtor shall deliver to Secured Party, within
--------------------
ninety (90) days after the end of Debtor's and each guarantor's fiscal years,
Debtor's and the guarantor's independent outside audited annual financial
statements, and Debtor shall furnish, within sixty (60) days after the end of
each quarter, quarterly financial statements of Debtor and each guarantor
certified as to completeness, accuracy and fair presentation by an appropriate
officer of Debtor. Debtor and each guarantor shall certify that all financial
information and statements provided to Secured Party fairly present the
financial condition of Debtor or the guarantor, as the case may be, at the date
thereof.
3
<PAGE>
(j) Perfection. This Agreement creates a valid and, after giving effect
----------
to the subordination of Comerica Bank, first priority security interest in the
Collateral, securing the payment and performance of the Indebtedness and all
actions necessary to perfect and protect such security interest have been duly
taken.
(k) Authorization. Debtor is now, and will at all times remain, duly
-------------
licensed, qualified to do business and in good standing in every jurisdiction
where failure to be so licensed or qualified and in good standing would have a
material adverse effect on its business, properties or assets. Debtor has the
power to authorize, execute and deliver this Security Agreement, the Notes and
the other documents relating thereto (the Security Agreement, Notes and other
documents, all as amended from time to time, are hereafter collectively referred
to as the "Loan Documents"), to incur and perform obligations hereunder and
thereunder, and to grant the security interests created hereby. The Loan
Documents have been duly authorized, executed, and delivered by or on behalf of
Debtor, and constitute the legal, valid, and binding obligations of Debtor and
are enforceable against Debtor in accordance with their respective terms. Debtor
will preserve and maintain its existence and will not wind up its affairs or
otherwise dissolve. Debtor will not, without thirty (30) days prior written
notice to Secured Party, (1) change its name or so change its structure such
that any financing statement or other record notice becomes misleading or (2)
change its principal place of business or chief executive or accounting offices
from the address stated herein.
(l) Litigation. There are no material actions, suits, proceedings, or
----------
investigations ("Litigation") pending or, to the knowledge of Debtor, threatened
against Debtor. Debtor is not in violation of any material term or provision of
its by-laws, or of any material agreement or instrument, or of any judgment,
decree, order, or any statute, rule, or governmental regulation applicable to
it. The execution, delivery, and performance of the Loan Documents do not and
will not violate, constitute a default under, or otherwise conflict with any
such term or provision or result in the creation of any security interest, lien,
charge, or encumbrance upon any of the properties or assets of Debtor, except
for the security interest herein created. Debtor will promptly notify Secured
Party in writing of Litigation against it if: (i) the outcome of such Litigation
may materially or adversely affect the finances or operations of Debtor (for
purposes of this provision and, to the extent applicable given the context, the
provisions in subparagraphs (m), (n), (o) and (p) of this Section 2, Two Hundred
Fifty Thousand and 00/100 Dollars ($250,000.00) shall be deemed material) or (2)
such Litigation questions the validity of any Loan Document or any action taken
or to be taken pursuant thereto. Debtor shall furnish to Secured Party such
information regarding any such Litigation as Secured Party shall reasonably
request.
(m) Compliance with Laws. Debtor shall comply in all material
--------------------
respects with all applicable laws, rules, and regulations and duly observe all
valid requirements of all governmental authorities, and all statutes, rules and
regulations relating to its business, including, without limitation, those
concerning public and employee health, safety, and social security and
withholding taxes and those concerning employee benefit plans and as
4
<PAGE>
such may be required by the Internal Revenue Code, as amended from time to time
("the Code") and the Employees Retirement Income Security Act of 1974 as amended
from time to time ("ERISA"). With respect to any "multiple employer plan" or
"single employer plan" as defined in ERISA (collectively, "Plans"), Debtor will
not: (i) incur any liability to the Pension Benefit Guaranty Corporation
("PBGC"); (ii) participate in any prohibited transaction involving any of such
Plans or any trust created thereunder which would subject Debtor to a tax or
penalty on prohibited transactions imposed under the Code or ERISA; (iii) fail
to make any contribution which it is obligated to pay under the terms of such
Plan; (iv) allow or suffer to exist any occurrence of a "reportable event", or
any other event or condition which presents a risk of termination by the PBGC of
any such Plan; or (v) incur any withdrawal liability with respect to any Plan
which is not fully bonded.
(n) Taxes. Debtor has timely filed all tax returns (federal, state, local,
-----
and foreign) required to be filed by it and has paid or established reserves for
all taxes, assessments, fees, and other governmental charges upon its
properties, assets, income and franchises. Debtor does not know of any actual or
proposed additional tax assessments for any fiscal period against it which would
have a material adverse effect on it. Debtor will promptly pay and discharge all
taxes, assessments, and other governmental charges prior to the date on which
penalties are attached thereto, establish adequate reserves for the payments of
such taxes, assessments, and other governmental charges (including cash
reserves, if any, required by generally accepted accounting principles ("GAAP")
for any taxes, assessments, or other charges being contested), make all required
withholding and other tax deposits, and, upon request, provide Secured Party
with receipts or other proof that any or all of such taxes, assessments, or
governmental charges have been paid in a timely fashion; provided, however, that
nothing contained herein shall require the payment of any tax, assessment, or
other governmental charge so long as its validity is being contested in good
faith and by appropriate proceedings diligently conducted. Should any stamp,
excise, or other tax, including mortgage, conveyance, deed, intangible, or
recording taxes become payable in respect of this Security Agreement, the Notes,
or any other Loan Documents, Debtor shall pay the same (including interest and
penalties, if any) and shall hold Secured Party harmless with respect thereto.
(o) Labor Laws. Debtor is in compliance with the Fair Labor Standards
----------
Act. Debtor is not engaged in any unfair labor practice which would have a
material adverse effect on it. There are: (1) no unfair labor practice
complaints pending or, to the best knowledge of Debtor, threatened against
Debtor before the National Labor Relations Board and no grievance or arbitration
proceedings arising out of or under collective bargaining agreements are pending
or, to the best knowledge of Debtor, threatened; (2) no strikes, work stoppages,
or controversies pending or threatened between Debtor and any of its employees;
and (3) no union representation questions that exist with respect to Debtor's
business and no union organizing activities that are taking place.
5
<PAGE>
(p) Environmental Laws. Debtor has complied and will comply in all
--------------------
material respects with all Environmental Laws (defined below) applicable to the
transfer, construction on, and operations of its property and business. Debtor
has (1) not received any summons, complaint, order, or similar notice that it is
not in compliance with, or that any public authority is investigating its
compliance with, any Environmental Laws and (2) no knowledge of any material
violation of any Environmental Laws on or about its assets or property. Debtor
will comply, in all material respects with all Environmental Laws. Should
Secured Party reasonably requests, Debtor will provide to Secured Party,
promptly following Debtor's receipt thereof, copies of any correspondence,
notice, complaint, order, or other document that it receives asserting or
alleging a circumstance or condition which requires or may require a cleanup,
removal, remedial action or other response by or on the part of Debtor under
Environmental Laws, or which seeks damages or civil, criminal or punitive
penalties from Debtor for an alleged violation of any Environmental Laws, and
will advise Secured Party in writing as soon as Debtor becomes aware of any
condition or circumstance that makes the environmental representations or
warranties contained in this Agreement inaccurate in any material respect. For
purposes of this Security Agreement, "Environmental Laws" means all federal,
state, and local laws, rules, regulations, orders, and decrees relating to
health, safety, hazardous substances, and environmental matters, including,
without limitation, the Resource Recovery and Reclamation Act of 1976, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
the Toxic Substances Control Act, the Clean Water Act of 1977, and the Clean Air
Act, all as amended from time to time.
(q) No Liability. Debtor acknowledges and agrees that Secured Party shall
------------
not be liable for any acts or omissions nor for any error of judgment or mistake
of fact or law other than as a result of Secured Party's gross negligence or
willful misconduct.
(r) Setoff. Without limiting any other right of Secured Party, whenever
------
Secured Party has the right to declare any Indebtedness to be immediately due
and payable (whether or not it has so declared), Secured Party is hereby
authorized at any time and from time to time to the fullest extent permitted by
law, to set off and apply against any and all of the Indebtedness, any and all
monies then or thereafter owed to Debtor by Secured Party in any capacity,
whether or not the obligation to pay such monies owed by Secured Party is then
due. Secured Party shall be deemed to have exercised such right of setoff
immediately at the time of such election even though any charge therefor is made
or entered on Secured Party's records subsequent thereto.
(s) Regulations. No proceeds of the loans or any other financial
-----------
accommodation hereunder will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, as that term is defined in
Regulations G, T, U, X of the Board of Governors of the Federal Reserve System.
6
<PAGE>
(t) Books and Records. Debtor shall maintain, at all times, true and
-----------------
complete books, records and accounts in which true and correct entries are made
of its transactions in accordance with GAAP and consistent with those applied in
the preparation of Debtor's financial statements. At all reasonable times, upon
reasonable notice, and during normal business hours, Debtor will permit Secured
Party or its agents to audit, examine and make extracts from or copies of any of
its books, ledgers, reports, correspondence, and other records. Secured Party
may verify any Collateral in any reasonable manner which Secured Party may
consider appropriate, and Debtor shall furnish all reasonable assistance and
information and perform any acts which Secured Party may reasonably request in
connection therewith.
(u) Written Notice. Debtor agrees to give Secured Party written notice of
--------------
any action or inaction by Secured Party or any agent or attorney of Secured
Party that may give rise to a claim against Secured Party or any agent or
attorney of Secured Party or that may be a defense to payment of the obligations
for any reason, including, but not limited to, commission of a tort or violation
of any contractual duty or duty implied by law. Debtor agrees that unless such
notice is fully given as promptly as possible (and in any event within sixty
(60) days) after Debtor has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action or inaction, Debtor
shall not assert, and Debtor shall be deemed to have waived, any claim or
defense arising therefrom.
(v) Indemnity. Debtor shall indemnify, defend and hold Secured Party, its
---------
parent, officers, directors, agents, employees, and attorneys harmless from and
against any loss, expense (including reasonable attorneys' fees and costs),
damage or liability arising directly or indirectly out of (i) any breach of any
representation, warranty or covenant contained herein and in the other Loan
Documents, (ii) any claim or cause of action that would deny Secured Party the
full benefit or protection of any provision herein and in the Loan Documents,
and (iii) the ownership, possession, lease, operation, use, condition, sale,
return, or other disposition of the Collateral. If after receipt of any payment
of all or any part of the Indebtedness, Secured Party is for any reason
compelled to surrender such payment to any person or entity, because such
payment is determined to be void or voidable as a preference , impermissible
set-off, or a diversion of trust funds, or for any other reason, this Security
Agreement and the Loan Documents shall continue in full force and effect and
Debtor shall be liable to Secured Party for the amount of such payment
surrendered. The provisions of the preceding sentence shall be and remain
effective notwithstanding any contrary action which may have been taken by
Secured Party in reliance upon such payment, and any such contrary action so
taken shall be without prejudice to Secured Party's rights under this Security
Agreement and shall be deemed to have been conditioned upon such payment having
become final and irrevocable. Additionally, Debtor will pay or reimburse Secured
Party for any and all reasonable costs and expenses incurred in connection
herewith, including, but not limited to, attorneys' fees, filing fees, search
fees, and lien recordation. The provisions of this paragraph shall survive the
termination of this Security Agreement and the Loan Documents.
7
<PAGE>
(w) Collateral Documentation. Debtor shall deliver to Secured Party prior to
------------------------
any advance or loan, satisfactory documentation regarding the Collateral to be
financed, including, but not limited to, such invoices, canceled checks
evidencing payments, or other documentation as may be reasonably requested by
Secured Party. Additionally, Debtor must satisfy Secured Party that Debtor's
business and financial information is as has been represented and there has been
no material change in Debtor's business, financial condition, or operations.
3. Prepayment. On any regular installment payment date under a Note, Debtor
----------
may prepay in full, but not in part, the then entire unpaid principal balance of
that Note, together with all accrued and unpaid interest thereon to the date of
such prepayment, provided that along with and in addition to such prepayment
Debtor shall pay (i) any and all other sums due hereunder or under the Note, and
(ii) a prepayment fee as liquidated damages and not as a penalty, in a sum equal
to the following percentages of the amount prepaid: 1.5% of the amount prepaid
for any prepayment during Loan Year 1; 1% of the amount prepaid for any
prepayment during Loan Year 2; 0.50% of the amount prepaid for any prepayment
during Loan Year 3; and 0% of the amount prepaid for any prepayment during Loan
Years 4 and 5. Any payment of the amounts due under the Notes following
acceleration of the maturity date upon the occurrence of any Event of Default
(as defined below) shall constitute a voluntary prepayment under the Notes as to
which the prepayment fee described in clause (ii) above shall apply. The phrase
"Loan Year" as used herein shall mean each twelve (12) consecutive months
commencing on the date of the Note in question.
4. Events of Default. If any one of the following events (each of which is
-----------------
herein called an "Event of Default") shall occur: (a) Debtor fails to pay any
part of the Indebtedness within ten (10) calendar days of its due date, or (b)
any warranty or representation of Debtor is untrue or inaccurate or Debtor
breaches any warranty or representation hereunder which is not cured within
thirty (30) days from such event or longer time if allowed by Secured Party in
writing, or (c) Debtor breaches or defaults in the performance of any other
agreement or covenant hereunder which is not cured within thirty (30) days from
such event or longer time if allowed by Secured Party in writing, or (d) Debtor
shall default in the payment or performance of any debt or other obligation owed
by it to Comerica Bank, its successors and assigns or replacements or Secured
Party and this default is not cured within ten (10) days after written notice
from Secured Party, or (e) Debtor becomes insolvent, makes an assignment for the
benefit of creditors or ceases to continue as a going business, or (f) a
receiver, trustee, conservator, or liquidator is appointed for Debtor or for all
or a substantial portion of Debtor's property, with or without the approval or
consent of Debtor, or (g) a petition is filed by or against Debtor under the
Bankruptcy Code or any amendment thereto or under any other insolvency law or
laws providing for the relief of debtors, or (h) in the reasonable opinion of
Secured Party the value of the Collateral is substantially reduced; or (i)
Debtor's net worth (determined in accordance with GAAP) as properly disclosed in
any financial statement to be provided hereunder ("Net Worth") shall be less
than Nineteen Million and 00/100
8
<PAGE>
Dollars ($19,000,000.00), or (j) the ratio of Debtor's total liabilities as
properly disclosed in any financial statement to be provided hereunder to Net
Worth shall exceed 2.7 to 1, then, and in any such event, Secured Party shall
have the right to exercise any one or more of the remedies hereinafter provided.
5. Remedies. If an Event of Default shall occur, in addition to all rights and
--------
remedies of a secured party under the Uniform Commercial Code, Secured Party
may, at its option, at any time (a) declare the entire unpaid Indebtedness to be
immediately due and payable; (b) without demand or legal process, enter into the
premises where the Collateral may be found and take possession of and remove the
Collateral, all without charge to or liability on the part of Secured Party so
long as Secured Party uses reasonable care in taking possession of and removing
the Collateral; and (c) require Debtor to assemble the Collateral, render it
unusable, and crate, pack, ship, and deliver the Collateral to Secured Party in
such manner and at such place as Secured Party may require, all at Debtor's sole
cost and expense. DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS IF ANY TO (1) PRIOR
NOTICE OF REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO
SUCH REPOSSESSION. Secured Party may, at its option, ship, store, and repair the
Collateral so removed and sell any or all of it at a public or private sale or
sales. Unless the Collateral is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized market, Secured Party
will give Debtor reasonable notice of the time and place of any public sale
thereof or of the time after which any private sale or any other intended
disposition thereof is to be made, it being understood and agreed that Secured
Party may be a buyer at any such sale and Debtor may not, either directly or
indirectly, be a buyer at any such sale. The requirements, if any, for
reasonable notice will be met if such notice is mailed postage prepaid to Debtor
at its address shown above, at least five (5) days before the time of sale or
disposition. Debtor shall also be liable for and shall upon demand pay to
Secured Party all expenses incurred by Secured Party in connection with the
undertaking or enforcement by Secured Party of any of its rights or remedies
hereunder or at law, including, but not limited to, all expenses of
repossessing, storing, shipping, repairing, selling or otherwise disposing of
the Collateral and legal expenses, including reasonable attorneys' fees (through
any and all appeals and judgment enforcement actions, it being acknowledged and
agreed by Debtor that this provision shall survive and not merged with any such
judgment), all of which costs and expenses shall be additional Indebtedness
hereby secured. After any such sale or disposition, Debtor shall be liable for
any deficiency of the Indebtedness remaining unpaid, with interest thereon at
the One Month LIBOR Rate plus five and 25/100 percent (5.25%) per annum.
6. Cumulative Remedies. All remedies of Secured Party hereunder are
-------------------
cumulative, are in addition to any other remedies provided for by law or in
equity and may, to the extent permitted by law, be exercised concurrently or
separately, and the exercise of any one remedy shall not be deemed an election
of such remedy or to preclude the exercise of any other remedy. No failure on
the part of Secured Party to exercise, and no delay in exercising any right or
remedy, shall operate as a waiver thereof or in any way modify or
9
<PAGE>
be deemed to modify the terms of this Security Agreement and the other Loan
Documents or the Indebtedness, nor shall any single or partial exercise by
Secured Party of any right or remedy preclude any other or further exercise of
the same or any other right or remedy.
7. Assignment. Secured Party may transfer or assign this Security Agreement,
----------
any Note, or the Indebtedness and the other Loan Documents either together or
separately without releasing Debtor or the Collateral, and upon such transfer or
assignment the assignee or holder shall be entitled to all the rights, powers,
privileges and remedies of Secured Party to the extent assigned or transferred.
The obligations of Debtor shall not be subject, as against any such assignee or
transferee, to any defense, set-off, or counter-claim available to Debtor
against Secured Party and any such defense, set-off, or counter-claim may be
asserted only against Secured Party.
8. Time is of the Essence. Time and manner of performance by Debtor of its
----------------------
duties and obligations under this Security Agreement, the Notes, and the other
Loan Documents is of the essence. If Debtor shall fail to comply with any
provision of this Security Agreement or any of the other Loan Documents, Secured
Party shall have the right, but shall not be obligated, to take action to
address such non-compliance, in whole or in part, and all moneys spent and
expenses and obligations incurred or assumed by Secured Party shall be paid by
Debtor upon demand and shall be added to the Indebtedness. Any such action by
Secured Party shall not constitute a waiver of Debtor's default.
9. Enforcement. This Agreement shall be governed by and construed in
-----------
accordance with the internal laws and decisions of the State of California, and
the parties agree that jurisdiction as to any dispute between them lies in the
United States District Court for the Northern District of California or any
other court in such state.
10. Further Assurance; Notice. Debtor shall, at its expense, do, execute and
-------------------------
deliver such further acts and documents as Secured Party may from time to time
reasonably require to assure and confirm the rights created or intended to be
created hereunder to carry out the intention or facilitate the performance of
the terms of this Security Agreement and the Loan Documents or to assure the
validity, perfection, priority or enforceability of any security interest
created hereunder. Debtor agrees to execute any instrument or instruments
necessary or expedient for filing, recording, perfecting, notifying,
foreclosing, and/or liquidating of Secured Party's interest in the Collateral
upon request of, and as determined by, Secured Party, and Debtor hereby
specifically authorizes Secured Party to prepare and file Uniform Commercial
Code financing statements and other documents and to execute same for and on
behalf of Debtor as Debtor's attorney-in-fact, irrevocably and coupled with an
interest, for such purposes. All notices required or otherwise given by either
party shall be deemed adequately and properly given if sent by registered or
certified mail or by overnight courier with a copy by facsimile to the other
party at the addresses stated herein or at such other address as the other party
may from time to time designate in writing.
10
<PAGE>
11. Waiver of Jury Trial. Debtor and Secured Party hereby waive their
--------------------
respective rights to a jury trial of any claim or cause of action based upon or
arising out of this Security Agreement, the Notes, or the other Loan Documents.
This waiver is informed and freely made. Debtor and Secured Party acknowledge
that this waiver is a material inducement to enter into a business relationship,
that each has already relied on the waiver in entering into this Agreement and
the other Loan Documents, and that each will continue to rely on the waiver in
their related future dealings. Debtor and Secured Party further warrant and
represent that each has reviewed this waiver with its legal counsel and that
each knowingly and voluntarily waives its jury trial rights following
consultation with legal counsel.
12. Complete Agreement. This Security Agreement and the other related
------------------
Loan Documents are intended by Debtor and Secured Party to be the final,
complete, and exclusive expression of the agreement between them. This Security
Agreement and the other related Loan Documents may not be altered, modified or
terminated in any manner except by a writing duly signed by the parties hereto.
Debtor and Secured Party intend this Security Agreement and the other related
Loan Documents to be valid and binding and no provisions hereof and thereof
which may be deemed unenforceable shall in any way invalidate any other
provisions of this Security Agreement and the other related Loan Documents, all
of which shall remain in full force and effect. This Security Agreement and the
other related Loan Documents shall be binding upon the respective successors,
legal representatives, and assigns of the parties. The singular shall include
the plural, the plural shall include the singular, and the use of any gender
shall be applicable to all genders. If there be more than one Debtor, the
warranties, representations and agreements herein are joint and several. The
Schedules on the following page[s] are a part hereof. Sections and subsections
headings are included for convenience of reference only and shall not be given
any substantive effect.
13. Credit Facility.
---------------
(a) Purpose. On and subject to the terms and conditions set forth in
this Agreement, Secured Party and Debtor hereby establish a credit facility
pursuant to which Secured Party agrees to lend to Debtor and Debtor agrees to
borrow from Secured Party a sum of up to Five Million and 00/100 Dollars
($5,000,000.00) (the "Facility"). The purpose of the Facility is to finance
Debtor's acquisition of the Collateral and proceeds advanced under the Facility
shall not in any event exceed the actual cost of the Collateral, plus applicable
taxes (together, the "Equipment Cost"), as verified and approved by Secured
Party. All of the Collateral shall be acceptable to Secured Party in its sole
discretion.
(b) Disbursements. On and subject to all of the terms and conditions of
this Agreement, Secured Party agrees to advance proceeds under the Facility to
or on behalf of
11
<PAGE>
Debtor; provided, however, that Secured Party shall have no obligation to
advance any funds under the Facility if any of the following conditions exists:
(i) another advance of funds under the Facility has occurred in the
same calendar month;
(ii) the amount of the advance requested by Debtor is less than One
Million and 00/100 Dollars ($1,000,000);
(iii) the sum of the amount of the advance, plus the amount of all
prior advances under the Facility, exceeds the Equipment Cost of the Collateral
that will secure the Facility immediately following the advance;
(iv) an Event of Default has occurred and is continuing on the date
the advance is to be disbursed; or
Each advance of funds under the Facility shall reduce, dollar for dollar, the
amount that may be advanced under the Facility and no amount may be reborrowed
once it has been advanced.
(c) The Notes. Each advance of funds under the Facility shall be evidenced
by a Note. Except as otherwise provided in the Notes, interest shall accrue
under each Note at a rate per annum equal to the "One-Month LIBOR Rate" (as
defined therein), plus two and 25/100 percent (2.25%). Each Note shall be
payable in sixty (60) consecutive monthly installments of principal and
interest. At Secured Party's discretion, each Note may also provide for an
initial interest only payment. A default under any Note shall constitute an
Event of Default hereunder and under each of the other Notes. Reference is made
to the Notes for a full statement of the subjects addressed in this Subsection.
(d) Request for Advances. Each request for an advance of funds under the
Facility shall be in writing and shall be in form and substance satisfactory to
Secured Party (the "Proceeds Request"). In connection with each Proceeds
Request, Debtor shall furnish to Secured Party complete and accurate copies of
payoff demands, purchase orders, invoices, canceled checks and other
information, documents and instruments as requested by Secured Party relating to
the Collateral. In addition, each such request (other than any such request that
is contemporaneous with the execution and delivery of this Agreement) shall be
accompanied by a certificate executed by a duly authorized officer of Debtor and
satisfactory in form and substance to Secured Party, certifying (i) that no
Event of Default or event which, with the passage of time or the giving of
notice, or both, would constitute an Event of Default, has occurred hereunder,
and (ii) the authority and incumbency of the individual(s) executing the
Proceeds Request on behalf of Debtor.
12
<PAGE>
(e) Origination and Commitment Fees. Debtor has previously deposited with
Secured Party the sum of Fifty Thousand and 00/100 Dollars ($50,000) (the
"Commitment Fee"), which Debtor hereby authorizes and directs Secured Party to
apply to Secured Party's out of pocket costs, including search, filing and other
incident fees and charges, in connection with the Facility (collectively,
"Transaction Expenses"). Debtor hereby authorizes and directs Secured Party to
apply any balance of the Commitment Fee remaining after payment of the
Transaction Expenses to the first payment due under each Note, on a pro rata
basis, and if for any reason the amount advanced under the Facility is less than
Three Million and 00/100 Dollars ($3,000,000) by June 30, 1996, Secured Party
shall retain any remaining balance of the Commitment Fee as an earned fee.
IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Security
Agreement as of the day and year first above written.
HELLER FINANCIAL, INC., ZYCON CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ Clifford Lehman By: /s/ Lawrence J. Shoemaker
--------------------- -------------------------
Name: Clifford Lehman Name: Lawrence J. Shoemaker
------------------- -----------------------
Title: Vice President Title: Sr. Vice President-Admin. & Inv. Rel.
------------------ -------------------------------------
Fax: 415-986-4106 Fax: (408) 241-5724
-------------------- --------------
13
<PAGE>
SCHEDULE
Description of Collateral
Description of Collateral (full description including make, model and serial
number):
See Schedule "A" attached hereto and incorporated herein by this
reference.
Place where Collateral is to be kept:
435 and 445 El Camino Real, Santa Clara, CA
1270 Campbell Avenue, San Jose, CA
Other liens, encumbrances or security interests to which Collateral is subject,
if any.
Some or all of the Collateral is or may be subject to the security
interests of Comerica Bank, which security interests Debtor has caused
or will cause to be subordinated to the security interest of Secured
Party arising hereunder on such terms and conditions as Secured Party
shall approve in its sole discretion.
Other Collateral
N/A
If Collateral is attached or to be attached to real estate, set forth:
Address of Real Estate:
See location of Collateral above.
Record Owner of Real Estate (Name and Address):
University Research Center and Sobrato Development Companies #871
10600 N. De Anza Boulevard, Suite 200
Cupertino, CA
If the real estate at which the Collateral is to be kept is leased:
Name and Address of Lessor of Real Estate:
See record owner of real estate above.
/s/ LJS
_________
Initials
14
<PAGE>
SCHEDULE A
Page 1 of 3
Schedule annexed to and made a part of a certain Security Agreement dated the
day of , 1996, and related documentation by and between the
- ---- -----------
undersigned.
Description of Collateral (Quantity; Model; General Description; and if
applicable, Serial Number); together with all accessions, additions,
attachments, replacements and substitutions thereto and therefor and all
proceeds (including insurance proceeds) thereof:
<TABLE>
<CAPTION>
Vendor Qty. Model/Part # General Description Serial #
------ ---- ------------ ------------------- --------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hitachi Digital 3 ND- Drill Machine K030025002
Graphics (USA), 4PS210E/ K030025001
Inc. 10P K010355002
- ----------------------------------------------------------------------------------------------------------------
Advanced Chemill 3 10020 24" Stand Alone Hot Air Dryer System DH614
Systems DH616
DH618
- ----------------------------------------------------------------------------------------------------------------
Orbotech 2 V309I AOI System SV5407
SV5106
- ----------------------------------------------------------------------------------------------------------------
4 VSR4I Verification System VR5416
VR5420
VR5427
VR5428
- ----------------------------------------------------------------------------------------------------------------
1 EU 309 Xpert 1700 Workstation HP715/80 48MB, S3101
2.0GB CDX300 CAD Ref 300 NCTUS
with CDR 30 2nd License
- -----------------------------------------------------------------------------------------------------------------
Holmuller 1 CS-75 Solder Etch Strip Line Machine with 267
America Sensor-PROX-DC Cap 30MM efect, standby
restraint assy, bracket-imput sensor,
demister-PCV/TI, and catch screed-flat-
PVC/TI
- ----------------------------------------------------------------------------------------------------------------
1 CS-105 Develop Etch Strip Line Machine 268
- ----------------------------------------------------------------------------------------------------------------
Multiline 1 Optiline Post Etch Punch with series 3000 OPE-209A
Technology console, auto load/unload features, and thin
core table inserts
- ----------------------------------------------------------------------------------------------------------------
Kaufman Sales 3 CM4 600 24" Wide, Unidirectional Clean Machines 4551
International UF3 with adjustable height stand, locking 4552
castors, and 18" extended entry conveyor 4553
- ----------------------------------------------------------------------------------------------------------------
Baker Technology 16 BTA-S3-4- Switch Mode Type Power Supplies; input Job#LP13638S
Associates 500-2D-0912 200V/30/60Hz, DC output 500/A/4V
Incorporated
- ----------------------------------------------------------------------------------------------------------------
1 Open Rack Frame with mounting hardware
and 1600mm x 1200mm x 800mm prewire
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE A
Page 2 of 3
<TABLE>
<CAPTION>
Vendor Qty. Model/Part# General Description Serial #
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Baker Technology 1 Digital Computer Interface
Associates
Incorporated
- --------------------------------------------------------------------------------
Technica, U.S.A. 1 2000 Scrubbex System with scrubbing 0933883
and deburring options
- --------------------------------------------------------------------------------
1 SBW/50 I.S. Comprex Scrubber with F6605
booster pump and sump and
additional filter canisters
- --------------------------------------------------------------------------------
Falcon Systems, 1 408 Fastfile Rackmount Base Kit 4 S092007
Inc. Server with Toshiba 3401B drive
with wide 2 chan, Mylex 16 Meg
DAC960P-3 with 16 Meg, Conner
4GB/7200/wide 1" drive, 32MB
8x36 72 pin simm module, and
Trimm 63" vertical cabinet
- --------------------------------------------------------------------------------
Wand Tool 3 IHB-24 Horizontal Buffer C9697
Company D4201E
F2741
- --------------------------------------------------------------------------------
3 3636R 90(degrees) Rotater Transfer
Conveyor F2742
G4320
- --------------------------------------------------------------------------------
MesaWest, 1 Manual Electroless Nickel/ I-22953-
Incorporated Immersion Gold/Electroless Gold 05/M-
PCB Processing System with 22953-03
CPVC or Polypropylene out-of-
tank pump an filter system for,
overflow weirs Nema rated Epoxy
coated control cabinet, loading
station, and upgraded double
boiler temperature controllers
- --------------------------------------------------------------------------------
Mettler Toledo, 1 DL70ES Tirator with rinsing unit, SR#5M501
Inc. sample transport, RS232C 5237
option, Burette drive, 10ML
burette, DG111-SC glass
electrode, DM140-SC platinum
electrode, electrode cable lemo
100 CM, peristaltic pump, and
Epson 80 column printer 1
- --------------------------------------------------------------------------------
Kennard 1 422 Router with CX 9000 CNC 1181
Engineering Inc.
- --------------------------------------------------------------------------------
Tri-Mer 1 C/F-17 Fume Scrubber System with Tri- 7308
Corporation Mer blower
- --------------------------------------------------------------------------------
Midwest Sign & 2 American Ultraviolet 9601L04
Screen Printing Conveyorized Curing System 34/9601
Supply Co., Inc. with double lamp units,spare L0427
parts kit, and Grainger #7H116 9601L04
upgraded blower 33/9604
L0664
- --------------------------------------------------------------------------------
Wheelabrator 1 2213 Memtek Electroless Nickel IX/
Clean Water Inc. Gold IX and Reter 15 Application
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE A
Page 3 of 3
<TABLE>
<CAPTION>
Vendor Qty. Model/Part # General Description Serial #
------ ---- ------------ ------------------- --------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Silicon Valley 9 66 X 22 X 26 Custom Storage Racks with
Shelving & 8 openings 1 1/8" exterior, and 3/4"
Equipment Co., dividers
Inc.
- ----------------------------------------------------------------------------------------------------------------
2 72 X 30 X 34 Technician Station with
double slanted riser with lips and 12"
clearance on risers.
- ----------------------------------------------------------------------------------------------------------------
8 6 X 4 X 18 Western Pacific Shelving
- ----------------------------------------------------------------------------------------------------------------
8 Fixture Transport Carts
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
HELLER FINANCIAL, INC. ZYCON CORPORATION
a Delaware corporation a Delaware corporation
By:/s/Clifford Lehman By:/s/Lawrence J. Shoemaker
-------------------------- ---------------------------
Name: Clifford Lehman Name: Lawrence J. Shoemaker
----------------------- ------------------------
Title: Vice President Title: Sr. Vice President-Admin. & Invtr.
---------------------- -----------------------
Date: 6/20/96 Date: June 19, 1996
----------------------- ------------------------
<PAGE>
- -------------------------------------------------------------------------------
[LOGO OF HELLER FINANCIAL]
PROMISSORY NOTE
$5,000,000.00 June , 1996
FOR VALUE RECEIVED, Zycon Corporation, a Delaware corporation ("Maker"),
promises to pay to the order of Heller Financial, Inc., a Delaware corporation
(together with any holder of this Note, "Payee"), at its office located at 500
West Monroe Street, Chicago, Illinois 60661, or at such other place as Payee may
from time to time designate, the principal sum of Five Million and 00/100
Dollars ($5,000,000.00), together with interest thereon at a floating rate per
annum equal to the One-Month LIBOR Rate (hereafter defined) plus two and 25/100
percent (2.25%), payable in sixty (60) consecutive monthly installments of
principal plus interest commencing August 1, 1996, and continuing on the same
day of each consecutive calendar month thereafter until this Note is fully paid,
the first fifty-nine (59) installments each in the principal amount of Eighty-
Three Thousand Three Hundred Thirty-Three and 33/100 Dollars ($83,333.33), plus
accrued interest, and the final installment in the principal amount of Eighty-
Three Thousand Three Hundred Thirty-Three and 53/100 Dollars ($83,333.53), plus
accrued interest. Maker shall also make an interest only payment on July 1,
1996, of accrued interest from the date of this Note through June 30, 1996. All
payments shall be applied first to interest and then to principal. Interest
shall be computed on the basis of a 360-day year and charged for the actual
number of days elapsed.
For purposes of this Note, "One Month LIBOR Rate" means, for each calendar
month, a rate of interest equal to:
(a) the rate of interest determined by Payee at which deposits in U.S.
Dollars are offered for the one (1) month interest period based on information
presented on the Reuters Screen LIBO Page as of 11:00 A.M. London time) on the
day which is two (2) business days (not counting Saturdays) prior to the first
day of each calendar month; provided that if at least two (2) such offered rates
appear on the Reuters Screen LIBO Page in respect of such interest period, the
arithmetic mean of all such rates (as determined by Payee) will be the rate
used; provided further that if there are fewer than two (2) offered rates or
Reuters ceases to provide LIBOR quotations, such rate shall be the average rate
of interest determined by Payee at which deposits in U.S. Dollars are offered
for the one (1) month interest period by Bankers Trust Company, The Chase
Manhattan Bank, National Association and Chemical Bank (or their respective
successors) to banks with combined capital and surplus in excess of $500,000,000
in the London interbank market as of 11:00 A.M. London time) on the applicable
interest rate determination date, divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) business days prior to the
beginning of each calendar month (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other governmental authority
having jurisdiction with respect thereto, as now and from time to time in
effect) for Eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) which are required to be maintained
by a member bank of the Federal Reserve System;
(such rate to be adjusted to the nearest one sixteenth of one percent (1/16 of
1%) or, if there is no nearest one sixteenth of one percent (1/16 of 1%), to the
next higher one sixteenth of one percent (1/16 of 1%)).
1
<PAGE>
For the initial funding month (or any fraction thereof) under this Note,
the applicable floating rate shall be the One Month LIBOR Rate in effect on the
date of this Note, with interest payable in arrears and calculated daily on the
basis of a 360 day year for the actual number of days elapsed during such
calendar month.
Notwithstanding the foregoing, if at any time implementation of any
provision hereof shall cause the interest contracted for or charged herein or
collectable hereunder to exceed the applicable lawful maximum rate, then the
interest shall be limited to such lawful maximum.
This Note is secured by the collateral described in that certain Security
Agreement dated June 1996, between Maker and Payee (together with all
----
related documents and agreements, the "Security Agreement"), to which reference
is made for a statement of the nature and extent of protection and security
afforded, the rights of Payee and the rights and obligations of Maker. A default
under this Note shall constitute a default under any and all of Maker's other
promissory notes in favor of Payee, now or hereafter made, and a default under
any such other promissory note shall also constitute a default under this Note.
On any regular installment payment date, Maker may prepay in full, but
not in part, the then entire unpaid principal balance hereof together with all
accrued and unpaid interest thereon to the date of such prepayment, provided
that along with and in addition to such prepayment Maker shall pay (i) any and
all other sums due hereunder or under the Security Agreement, and (ii) a
prepayment fee as liquidated damages and not as a penalty, in a sum equal to the
following percentages of the amount prepaid: 1.5% of the amount prepaid for any
prepayment during Loan Year 1; 1% of the amount prepaid for any prepayment
during Loan Year 2; 0.50% of the amount prepaid for any prepayment during Loan
Year 3; and 0% of the amount prepaid for any prepayment during Loan Years 4 and
5. Any payment of the amounts due under this Note following acceleration of the
maturity date upon the occurrence of any Event of Default (as defined in the
Security Agreement) shall constitute a voluntary prepayment hereunder as to
which the prepayment fee described in clause (ii) above shall apply. The phrase
"Loan Year" as used herein shall mean each twelve (12) consecutive months
commencing on the date of this Note.
Time is of the essence hereof. If payment of any installment or any other
sum due under this Note or the Security Agreement is not paid within ten (10)
days after its due date, Maker agrees to pay a late charge of five cents
(5(cents)) per dollar on, and in addition to, the amount of each such payment,
but not exceeding the lawful maximum. In the event Maker shall fail to make any
payment under this Note within ten (10) days after its due date or if Maker
shall be in breach or default of the Security Agreement, then the entire unpaid
principal balance hereof with accrued unpaid interest thereon together with all
other sums payable under this Note or the Security Agreement, shall, at the
option of Payee and without notice or demand, become immediately due and
payable, such accelerated balance bearing interest until paid at the rate of
five and 25/100 percent (5.25%) per annum above the One-Month LIBOR Rate.
Maker and all endorsers, guarantors or any others who may at any time
become liable for the payment hereof hereby consent to any and all extensions of
time, renewals, waivers and modifications of, and substitutions or release of
security or of any party primarily or secondarily liable on, or with respect to,
this Note or the Security Agreement or any of the terms and provisions of either
that may be made, granted or consented to by Payee, and agree that suit may be
brought and maintained against any one or more of them, at the election of
Payee, without joinder of the others as parties thereto, and that Payee shall
not be required to first foreclose, proceed against, or exhaust any security
herefore, in order to enforce payment of this Note by any one or more of them.
Maker and all endorsers, guarantors or any others who may at any time become
liable for the payment hereof hereby severally waive presentment, demand for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
and all other notices in connection with this Note, filing of suit and diligence
in collecting this Note or enforcing any of the
2
<PAGE>
security herefore, and agree to pay, if permitted by law, all expenses incurred
in collection, including reasonable attorneys' fees, and hereby waive all
benefits of valuation, appraisement and exemption laws.
If there be more than one Maker, all the obligations, promises, agreements
and covenants of Maker under this Note are joint and several. If any Maker is a
corporation, it and the persons signing on its behalf represent and warrant that
the execution and delivery of this Note has been duly authorized by all
necessary and appropriate corporate and shareholder action.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING PAYEE'S
RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO
THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL)
HAVING SITUS WITHIN THE STATE OF CALIFORNIA, EXPRESSLY WAIVES PERSONAL SERVICE
OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED
TO THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED
WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF.
MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND
FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT IT HAS ALREADY RELIED ON THE WAIVER IN
ENTERING INTO THIS NOTE, AND THAT IT WILL CONTINUE TO RELY ON THE WAIVER IN ITS
RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND REPRESENTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
Witness/Attest: ZYCON CORPORATION, a
Delaware corporation
By: /s/ Jeri A. Shoemaker By: /s/ Lawrence J. Shoemaker
----------------------- --------------------------
Name: Lawrence J. Shoemaker
-------------------------
Title: Sr. Vice President
Administration & Inv. Rel.
--------------------------
<PAGE>
Exhibit 10.2
This Supplemental Security Agreement is executed by Zycon Corporation, a
Delaware corporation ("Borrower") pursuant to the terms of a Loan and Security
Agreement dated June 28, 1993 between Borrower and MetLife Capital Corporation
("Lender"). All capitalized terms used herein that are not otherwise defined
herein shall have the respective meanings given to such terms in the Loan and
Security Agreement.
In order to provide security for the payment and performance of
Borrower's obligations under the Loan Documents, Borrower has granted to Lender
a first priority security interest in the Collateral. In addition to said grant,
Borrower intends by this Supplemental Security Agreement to grant to Lender a
first priority security interest in the items of Equipment identified herein.
1. To further secure the payment and performance of all of Borrower's
obligations to lender under the Loan Documents, Borrower hereby grants to Lender
a first priority security interest in the items of Collateral described below,
including all present and future additions, attachments and accessories thereto,
all substitutions therefor and replacements thereof and all proceeds
thereof, including all proceeds of insurance:
Qty. Model/Mfr. Description Serial No. Cost or Appraised Value
Various Manufacturing $5,048,706.40
and Production
Equipment more
completely described
on the attached
Exhibit "A".
2. Borrower hereby (a) affirms that the representations and warranties set
forth in Section 5 of the Loan and Security Agreement are true and
correct as of the date hereof; (b) represents and warrants that Lender
has a first priority security interest in the Collateral*, and
(c) represents and warrants that the above described equipment will be
maintained at the following location(s):
445 & 435 El Camino Real 12270 Campbell Avenue
Santa Clara, CA 95050 San Jose, CA 95050
3. The Loan Amount for loans to be made pursuant to this Supplemental
Security Agreement is $5,048,706.40.
4. The Commitment Expiration Date for loans to be made pursuant to this
Supplemental Security Agreement is June 30, 1996.
5. The amount of liability insurance required to be maintained by Borrower
pursuant to Section 5(d) of the Loan and Security Agreement is
$500,000.00.
6. All of the terms and provisions of the Loan and Security Agreement are
hereby incorporated in and made a part of this Supplemental Security
Agreement to the same extent as if fully set forth herein.
In witness whereof, Borrower has executed and delivered this
Supplemental Security Agreement this _________ day of ___________, 19____.
Borrower: Zycon Corporation
By: /s/ Lawrence J. Shoemaker
-------------------------
(Print Name) Lawrence J. Shoemaker
-------------------------
Title: Senior Vice President
-------------------------
Administration & Investor
Relations
* Subject to the Subordination Agreement between Comerica Bank-California and
Lender dated June ___, 1996.
[LOGO] MetLife Capital
<PAGE>
This Exhibit "A" is attached to and made part of that certain Supplemental
Security Agreement No. Three by and between MetLife Capital
Corporation and Zycon Corporation
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vendor/Invoice Qty Equipment Description Serial Number TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Optical Radiation Corp. 1 OB 7550 FPE 10KW Auto Expose System TD00381 $495,244.00
#21141
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Optical Radiation Corp. 1 Opti-Beam 7557 Film Phototool Exchange System TL00394 $584,543.75
#21192
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Dupont Co. 1 ASL-24 Yieldmaster Used War 175 $164,749.75
#H480800392
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Nagase California Corp. 2 TN-890LR Onno-Sokki Auto Expose Units 95J2889-1
95J2889-2
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
1 TN-270 Onno-Sokki Turn Over Unit 95J2889-3 $641,705.13
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Morton Dynachem 1 1500C Cut Sheet Laminator 167-2
#410296
- ----------------------------------------------------------------------------------------------------------------------
1 Thin Core Device (0.004) $242,437.50
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Morton Dynachem 1 1500C Cut Sheet Laminator 167-3
#410297
- ----------------------------------------------------------------------------------------------------------------------
1 Thin Core Device (0.004) $242,437.50
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Unidyne 1 206E - Automatic Optical Inspection System 313 $257,510.05
#2101
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Unidyne 1 206E - Automatic Optical Inspection System 189 $242,437.50
#2084
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Unidyne 1 206E - Automatic Optical Inspection System 174 $257,510.05
#2097
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Solution Sources, Inc. 1 Model 4400-002 Verification Hardware: 5/95-20-0288
#001520 P/N 440-013 Com. Aid. Rep. SFTW
P/N 4400-017 Flt. Dict. & Stat. Data
P/N 44---018 Auto. Shts. Det. SFTW
- ----------------------------------------------------------------------------------------------------------------------
1 4400-052 Fujitsu Plasma Display
- ----------------------------------------------------------------------------------------------------------------------
1 4400V Camera Opt. 70X Mag. $67,480.00
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Ishi Hyoki (America), Inc. 5 IJS-630-T Jet Scrubbers U3013,
#002710, #002323, U5030,U5084,
#2323TX, #002533 U5108,U5109
- ----------------------------------------------------------------------------------------------------------------------
$487,835.97
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
BTU International 1 DR 251-3-144DS IR Oven ZSC-1 $21,650.00
#170761
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Falcon Systems, Inc. 4 HP 712/80 Systems 6457A50421,
#15157 6514A51241,
6514A51023,
6515A51025
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 1
<PAGE>
This Exhibit "A" is attached to and made part of that certain Supplemental
Security Agreement No. Three by and between MetLife Capital Corporation and
Zycon Corporation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
| Vendor/Invoice | Qty | Equipment Description | Serial Number | TOTAL |
| | | | | |
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4 CRX 20" Monitors JPO1083249,
JPO1087119,
JPO1093774,
JPO1093775
- -----------------------------------------------------------------------------------------------------------------------
4 HP 1GB SE SCSI-II DRIVE TY214033,
USS1101NFL,
WYAX177191,
WYAX246126
- -----------------------------------------------------------------------------------------------------------------------
4 64MB HP 715 KIT (2X 32MP)
- -----------------------------------------------------------------------------------------------------------------------
4 HP 720 Upgrade to 735/125 A56101154876,
A56101154888,
A56101154876,
A56101250770
- -----------------------------------------------------------------------------------------------------------------------
$67,405.20
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
HITACHI AMERICA 2 ND-4K21E/10P Drilling Systems K010355001
#606856 K010355003
- -----------------------------------------------------------------------------------------------------------------------
$633,570.00
- -----------------------------------------------------------------------------------------------------------------------
HITACHI AMERICA 2 ND-4K21E/10P Drilling Systems K330045001
#605207 K330045002
- -----------------------------------------------------------------------------------------------------------------------
$642,190.00
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Grand Total $5,048,706.40
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2
<PAGE>
AMENDMENT NO. ONE
Amendment No. One to that certain Loan and Security Agreement dated June 28,
1993 ("Agreement") by and between MetLife Capital Corporation, as Lender
and Zycon Corporation as Borrower
WITNESSETH:
----------
WHEREAS the parties entered into the Agreement as aforesaid, and
WHEREAS the parties now desire to amend the Agreement in certain respects;
NOW THEREFORE, it is agreed as follows:
Section 18 (a) is amended to include the following additional event of default:
"(vii) any event of default occurs with respect to that certain Loan
Agreements dated March 31, 1994 and December 29, 1995 between Borrower
and Comerica Bank."
The following additional section shall be included:
"Affirmative Covenants: These covenants are based on financial statements
presented on a consolidated basis to include Zycon Malaysia. Furthermore, these
covenants are all inclusive for all existing and future loans under the
Agreement.
Stockholders' Equity. Borrower shall maintain stockholders' equity of
not less than $23,500,000.
Leverage. Borrower shall maintain a ratio of total liabilities to
tangible net worth not to exceed 2.60:1 at December 31, 1995, declining
to 2.25:1 at December 31, 1997. Tangible net worth shall be determined
as stockholders' equity less intangible assets.
Cash Flow Coverage. Borrower shall maintain a ratio of total cash flow
to fixed charges of not less than 1.25:1. Total cash flow shall be
defined as net after-tax income from annual audited financial statements
plus depreciation minus stockholder dividends. Fixed charges shall be
defined as the total of (1) obligations payable during any period of
twelve (12) consecutive months for principal no borrowed money repayable
over a period in excess of one (1) year and (ii) any other obligations
under leases which shall have been or should be recorded as capital
leases.
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Amendment No.
One to the Loan and Security Agreement this 10th day of June, 1996.
LENDER: BORROWER:
METLIFE CAPITAL CORPORATION ZYCON CORPORATION
By: /s/ Judy Johnston By: /s/ Laurence J. Shoemaker
--------------------- -----------------------------------
Its: Its: Senior Vice President
--------------------- -----------------------------------
Administration & Investor Relations
-----------------------------------
[LOGO] MetLife Capital
<PAGE>
No. 2015093-003 TERM PROMISSORY NOTE NO. THREE
_____________
$ 5,048,706.40 June 21, 1996
_____________ _____________________ ________
FOR VALUED RECEIVED, the undersigned, Zycon Corporation, a Delaware
corporation ("Maker"), promises to pay to the order of METLIFE CAPITAL
CORPORATION ("Payee"), at its office at P.O. Box C-97550, Bellevue, Washington
98009, the principal sum of FIVE MILLION FORTY-EIGHT THOUSAND SEVEN HUNDRED SIX
DOLLARS AND FORTY CENTS ($5,049,706.40) Dollars together with interest on unpaid
principal from the date of disbursement of such principal amount until payments
in full at a rate per annum equal to the weekly average of 30 Day Commercial
Paper in effect from time to time, as published in Federal Reserve Statistical
Release H. 15(519), plus 2.10 percent (2.10%) (the "Variable Rate") computed on
the basis of a 360 day year of twelve consecutive thirty day months, in sixty
(60) monthly installments in the amount of One Hundred One Thousand Two Hundred
Thirty-Seven Dollars and Seventy-One Cents ($101,237.71) commencing on July 21,
1996 and monthly thereafter until June 21, 2001, on which date the entire
balance of principal and interest unpaid shall be due and payable ("Term"). The
amount of each payment during the first twelve (12) months of the term shall be
a level amount calculated as if the Loan Amount was amortized over the Term at
the Variable Rate in effect at loan closing ("Amortization Rate"). Payments
received will be applied first to secured interest at the Variable rate and then
applied in principal.
On each anniversary of loan disbursement, the then outstanding principal
balance will be compared with the principal balance of the loan as if amortized
at the Amortization Rate. In the event the outstanding principal balance exceeds
the principal balance of the loan if amortized at the Amortization Rate, Maker
shall immediately pay the amount of such underpayment to Payee. In the event the
outstanding principal balance is less than the principal balance of the loan if
amortized a the Amortization Rate such overpayment will be applied to the
outstanding principal balance. Additionally, the amount of each payment for the
ensuing twelve (12) months will be calculated by amortizing the then outstanding
principal balance at the then current Variable Rate over the remaining Term.
Except as may be otherwise expressly provided herein, this Note may not
be prepaid in whole or in part, except with the prior written consent of Payee.
Maker shall have the privilege of prepaying all (but not part) of the then
outstanding balance under this Note on June 21, 1998.
It is specifically understood and agreed by Maker that, in the event of
default under the Note or under any instrument securing the Note, a tender of
payment of the unpaid principal and accrued interest then outstanding shall be
deemed a prepayment and must include a premium equal to six (6) months' interest
at the Rate computed on the principal amount so tendered. It is further
understood and agreed by Maker that Payee shall not be obligated to accept said
tender,and said tender shall for all purposes be deemed ineffectual and
deficient, unless said tender shall include the premium herein above required.
In the event that Payee does not receive any payment on the date due,
Maker will pay Payee a late charge of five percent (5%) of the payment
outstanding together with the payment, and provided said sum is received within
ten (10) days of the date due, Payee agrees not to demand immediate payment of
the whole sum of principal and interest as otherwise permitted herein.
If, from any circumstances whatsoever, payment of any obligation due
under this Note at the time such performance shall be due shall involve
exceeding the maximum amount currently prescribed by any applicable usury
statute or any other applicable law, then such obligation shall be reduced to
such maximum amount, so that in no event shall any payment be possible under
this Note, or under any other instrument evidencing or securing the indebtedness
evidenced hereby, that is in excess of such maximum amount.
In the event that an Event of Default shall occur under the Loan and
Security Agreement (as hereinafter defined) or any other instrument now or
hereafter securing repayment hereof, following any required notice and/or the
expiration of any applicable period of grace, then, and in such event, the
principal indebtedness evidenced hereby, and any other sums advanced hereunder,
together with all unpaid interest accrued thereon shall, at the option of Payee,
at once become due and payable and may be collected forthwith, regardless of the
stipulated date of maturity. TIME IS OF THE ESSENCE WITH RESPECT TO THIS NOTE.
Interest shall accrue on the outstanding principal for so long as such event of
default continues, regardless of whether or not there has been an acceleration
of the indebtedness evidenced hereby as set forth herein, at the rate equal to
the lesser of fifteen percent (15%) per annum or the maximum rate allowable
under law. All such interest shall be paid at the time of and as a condition
precedent to the curing of any such default should Payee, at its sole option,
allow such default to be cured. In the event this Note, or any part thereof, is
collected due to an event of default by or through an attorney-at-law, Maker
agrees to pay all costs of collection including, but not limited to, reasonable
attorneys' fees, whether or not suit is filed.
This Note is one of the notes referred to in and is secured by the Loan
and Security Agreement dated June 28, 1993 between Maker and Payee. The terms of
the Loan and Security Agreement are incorporated herein by reference.
Maker waives any right of exemption and waives presentment, protest and
demand and notice of protest, demand and of dishonor and nonpayment of this
Note, and consents that any holder hereof shall have the right, without notice,
to grant any extension or extensions of time for payment of this Note or any
part thereof or any other indulgences of forbearances whatsoever, or may release
any of the security for this Note without in any way affecting the liability of
any other party for the payment of this Note.
The due payment and performance of Maker's obligations hereunder shall
be without regard to any counterclaim, right of offset, or any other
counterclaim whatsoever which Maker may have against Payee and
without regard to any other obligations of any nature whatsoever which Payee may
have to Maker, and no such counterclaim or offset shall be asserted by Maker in
any action, suit or proceeding instituted by Payee for payment of Maker's
obligations hereunder.
This Note and the Loan and Security Agreement shall be governed by and
construed in accordance with the laws of the State of California.
[LOGO OF METLIFE CAPITAL APPEARS HERE]
<PAGE>
Maker acknowledges that there is no assumption that the value of the
property securing this Note is equal to the face amount of the Note, and that a
deficiency judgment may be necessary in proceedings taken for enforcement
hereof.
No amendment to this Note shall be binding upon Payee unless it is in
writing and duly signed by Payee.
IN WITNESS WHEREOF, the Maker has caused these presents to be duly
signed the date first above written.
Borrower: Zycon Corporation
__________________________
By: /s/ Lawrence J. Shoemaker
__________________________
Witness: /s/ Kenneth R. Shilling (Print Name) Lawrence J. Shoemaker
_______________________ __________________________
Title: Senior Vice President
__________________________
Administration & Investor Relations
<PAGE>
ZYCON CORPORATION AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION
OF NET INCOME PER SHARE
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Income $ 1,638 $ 5,499
======== ========
Pro forma net income $ 1,569 $ 2,264
======== ========
Weighted average shares
outstanding during the period 11,007 8,000 11,004 8,000
Common shares issued and stock
options granted in accordance
with Staff Accounting Bulletin
No. 83 97 97
Common stock equivalents 83 86
Shares deemed outstanding to
fund final shareholder
distribution 553 553
------ ----- ------ -----
Total shares outstanding for
purposes of calculating primary
and fully diluted earnings
per share 11,090 8,650 11,090 8,650
====== ===== ====== =====
Net income per common and
common stock equivalent share $ 0.15 $ 0.50
======= =======
Pro forma primary earnings per
common and common stock
equivalent share $ 0.18 $ 0.26
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ZYCON
CORPORATION'S CONSOLIDATED CONDENSED BALANCE SHEETS AND CONSOLIDATED CONDENSED
STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995,
RESPECTIVELY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,814
<SECURITIES> 0
<RECEIVABLES> 22,992
<ALLOWANCES> (280)
<INVENTORY> 8,963
<CURRENT-ASSETS> 42,786
<PP&E> 69,321
<DEPRECIATION> 42,973
<TOTAL-ASSETS> 129,712
<CURRENT-LIABILITIES> 67,712
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 61,989
<TOTAL-LIABILITY-AND-EQUITY> 129,712
<SALES> 103,468
<TOTAL-REVENUES> 103,468
<CGS> 86,402
<TOTAL-COSTS> 93,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> 9,356
<INCOME-TAX> 3,857
<INCOME-CONTINUING> 9,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,499
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
