-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QC6fhulM8BzxkqZpmcUkcD+5rb2QfudxA1RwKA5H7VeOuTWIwecW/oaT9W5dGNes s24aNdWPp5JY6S1EtOAnqw== 0000950135-97-000759.txt : 19970222 0000950135-97-000759.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950135-97-000759 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970218 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HADCO CORP CENTRAL INDEX KEY: 0000729533 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 042393279 STATE OF INCORPORATION: MA FISCAL YEAR END: 1030 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-21977 FILM NUMBER: 97537881 BUSINESS ADDRESS: STREET 1: 12A MANOR PKWY CITY: SALEM STATE: NH ZIP: 03079 BUSINESS PHONE: 6038988000 MAIL ADDRESS: STREET 1: 12A MONOR PARKWAY CITY: SALEM STATE: NH ZIP: 03079 S-3 1 HADCO CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HADCO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2393279 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
12A MANOR PARKWAY SALEM, NEW HAMPSHIRE 03079 (603) 898-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ANDREW E. LIETZ CHIEF EXECUTIVE OFFICER HADCO CORPORATION 12A MANOR PARKWAY SALEM, NEW HAMPSHIRE 03079 (603) 898-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO STEPHEN A. HURWITZ, ESQ. PETER B. TARR, ESQ. TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR, LLP HIGH STREET TOWER 60 STATE STREET 125 HIGH STREET BOSTON, MA 02109 BOSTON, MA 02110 (617) 526-6000 (617) 248-7000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] ------------------------ CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, par value $.05 per share...... 2,300,000 $54.625 $125,637,500(2) $38,072 - ---------------------------------------------------------------------------------------------------------------- % Convertible Subordinated Notes due 2004...................................... $115,000,000 100% $115,000,000 $34,849 - ---------------------------------------------------------------------------------------------------------------- Common Stock, par value $.05 per share...... (3) (3) (3) (3) ====================================================================================================================================
(1) Includes 300,000 shares of Common Stock and an additional $15,000,000 principal amount of Notes which the Underwriters may purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and based on the average of the high and low sales prices on February 13, 1997, as reported on the Nasdaq National Market. (3) An indeterminate number of shares of Common Stock issuable upon conversion of the % Convertible Subordinated Notes due 2004, including shares issuable pursuant to the anti-dilution provisions of such Notes. No separate consideration will be received for any such shares so issued upon such conversion. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1997 LOGO 2,000,000 SHARES COMMON STOCK $100,000,000 % CONVERTIBLE SUBORDINATED NOTES DUE 2004 Hadco Corporation ("Hadco" or the "Company") hereby offers 2,000,000 shares of Common Stock (the "Common Stock Offering"), and $100,000,000 aggregate principal amount of % Convertible Subordinated Notes due 2004 (the "Note Offering"). The % Convertible Subordinated Notes due 2004 (the "Notes") are convertible into shares of Common Stock at any time through maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain events. Prior to the Note Offering, there has been no public trading market for the Notes. The Notes are expected to be traded on the over-the-counter market. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "HDCO." On February 13, 1997, the last reported sale price for the Common Stock on the Nasdaq National Market was $53.6875 per share. Interest on the Notes is payable on and , commencing , 1997. Prior to , 2000, the Notes are not redeemable at the option of the Company. At any time on or after that date, the Notes are redeemable at the option of the Company, in whole, or in part from time to time, at the declining redemption prices set forth herein, together with accrued and unpaid interest. See "Description of Notes -- Optional Redemption by the Company." In the event of a Designated Event (as defined), each holder may require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof, plus accrued and unpaid interest. The Notes are unsecured and are subordinated to all existing and future Senior Indebtedness (as defined) of the Company and effectively subordinated with respect to the assets and earnings of the Company's subsidiaries to all indebtedness and other liabilities of such subsidiaries. As of January 25, 1997, the Company had approximately $218 million of outstanding indebtedness that would have constituted Senior Indebtedness and the Company's subsidiaries had outstanding indebtedness and other liabilities of approximately $57 million to which the Notes would have been effectively subordinated. See "Description of Notes." The Common Stock Offering and the Note Offering are referred to collectively as the "Offerings." Neither the closing of the Common Stock Offering nor the closing of the Note Offering is conditioned on the closing of the other offering. Adams, Harkness & Hill, Inc. will be a Representative of the Common Stock Underwriters in the Common Stock Offering only. See "Underwriting." ------------------------ THE COMMON STOCK AND NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ===================================================================================================================== UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY(1) - --------------------------------------------------------------------------------------------------------------------- Per Share...................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- Per Note....................................... % % % - --------------------------------------------------------------------------------------------------------------------- Total Shares................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- Total Notes.................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- Total(2)....................................... $ $ $ =====================================================================================================================
(1) Before deducting expenses payable by the Company, estimated at $1,200,000. (2) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock, and the Company has granted the Underwriters a 30-day option to purchase up to an additional $15,000,000 principal amount of Notes, solely to cover over-allotments, if any. See "Underwriting." If such options are exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively, and the total proceeds to the Selling Stockholders will be $ . ------------------------ The Common Stock is offered by the Common Stock Underwriters as stated herein, and the Notes are offered by the Note Underwriters as stated herein, subject in each case to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such securities will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California on or about , 1997. ROBERTSON, STEPHENS & COMPANY MERRILL LYNCH & CO. ADAMS, HARKNESS & HILL, INC. The date of this Prospectus is , 1997. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 3 HADCO Where Technology and Time To Market Connect(TM) Tech Centers Volume Manufacturing - - Hadco provides development, - Hadco can transition production design and quick-turn prototype from prototype to full-scale services to customers. commercial production. - - Tech Center developments - Hadco volume capabilities include: include: - Multilayer printed circuits - Multilayer printed circuits of of 38+ layers 18+ layers - Embedded discrete components - BGA and TAB - Multichip modules (MCM) - MCM and SCC - Single chip carriers (SCC) - Volume manufacturing facilities are located in California, - Planar Magnetics New Hampshire, New York and Malaysia. - Advanced surface finishes - Substrates for high-frequency markets - - Tech Centers are located in California, Massachusetts and New Hampshire. Includes pictures of various printed circuits. CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND THE NOTES, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERINGS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Incorporation of Certain Information by Reference..................................... 3 Summary............................................................................... 4 Risk Factors.......................................................................... 8 Use of Proceeds....................................................................... 16 Dividend Policy....................................................................... 16 Price Range of Common Stock........................................................... 17 Capitalization........................................................................ 18 Selected Consolidated Financial Data.................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 21 Business.............................................................................. 28 Management............................................................................ 41 Principal Shareholders................................................................ 43 Description of Capital Stock.......................................................... 46 Description of Notes.................................................................. 48 Certain Federal Income Tax Considerations............................................. 60 Underwriting.......................................................................... 62 Legal Matters......................................................................... 64 Experts............................................................................... 64 Additional Information................................................................ 65 Available Information................................................................. 65 Index to Consolidated Financial Statements............................................ F-1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are hereby incorporated by reference into this Prospectus: (1) Annual Report on Form 10-K for the fiscal year ended October 26, 1996; (2) Current Report on Form 8-K dated December 5, 1996; and (3) Current Report on Form 8-K dated January 24, 1997, as amended by Form 8-K/A dated February 14, 1997. All documents subsequently filed by Hadco pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Offerings shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated by reference or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that such statement is modified or superseded by any other subsequently filed document which is incorporated or is deemed to be incorporated by reference herein. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. Hadco hereby undertakes to provide without charge to each person, including any beneficial owner, to whom this Prospectus has been delivered, on the written or oral request of such person, a copy of any or all of the documents referred to above which have been or may be incorporated into this Prospectus and deemed to be part hereof, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents. These documents are available upon request from Timothy P. Losik, Vice President, Chief Financial Officer and Treasurer, Hadco Corporation, 12A Manor Parkway, Salem, New Hampshire 03079, (603) 898-8000. 3 5 SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including "Risk Factors," and Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus or incorporated by reference herein. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment options. As used herein, the terms "Company" and "Hadco," unless otherwise indicated or the context otherwise requires, refer to Hadco Corporation and its subsidiaries, including Zycon Corporation ("Zycon"). However, all financial information for periods ended prior to January 10, 1997, unless otherwise indicated or the context otherwise requires, is for Hadco Corporation alone and does not include Zycon. THE COMPANY Hadco is the largest manufacturer of advanced electronic interconnect products in North America. The Company offers a wide array of sophisticated manufacturing, engineering and systems integration services to meet its customers' electronic interconnect needs. The Company's principal products are complex multilayer rigid printed circuits and backplane assemblies. Hadco's largest customers include many of the leading and fastest growing companies in the electronics industry, such as Cabletron Systems, Cisco Systems, Intel, Solectron, Sun Microsystems and U.S. Robotics. Hadco's advanced manufacturing and assembly facilities are designed to meet the accelerated time-to-market and time-to-volume requirements of its customers whose markets and products are characterized by high growth rates, rapid technological advances and short product life-cycles. To this end, Hadco (including Zycon) has invested approximately $235 million in state-of-the-art production facilities and new technologies during the past five fiscal years. Hadco provides customers with a range of products and services that includes development, design, quick-turn prototype, pre-production, volume production, and backplane assembly. Hadco is one of a small number of printed circuit manufacturers with the technology and advanced production facilities necessary to offer all of these services. The Company believes its combination of a broad product offering and advanced technology facilitates long-term relationships with existing customers, attracts new customers, helps customers meet their time-to-market and time-to-volume needs, and satisfies a larger share of customers' electronic interconnect requirements. Hadco's customers are a diverse group of electronics original equipment manufacturers ("OEMs") and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. Hadco (including Zycon) supplied its products and services to a diverse base of approximately 500 customers in fiscal 1996, including 77 customers with purchases in excess of $1 million. The Company's ten largest customers accounted for approximately 43% of net sales in fiscal 1996 on a pro forma basis including Zycon. Industry sources estimate that the number of U.S. interconnect manufacturers has decreased from over 2,100 in 1978 to approximately 700 in 1995 during a period when the market size increased to $8.3 billion for rigid printed circuits and backplane assemblies. In large part, this decrease in manufacturers resulted from the increasingly advanced technology and services required by sophisticated electronics OEMs to meet their needs for complex products and shorter time-to-market cycles in their industries. As OEMs have narrowed their supply base, the increased investment necessary for state-of-the-art production facilities and advanced technologies has accelerated consolidation in the printed circuit industry and the exit of smaller companies. 4 6 To capitalize on this consolidation trend and to gain increased economies of scale, Hadco acquired Zycon on January 10, 1997. This acquisition increased Hadco's net sales significantly, added approximately 600,000 square feet of manufacturing space (approximately a 100% increase) and substantially expanded the Company's manufacturing capabilities and geographic reach. The new manufacturing capabilities consist of state-of-the-art West Coast facilities for volume production of complex printed circuits and backplane assemblies, a quick-turn prototype and design facility on the East Coast, and a newly constructed facility for volume production in Malaysia. The acquisition of Zycon has also broadened the Company's customer base, expanded its involvement in many fast growing industry sectors, added new proprietary technologies, and increased its sales force. The Company's strategy takes advantage of other major industry trends such as the increased customer demand for a single source of integrated services, accelerating time-to-market and time-to-volume product requirements, and the increased demand for complex electronic products and new interconnect technologies. The principal components of Hadco's strategy are size, financial strength, investment in state-of-the-art facilities and technologies, and a broad and integrated offering (from development and design through volume production and backplane assembly). The Company believes this strategy is responsible for its emergence as the largest manufacturer of advanced electronic interconnect products in North America. The Company was incorporated in Massachusetts in 1966. The Company's principal executive offices are located at 12A Manor Parkway, Salem, New Hampshire 03079, and its telephone number is (603) 898-8000. Hadco(TM), ResistAIR(TM) and MicroPath(TM) are trademarks of the Company. This Prospectus also includes the trademarks of other companies. THE COMMON STOCK OFFERING Common Stock Offered by the Company................................. 2,000,000 shares Common Stock to be Outstanding after the Common Stock Offering...... 12,444,188 shares(1) Nasdaq National Market Symbol....................................... HDCO
- ------------ (1) Based on shares outstanding on January 25, 1997. Excludes options outstanding as of January 25, 1997 to acquire 1,219,829 shares of Common Stock at a weighted average exercise price of $15.06 per share and an additional 843,000 shares of Common Stock reserved for issuance under the Company's stock option plans. See Note 10 of Notes to the Company's Consolidated Financial Statements. Also excludes shares of Common Stock issuable upon conversion of the Notes. 5 7 THE NOTE OFFERING Securities Offered......... $100 million principal amount of % Convertible Subordinated Notes due 2004 (the "Notes") ($115 million principal amount of Notes if the over-allotment option is exercised in full). Interest Payment Dates..... and , commencing , 1997. Maturity................... , 2004. Conversion................. Convertible into Common Stock, $.05 par value, of the Company at any time through maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain events. See "Description of Notes -- Conversion." Optional Redemption........ The Notes are not redeemable at the option of the Company prior to , 2000. At any time on or after that date, the Notes are redeemable at the option of the Company, in whole or in part from time to time, at the declining redemption prices set forth herein, plus accrued and unpaid interest to the redemption date. See "Description of Notes -- Optional Redemption by the Company." Repurchase at Option of Holders upon a Designated Event...................... In the event of a Designated Event (as defined), each holder may require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof plus accrued and unpaid interest. See "Description of Notes -- Repurchase at Option of Holders Upon a Designated Event." Subordination.............. Subordinate to all existing and future Senior Indebtedness (as defined) of the Company and will be effectively subordinated with respect to the assets and earnings of the Company's subsidiaries to all indebtedness and other liabilities of such subsidiaries. As of January 25, 1997, the Company had approximately $218 million of outstanding indebtedness that would have constituted Senior Indebtedness, and subsidiaries of the Company had outstanding indebtedness and other liabilities of approximately $57 million (excluding intracompany liabilities and liabilities of a type not required to be reflected as liabilities on the balance sheets of such subsidiaries in accordance with generally accepted accounting principles) to which the Notes would have been effectively subordinated. The Indenture will not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company or any of its subsidiaries can create, incur, assume or guarantee. See "Description of Notes -- Subordination." Trading.................... The Notes are expected to trade on the over-the-counter market. USE OF PROCEEDS The Company intends to use a majority of the net proceeds from the sale of the 2,000,000 shares of Common Stock and the $100 million principal amount of the Notes to repay a portion of the outstanding indebtedness incurred in connection with the acquisition of Zycon, and the remainder for general corporate purposes, which may include additional acquisitions. See "Use of Proceeds." 6 8 SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except ratio and per share data)
FISCAL YEAR ENDED, THREE MONTHS ENDED, --------------------------------------------------- -------------------------------------- OCTOBER 29, OCTOBER 28, OCTOBER 26, JANUARY 27, JANUARY 25, 1994 1995 1996 OCTOBER 26, 1996 1997(1) JANUARY 25, ----------- ----------- ----------- 1996 ----------- ----------- 1997 ------------ ------------ PRO FORMA(2) PRO FORMA(2) CONSOLIDATED STATEMENT OF OPERATIONS: Net sales................... $ 221,570 $ 265,168 $ 350,685 $570,345 $76,481 $ 111,536 $172,547 Gross profit................ 43,973 64,495 86,148 119,494 19,482 24,855 32,941 Write-off of acquired in- -- -- -- -- -- 78,000 -- process research and development............... Income (loss) from 16,482 33,906 51,532 64,968 11,534 (62,443) 18,637 operations................ Net income (loss)........... $ 9,943 $ 21,374 $ 32,014 $ 28,700 $ 7,191 $ (69,161) $ 8,275 Net income (loss) per $ .93 $ 1.98 $ 2.89 $ 2.59 $ .65 $ (6.64) $ .76 share(3).................. Weighted average shares 10,720 10,806 11,084 11,084 11,104 10,413 10,944 outstanding(3)............ OTHER DATA: Ratio of earnings to fixed 19.4x 66.2x 156.3x 4.1x 125.1x -- 4.1x charges(4)................ EBITDA(5)................... 30,704 48,812 70,375 91,906 15,582 21,818 26,002 Capital expenditures........ 19,510 28,865 54,998 107,154 13,713 11,011 17,939 Interest expense............ 891 537 338 16,197 95 933 4,669
JANUARY 25, 1997 -------------------------------------- ACTUAL AS ADJUSTED(6) ----------- ------------------------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................................... $ 22,072 $ 22,072 Total assets.................................................................. 448,554 452,154 Long-term debt and capital lease obligations, net of current portion.......... 228,168 130,362 Stockholders' investment...................................................... 71,057 172,463
- ------------ (1) Net loss for the three months ended January 25, 1997 includes a non-recurring write-off relating to the acquisition of Zycon for in-process research and development. Before deducting the non-recurring write-off, income from operations was $15,557,000, net income was $8,839,000, net income per share was $.81 (based on weighted average shares outstanding of approximately 10,944,000), and the ratio of earnings to fixed shares was 17.6x. (2) Gives effect to the acquisition of Zycon assuming such transaction had occurred on October 29, 1995. See the Company's unaudited Pro Forma Condensed Consolidated Financial Statements beginning on page F-23 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) See Note 1 of Notes to the Company's Consolidated Financial Statements for an explanation of the basis used to calculate net income (loss) per share. (4) Computed by dividing the sum of net income (loss), before deducting provisions for income taxes and fixed charges, by total fixed charges. Fixed charges consist of interest on debt and amortization of debt issuance costs and a portion of capital lease costs that is intended to represent interest expense. (5) EBITDA represents net income before interest, income taxes, depreciation and amortization, and write-off of acquired in-process research and development. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to the Company's ability to service debt. (6) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of Common Stock (at an assumed public offering price of $53.6875 per share) in the Common Stock Offering and the sale of $100 million of principal amount of Notes in the Note Offering, in each case less estimated underwriting discounts and commissions and offering expenses payable by the Company, and (ii) the application of the net proceeds from the Common Stock Offering and the Note Offering. See "Use of Proceeds." 7 9 RISK FACTORS This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth in the following risk factors and elsewhere in this Prospectus. In addition to the other information included or incorporated by reference in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock or the Notes offered hereby. DEPENDENCE ON ELECTRONICS INDUSTRY The Company's principal customers are electronics OEMs and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. These industry segments, and the electronics industry as a whole, are characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. Discontinuance or modifications of products containing components manufactured by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. Further, 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 or a downturn in the electronics industry would likely result in intensified price competition, reduced gross margins and a decrease in unit volume, all of which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Industry Overview and Trends" and "-- Markets and Customers." FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied and may continue to fluctuate significantly. At times in the past, the Company's net sales and net income have decreased from the prior quarter. Operating results are affected by a number of factors, including the timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter, trends in the electronics industry and general economic factors. In recent years, the Company's gross margins have varied primarily as a result of capacity utilization, product mix, lead times, volume levels and complexity of customer orders. There can be no assurance that the Company will be able to manage the utilization of manufacturing capacity or product mix in a manner that would maintain or improve gross margins or the Company's business, financial condition and results of operations. The timing and volume of orders placed by the Company's customers vary due to customer attempts to manage inventory, changes in customers' manufacturing strategies and variation in demand for customer products. An interruption in manufacturing resulting from shortages of parts or equipment, fire, earthquake or other natural disaster, equipment failure or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's expense levels are relatively fixed and are based, in part, on expectations of future revenues. Consequently, if revenue levels are below expectations, this occurrence is likely to materially adversely affect the Company's business, financial condition and results of operations. Results of operations in any period are not necessarily indicative of the results to be expected for any future period. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock and the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 10 VARIABILITY OF 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 the customers' manufacturing strategies and variation in demand for customer products due to, among other things, technological change, new product introductions, product life-cycles, competitive conditions or general economic conditions. Since the Company generally does not obtain long-term purchase orders or commitments from its customers, it must anticipate the future volume of orders based on discussions with its customers. A substantial portion of sales in a given quarter may depend on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. 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. A significant portion of the Company's released backlog at any time may be subject to cancellation or postponement without penalty. The Company cannot assure the timely replacement of canceled, delayed or reduced orders. Significant or numerous cancellations, reductions or delays in orders by a customer or group of customers could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Released Backlog." ACQUISITIONS The Company acquired 100% of the capital stock of Zycon, a manufacturer of electronic interconnect products, on January 10, 1997 (the "Zycon acquisition"). Zycon currently operates as a wholly-owned subsidiary of the Company. The Company has limited experience in integrating acquired companies or technologies into its operations. Therefore, there can be no assurance that the Company will operate the acquired business profitably during the next year or in the future. Contemporaneous with the Zycon acquisition, nine senior management personnel of Zycon were terminated. There can be no assurance that the Company will not be materially adversely affected by such terminations or that the Company will be able to retain key personnel at Zycon. Accordingly, operating expenses associated with the acquired business may have a material adverse effect on the Company's business, financial condition and results of operations in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- General." The Company may from time to time pursue the acquisition of other companies, assets, products or technologies. The Company may incur additional indebtedness in connection with a future business acquisition, and the incurrence of substantial amounts of debt in connection with future acquisitions could increase the risk of the Company's operations. If the Company's cash flow and existing working capital are not sufficient to fund its general working capital requirements or to service its indebtedness, the Company would have to raise additional funds through the sale of its equity securities, the refinancing of all or part of its indebtedness or the sale of assets or subsidiaries. There can be no assurance that any of these sources of funds would be available in amounts sufficient for the Company to meet its obligations. The cost of debt financing may also impair the ability of the Company to maintain adequate working capital or to make future acquisitions. In addition, the issuance of additional shares of Common Stock in connection with future acquisitions could be dilutive to existing investors. Acquisitions involve a number of operating risks that could materially adversely affect the Company's operating results, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, the amortization of acquired intangible assets, and the potential loss of key employees of the acquired companies. Furthermore, acquisitions may involve businesses in which the Company lacks experience. There can be no assurance that the Company will be able to manage one or more acquisitions successfully, or that the Company will be able to integrate the operations, products or personnel gained through any such acquisitions without a 9 11 material adverse effect on the Company's business, financial condition and results of operations. See "Business -- The Hadco Strategy." COMPETITION The electronic interconnect industry is highly fragmented and characterized by intense competition. The Company believes that its major competitors are the large U.S. and international independent and captive producers that also manufacture multilayer printed circuits and provide backplane and other electronic assemblies. Some of these competitors have significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than the Company. During periods of recession or economic slowdown in the electronics industry and other periods when excess capacity exists, electronics OEMs become more price sensitive, which could have a material adverse effect on interconnect pricing. In addition, the Company believes that price competition from printed circuit manufacturers in Asia and other locations with lower production costs may play an increasing role in the printed circuit markets in which the Company competes. The Company's basic interconnect technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. The demand for printed circuits has continued to be affected by the development of smaller, more powerful electronic components requiring less printed circuit area. Expansion of the Company's existing products or services could expose the Company to new competition. Moreover, new developments in the electronics industry could render existing technology obsolete or less competitive and could potentially introduce new competition into the industry. There can be no assurance that the Company will continue to compete successfully against present and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry Overview and Trends." TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION The market for the Company's products and services is characterized by rapidly changing technology and continuing process development. The future success of the Company's business will depend in large part upon its ability to maintain and enhance its technological capabilities, develop and market products and services that meet changing customer needs and successfully anticipate or respond to technological changes, on a cost-effective and timely basis. In addition, the electronic interconnect industry could in the future encounter competition from new technologies that render existing electronic interconnect technology less competitive or obsolete, including technologies that may reduce the number of printed circuits required in electronic components. There can be no assurance that the Company will effectively respond to the technological requirements of the changing market. To the extent the Company determines that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment are likely to continue to require significant capital investment by the Company. There can be no assurance that capital will be available for this purpose in the future or that investments in new technologies will result in commercially viable technological processes or that there will be commercial applications for these technologies. Moreover, the Company's business involves highly complex manufacturing processes that have in the past and could in the future be subject to periodic failure or disruption. Process disruptions can result in delays in certain product shipments. There can be no assurance that failures or disruptions will not occur in the future. The loss of revenue and earnings to the Company from such a technological change, process development or process disruption, as well as any disruption of the Company's operations resulting from a natural disaster such as an earthquake, fire 10 12 or flood, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry Overview and Trends," "-- The Hadco Strategy" and "-- Products and Services." MALAYSIA FACILITY Zycon recently completed construction of a volume manufacturing facility for printed circuits in Malaysia. Hadco'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. The Company expects that the Malaysia facility will incur operating losses during future quarters of operations as a result of various factors, including, without limitation, initial operating inefficiencies, other start-up costs, and price competition for the products which the Company intends to produce at the new facility. Losses incurred in its Malaysia operations will not be deductible for United States income tax purposes. International operations are also subject to a number of risks, including unforeseen changes in regulatory requirements, exchange rates, tariffs and other trade barriers, misappropriation of intellectual property, currency fluctuations, and political and economic instability. CUSTOMER CONCENTRATION During the past several years, the Company's sales to a small number of its customers have accounted for a significant percentage of the Company's annual net sales. During fiscal 1994, 1995 and 1996, the Company's ten largest customers accounted for approximately 48%, 46% and 48% of net sales, respectively, and 43% in fiscal 1996 on a pro forma basis including Zycon. In fiscal 1996, Sun Microsystems accounted for approximately 10% of the net sales of the Company (including Zycon). Given the Company's strategy of developing long-term relationships with high growth companies, the Company's dependence on a number of its most significant customers may increase. There can be no assurance that the Company will be able to identify, attract and retain customers with high growth rates or that the customers that it does attract and retain will continue to grow. Although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, the Company expects to continue to depend upon its principal customers for a significant portion of its net sales. The loss of or decrease in orders from one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Markets and Customers." MANUFACTURING CAPACITY The Company believes its long-term competitive position depends in part on its ability to increase manufacturing capacity. The Company may obtain such additional capacity through acquisitions or expansion of its current facilities. Either approach would require substantial additional capital, and there can be no assurance that such capital will be available from cash generated by current operations. Further, there can be no assurance that the Company will be able to acquire sufficient capacity or successfully integrate and manage such additional facilities. In addition, the Company's expansion of its manufacturing capacity has significantly increased 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 failure to obtain sufficient capacity or to successfully integrate and manage additional manufacturing facilities could adversely impact the Company's relationships with its customers and materially adversely affect the Company's business, financial condition and results of operations. The Company has a large manufacturing facility in Santa Clara, California, and an earthquake or other natural disaster in that area that results in an interruption of manufacturing at such facility would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing and Facilities." 11 13 MANAGEMENT OF GROWTH The Company has initiated significant expansion, including geographic expansion, of its operations, which has placed, and will continue to place, significant demands on the Company's management, operational, technical and financial resources. These demands are compounded by the Zycon acquisition. See "-- Acquisitions." The Company expects that expansion will require additional management personnel and the development of further expertise by existing management personnel. The Company's ability to manage growth effectively, particularly given the increasing scope of its operations, will require it to continue to implement and improve its operational, financial and management information systems as well as to further develop the management skills of its managers and supervisors and to train, motivate and manage its employees. The Company's failure to effectively manage future growth, if any, could have a material adverse effect on the Company's business, financial condition and results of operations. Competition for personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future, especially engineering personnel. The failure to hire and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL MATTERS The Company is subject to a variety of local, state and federal environmental laws and regulations relating to the storage, use, discharge and disposal of chemicals, solid waste and other hazardous materials used during its manufacturing process, as well as air quality regulations and restrictions on water use. When violations of environmental laws occur, the Company can be held liable for damages and the costs of remedial actions and can also be subject to revocation of permits necessary to conduct its business. Any such revocations could require the Company to cease or limit production at one or more of its facilities, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's failure to comply with present and future regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. The Company operates in several environmentally sensitive locations and is subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes or restrictions on discharge limits, emissions levels, or material storage or handling might require a high level of unplanned capital investment and/or relocation. There can be no assurance that compliance with new or existing regulations will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Environmental Matters," "-- Legal Proceedings" and Note 9 of Notes to the Company's Consolidated Financial Statements. AVAILABILITY OF RAW MATERIALS AND COMPONENTS While the Company has not entered into any supply agreements and does not have any guaranteed sources of raw materials or components, it routinely purchases raw materials and components from several key material suppliers. Although alternative material suppliers are currently available, a significant unplanned event at a major supplier could have a material adverse effect on the Company's operations. Zycon has experienced shortages of certain types of raw materials in the past. The potential exists for shortages of certain types of raw materials or components and any such future shortages or price fluctuations in raw materials could have a material adverse effect on the Company's manufacturing operations and future unit costs, thereby materially adversely affecting the Company's business, financial condition and results of operations. Product changes and the overall demand for electronic interconnect products could increase the industry's use of new laminate materials, standard laminate materials, multilayer blanks, electronic components and other materials, and therefore such 12 14 materials may not be readily available to the Company in the future. Electronic components used by the Company in producing backplane assemblies are purchased by the Company and, in certain circumstances, the Company may bear the risk of component price fluctuations. There can be no assurance that shortages of certain types of electronic components will not occur in the future. Component shortages or price fluctuations could have a material adverse effect on the Company's backplane assembly business, thereby materially adversely affecting the Company's business, financial condition and results of operations. To the extent that the Company's backplane assembly business expands as a percentage of the Company's net sales, component shortages and price fluctuations could, to a greater extent, materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Supplier Relationships." DEPENDENCE ON KEY PERSONNEL The Company's future success depends to a large extent upon the continued services of key managerial and technical employees, none of whom, except for the President/Chief Executive Officer, is bound by an employment agreement or a non-competition agreement. The President/Chief Executive Officer's non-competition agreement is for one year after the termination of his employment with the Company. The loss of the services of any of the Company's key employees could have a material adverse effect on the Company. The Company believes that its future success depends on its continuing ability to attract and retain highly qualified technical, managerial and marketing personnel. Competition for such personnel is intense, especially for engineering personnel, and there can be no assurance that the Company will be able to attract, assimilate or retain such personnel. If the Company is unable to hire and retain key personnel, the Company's business, financial condition and results of operations may be materially adversely affected. See "Management." INTELLECTUAL PROPERTY The Company's success depends in part on its proprietary techniques and manufacturing expertise, particularly in the area of complex multilayer printed circuits. The Company has few patents and relies primarily on trade secret protection of its intellectual property. There can be no assurance that the Company will be able to protect its trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. In addition, litigation may be necessary to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of patent infringement. If any infringement claim is asserted against the Company, the Company may seek to obtain a license of the other party's intellectual property rights. There is no assurance that a license would be available on reasonable terms or at all. Litigation with respect to patents or other intellectual property matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company's business, financial condition and results of operations. SUBORDINATION OF NOTES AND ABSENCE OF FINANCIAL COVENANTS The Notes will be unsecured and subordinated in right of payment in full to all existing and future Senior Indebtedness (as defined) of the Company and will be effectively subordinated with respect to the assets and earnings of the Company's subsidiaries to all indebtedness and other liabilities of such subsidiaries. As of January 25, 1997, the Company had approximately $218 million of outstanding indebtedness that would have constituted Senior Indebtedness, and subsidiaries of the Company had outstanding indebtedness and other liabilities aggregating approximately $57 million (excluding intracompany liabilities and liabilities of a type not required to be reflected as liabilities on the balance sheet of such subsidiaries in accordance with generally accepted accounting principles) to which the Notes would have been effectively subordinated. The Indenture will not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company or any of its subsidiaries can create, incur, assume or guarantee. During the continuance beyond any applicable grace period of any default 13 15 of the payment of principal, premium, if any, interest or any other payment due on any Senior Indebtedness and upon notice by holders of Designated Senior Indebtedness (as defined) to the Trustee of a covenant default on Designated Senior Indebtedness, no payment of principal, or premium, if any, or interest on the Notes (including, but not limited to the redemption price or repurchase price with respect to the Notes) may be made by the Company. In addition, upon any distribution of assets of the Company pursuant to any dissolution, winding up, liquidation or reorganization, or acceleration of the maturity of the Notes as a result of an Event of Default (as defined), the payment of the principal of, or premium, if any, and interest on the Notes is subordinated to the extent provided in the Indenture to the prior payment in full of all Senior Indebtedness. By reason of the subordination, in the event of the Company's liquidation or dissolution, holders of Senior Indebtedness may receive more, ratably, and holders of the Notes may receive less, ratably, than the other creditors of the Company. The Notes are obligations exclusively of the Company. As a significant portion of the Company's consolidated operations is conducted through subsidiaries, the cash flow and the consequent ability to service debt, including the Notes, of the Company is partially dependent upon the earnings of such subsidiaries and the distribution of those earnings, or upon loans or other payments of funds by those subsidiaries, to the Company. Such subsidiaries are separate and distinct legal entities, and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor, whether by dividends, distributions, loans or other payments. In addition, the payment of dividends or distributions and the making of loans and advances to the Company by any such subsidiaries may be subject to statutory or contractual restrictions, and may be contingent upon the earnings of those subsidiaries and subject to various business considerations. Any right of the Company to receive assets of subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in these assets) would be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. See "Description of Notes -- Subordination." The Indenture does not contain any financial performance covenants. Consequently, the Company is not required under the Indenture to meet any financial tests such as those that measure the Company's working capital, interest coverage, fixed charge coverage or net worth in order to maintain compliance with the terms of the Indenture. No sinking fund is provided for the Notes. LIMITATIONS ON REPURCHASE OF NOTES UPON A DESIGNATED EVENT In the event of a Designated Event, each holder may require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the repurchase date. If a Designated Event were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all Notes tendered by the holders thereof. The Company's repurchase of Notes, absent a waiver, would constitute a default under the terms of the Company's senior revolving credit loan facility with The First National Bank of Boston. In addition, the Company's repurchase of Notes as a result of the occurrence of a Designated Event may be prohibited or limited by the subordination provisions applicable to the Notes, or be prohibited or limited by, or create an event of default under, the terms of other agreements relating to borrowings which constitute Senior Indebtedness as may be entered into, amended, supplemented or replaced from time to time. Failure of the Company to repurchase Notes at the option of the holder upon a Designated Event would result in an Event of Default under the Indenture. The Notes may not be repurchased at the option of holders following a Designated Event if there has occurred and is continuing an Event of Default (other than a default in the payment of the repurchase price with respect to such Notes on the repurchase date). See "Description of Notes -- Repurchase at Option of Holders Upon a Designated Event." 14 16 ABSENCE OF PUBLIC MARKET FOR THE NOTES; VOLATILITY OF THE NOTES Prior to the Note Offering, there has been no trading market for the Notes. The Company expects that the Notes will trade on the over-the-counter market. However, there can be no assurance that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. Robertson, Stephens & Company LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated have advised the Company that they currently intend to make a market in the Notes, but they are not obligated to do so and may discontinue such market making at any time. There can be no assurance that an active market for the Notes will develop and continue upon completion of the Note Offering or that the market price of the Notes will not decline. Various factors such as changes in prevailing interest rates or changes in perceptions of the Company's creditworthiness could cause the market price of the Notes to fluctuate significantly. The trading price of the Notes could also be significantly affected by the market price of the Common Stock, which could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results, announcements of technological innovations or new products by the Company, its customers or its competitors, developments in patents or other intellectual property rights, general conditions in the electronics industry and general economic and market conditions. Factors creating volatility in the trading prices of the Common Stock could have a significant impact on the trading price of the Notes. VOLATILITY OF STOCK PRICE The Company's Common Stock has experienced significant price volatility historically, and such volatility may continue to occur in the future. Factors such as announcements of large customer orders, order cancellations, new product introductions by the Company or competitors or general conditions in the electronics industry, as well as quarterly variations in the Company's actual or anticipated results of operations, may cause the market price of the Company's Common Stock to fluctuate significantly. Furthermore, the stock market has experienced extreme price and volume fluctuations in recent years, which has had a substantial effect on the market price for securities issued by many technology companies, often for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may materially adversely affect the price of the Company's Common Stock. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. ANTI-TAKEOVER PROVISIONS The Company's Stockholder Rights Plan and certain provisions of the Company's Restated Articles of Organization and By-Laws and of Massachusetts Law, including Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions" and Chapter 110F, the so-called Business Combination Statute, could discourage potential acquisition proposals and could delay or prevent a change in control or sale of the Company. The rights of holders of Notes to require the Company to repurchase Notes under certain circumstances could also have the same effect. Each and all of the above provisions, statutes and rights could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of Common Stock and may render more difficult or discourage a merger, consolidation or tender offer (even if such transaction is supported by the Company's Board of Directors or is favorable to the stockholders), the assumption of control by a holder of a large block of the Company's shares, and the removal of incumbent management. See "Description of Capital Stock" and "Description of Notes -- Repurchase at Option of Holders Upon a Designated Event." 15 17 USE OF PROCEEDS The net proceeds to the Company from the sale of 2,000,000 shares of Common Stock (at an assumed public offering price of $53.6875 per share) and $100 million principal amount of the Notes, in each case less estimated underwriting discounts and commissions and offering expenses payable by the Company, are estimated to be approximately $101.4 million and $96.4 million, respectively, for an aggregate of approximately $197.8 million ($106.4 million and $111.0 million, respectively, for an aggregate of approximately $217.4 million, if the Underwriters' over-allotment options are exercised in full). Neither the closing of the Common Stock Offering nor the closing of the Note Offering is conditioned on the closing of the other offering. The Company expects to use a majority of the net proceeds to repay a portion of the outstanding balance on its senior revolving credit loan facility with The First National Bank of Boston (the "Credit Facility"). The Company obtained the Credit Facility (i) primarily to finance the purchase of the shares of Common Stock of Zycon pursuant to the tender offer completed by the Company on January 10, 1997, (ii) to refinance Zycon's existing bank credit agreements, and (iii) for working capital and other general corporate purposes. Pursuant to the terms of the Credit Facility, the Company may be required to use $50 million from the net proceeds of the Note Offering to repay a portion of the outstanding balance thereunder. As of January 25, 1997, the amount outstanding under the Credit Facility was $215 million. Interest on loans outstanding under the Credit Facility is, at the Company's election, payable at either (i) the higher of the lender's base rate, or a floating rate equal to 1.5% over the prevailing U.S. federal funds rate, or (ii) a Eurodollar Rate, which is a fixed rate equal to an applicable Eurodollar rate margin plus the prevailing Eurodollar rate for interest periods of one, two, three or six months. As of January 25, 1997, the weighted average interest rate on loans outstanding under the Credit Facility was 6.68%. The Credit Facility matures in January 2002. The remaining net proceeds will be used for general corporate purposes, including working capital, product development and capital expenditures. A portion of the net proceeds may also be used for the acquisition of companies, assets, products or technologies. As of the date of this Prospectus, the Company has no commitments or agreements with respect to any significant acquisitions, and no portion of the net proceeds has been allocated for any specific acquisition. DIVIDEND POLICY The Company has never declared or paid a cash dividend on its Common Stock, and it is currently anticipated that the Company will continue to retain its earnings for use in its business and not pay cash dividends. The Company's Credit Facility currently contains a covenant prohibiting the Company from paying a cash dividend. 16 18 PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "HDCO." The following table sets forth, for the periods indicated, the range of high and low sale prices for the Company's Common Stock on the Nasdaq National Market.
HIGH LOW ---- --- Fiscal 1995 First Quarter....................................................... $ 9 5/8 $8 Second Quarter...................................................... 18 1/8 8 7/8 Third Quarter....................................................... 32 1/8 15 3/8 Fourth Quarter...................................................... 33 1/4 22 1/2 Fiscal 1996 First Quarter....................................................... 34 15/16 21 1/4 Second Quarter...................................................... 35 3/4 23 3/4 Third Quarter....................................................... 30 3/4 18 1/4 Fourth Quarter...................................................... 34 1/8 18 1/2 Fiscal 1997 First Quarter....................................................... 59 1/8 27 3/8 Second Quarter (through February 13, 1997).......................... 57 1/8 49
As of February 13, 1997, there were approximately 331 holders of record of the Common Stock. On February 13, 1997, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $53.6875 per share. 17 19 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of January 25, 1997, and as adjusted to reflect (i) the sale by the Company of 2,000,000 shares of Common Stock (at an assumed public offering price of $53.6875 per share) in the Common Stock Offering and the sale of $100 million aggregate principal amount of Notes in the Note Offering, in each case less estimated underwriting discounts and commissions and offering expenses payable by the Company, and (ii) the application of the net proceeds from the Common Stock Offering and the Note Offering:
JANUARY 25, 1997 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (In thousands) Short-term debt and current portion of long-term debt and capital lease obligations.................................................. $ 8,116 $ 8,116 ======== ======== Long-term debt: Long term debt and capital lease obligations, net of current portion......................................................... 228,168 30,362 % Convertible Subordinated Notes due 2004........................ -- 100,000 Stockholders' investment: Common Stock, $0.05 par value, 25,000,000 shares authorized; 10,444,188 shares issued; 12,444,188 shares issued, as adjusted(1)..................................................... 523 623 Paid-in capital.................................................... 32,283 133,589 Deferred compensation.............................................. (209) (209) Retained earnings.................................................. 38,460 38,460 -------- -------- Total stockholders' investment................................ 71,057 172,463 -------- -------- Total capitalization....................................... $299,225 $ 302,825 ======== ========
- ------------ (1) Excludes options outstanding as of January 25, 1997 to acquire 1,219,829 shares of Common Stock at a weighted average exercise price of $15.06 per share and an additional 843,000 shares of Common Stock reserved for issuance under the Company's stock option plans. See Note 10 of Notes to the Company's Consolidated Financial Statements. Also excludes shares of Common Stock issuable upon conversion of the Notes. 18 20 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial data for Hadco and subsidiaries. The selected consolidated financial data for each of the years ended October 31, 1992, October 30, 1993, October 29, 1994, October 28, 1995 and October 26, 1996 have been derived from the Company's Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data for the three months ended January 27, 1996 and January 25, 1997 have been derived from the Company's unaudited Consolidated Financial Statements, which reflect in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The results for the three months ended January 25, 1997 are not necessarily indicative of results for any future period. The pro forma statements of operations data for the year ended October 26, 1996 and the three months ended January 25, 1997 have been derived from the Pro Forma Condensed Consolidated Financial Statements included elsewhere in this Prospectus. The pro forma statements of operations data are not necessarily indicative of the actual results that would have been achieved had the Zycon acquisition occurred at the beginning of the respective periods nor do they purport to indicate the results of future operations of the Company. The selected consolidated financial data should be read in conjunction with the Company's and Zycon's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEAR ENDED, THREE MONTHS ENDED, --------------------------------------------------------------------- ------------------------------------ OCT. 31, OCT. 30, OCT. 29, OCT. 28, OCT. 26, OCT. 26, JAN. 27, JAN. 25, JAN. 25, 1992 1993 1994 1995 1996 1996 1996 1997(1) 1997 -------- -------- -------- -------- -------- -------------- -------- -------- -------------- PRO FORMA(2) PRO FORMA(2) (In thousands, except ratio and per share data) CONSOLIDATED STATEMENT OF OPERATIONS: Net sales.......... $183,408 $189,494 $221,570 $265,168 $350,685 $570,345 $76,481 $111,536 $172,547 Gross profit....... 34,160 35,393 43,973 64,495 86,148 119,494 19,482 24,855 32,941 Write-off of acquired in-process research and development...... -- -- -- -- -- -- -- 78,000 -- Income (loss) from operations....... 13,404 13,710 16,482 33,906 51,532 64,968 11,534 (62,443) 18,637 Net income (loss)........... $ 8,075 $ 8,227 $ 9,943 $ 21,374 $ 32,014 $ 28,700 $ 7,191 $(69,161) $ 8,275 Net income (loss) per share(3)..... $ .75 $ .76 $ .93 $ 1.98 $ 2.89 $ 2.59 $ .65 $ (6.64) $ .76 Weighted average shares outstanding(3)... 10,808 10,819 10,720 10,806 11,084 11,084 11,104 10,413 10,944 OTHER DATA: Ratio of earnings to fixed charges(4)....... 6.9x 10.2x 19.4x 66.2x 156.3x 4.1x 125.1 x -- 4.1x EBITDA(5).......... 26,974 25,378 30,704 48,812 70,375 91,906 15,582 21,818 26,002 Capital expenditures..... 10,854 10,978 19,510 28,865 54,998 107,154 13,713 11,011 17,939 Interest expense... 2,045 1,402 891 537 338 16,197 95 933 4,669
JANUARY 25, 1997 OCT. 31, OCT. 30, OCT. 29, OCT. 28, OCT. 26, ------------------------- 1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(6) -------- -------- -------- -------- -------- -------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital................................ $ 25,215 $ 30,593 $ 31,829 $ 41,043 $ 43,561 $ 22,072 $ 22,072 Total assets................................... 104,035 110,782 126,326 162,991 219,501 448,554 452,154 Long-term debt and capital lease obligations, net of current portion....................... 11,046 9,382 4,526 2,387 1,515 228,168 130,362 Stockholders' investment....................... 59,363 68,431 77,440 100,774 138,841 71,057 172,463
19 21 - ------------ (1) Net loss for the three months ended January 25, 1997 includes a non-recurring write-off relating to the acquisition of Zycon for in-process research and development. Before deducting the non-recurring write-off, income from operations was $15,557,000, net income was $8,839,000, net income per share was $.81 (based on weighted average shares outstanding of approximately 10,944,000), and the ratio of earnings to fixed charges was 17.6x. (2) Gives effect to the acquisition of Zycon assuming such transaction had occurred on October 29, 1995. See the Company's unaudited Pro Forma Condensed Consolidated Financial Statements beginning on page F-23 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) See Note 1 of Notes to the Company's Consolidated Financial Statements for an explanation of the basis used to calculate net income (loss) per share. (4) Computed by dividing the sum of net income (loss), before deducting provisions for income taxes and fixed charges, by total fixed charges. Fixed charges consist of interest on debt and amortization of debt issuance costs and a portion of capital lease costs that is intended to represent interest expense. (5) EBITDA represents net income before interest, income taxes, depreciation and amortization, and write-off of acquired in-process research and development. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to the Company's ability to service debt. (6) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of Common Stock (at an assumed public offering price of $53.6875 per share) in the Common Stock Offering and the sale of $100 million of principal amount of Notes in the Note Offering, in each case less estimated underwriting discounts and commissions and offering expenses payable by the Company, and (ii) the application of the net proceeds from the Common Stock Offering and the Note Offering. See "Use of Proceeds." 20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under "Risk Factors" and elsewhere in this Prospectus. As used herein, the terms "Company" and "Hadco," unless otherwise indicated or the context otherwise requires, refer to Hadco Corporation and its subsidiaries, including Zycon. However, all financial information for periods ended prior to January 10, 1997, unless otherwise indicated or the context otherwise requires, is for Hadco Corporation alone and does not include Zycon. OVERVIEW Hadco is the largest manufacturer of advanced electronic interconnect products in North America. The Company offers a wide array of sophisticated manufacturing, engineering and systems integration services to meet its customers' electronic interconnect needs. The Company's principal products are complex multilayer printed circuits and backplane assemblies. Hadco's customers are a diverse group of electronics OEMs and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. The Company was incorporated in 1966 and began operations in Cambridge, Massachusetts as a manufacturer of single and double-sided printed circuits. A 16,000 square foot printed circuit facility was constructed in 1969 in Derry, New Hampshire, and the Company added multilayer printed circuits to its product offering in 1975. In 1979, the Company acquired a 33,000 square foot printed circuit facility in Owego, New York. In 1981, the Company added to its double-sided and multilayer printed circuit product offerings with the construction of Tech Center One in Salem, New Hampshire, a quick-turn prototype operation to serve the prototype printed circuit needs of OEMs. In 1982, the Company began backplane assembly operations in Salem, New Hampshire. In 1983, the Company expanded further by adding a second Tech Center in the Silicon Valley area. In 1984, the Company completed an initial public offering of its Common Stock. By fiscal 1991, net sales of the Company were $153 million and grew to $351 million in fiscal 1996, $570 million on a pro forma basis including Zycon. During this period, the printed circuit industry experienced an increasing demand for complex products that required a significant investment in facilities. The Company (including Zycon) has invested approximately $235 million in state-of-the-art production facilities and new technologies during the past five fiscal years. ZYCON ACQUISITION On January 10, 1997, the Company purchased Zycon. The acquisition added state-of-the-art facilities for volume production of complex printed circuits and backplane assemblies in the Silicon Valley area, a quick-turn prototype and design facility in Massachusetts, and a newly constructed facility for volume production of printed circuits in Malaysia. With this acquisition, Hadco became the largest manufacturer of advanced electronic interconnect products in North America. Hadco acquired Zycon for $212 million and recorded the acquisition under the purchase method of accounting. As a result, a purchase price premium of $187 million was recorded on the transaction. Approximately $78 million of the premium was written off as acquired in-process research and development with no alternative future use as a non-recurring write-off to net income for the three months ended January 25, 1997. The remaining premium of $109 million was allocated to identifiable intangibles and goodwill, and will be written off over 12 to 30 years, with an average amortization period of 17 years. The acquisition was financed from a $250 million senior revolving credit facility, plus existing cash and short-term investments. 21 23 The gross profit margin for Hadco for the fiscal year ended October 26, 1996 was 24.6%. The gross profit margin for Zycon for the fiscal year ended December 31, 1996 was 15.2%. As a result of the Zycon acquisition, the Company expects that its gross profit margin will be lower in future quarters than has historically been the case for Hadco. RESULTS OF OPERATIONS The following table sets forth certain Consolidated Statements of Operations data and other data as a percentage of net sales. The table and the discussion below should be read in conjunction with the Company's and Zycon's Consolidated Financial Statements and Notes thereto, that appear elsewhere in this Prospectus.
FISCAL YEAR ENDED, THREE MONTHS ENDED, ------------------------------------------------ ------------------------------------ OCT. 29, OCT. 28, OCT. 26, OCT. 26, JAN. 27, JAN. 25, JAN. 25, 1994 1995 1996 1996 1996 1997(1) 1997 -------- -------- -------- ------------ -------- -------- ------------ PRO FORMA(2) PRO FORMA(2) CONSOLIDATED STATEMENT OF OPERATIONS: Net sales............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales......... 80.2 75.7 75.4 79.0 74.5 77.7 80.9 -------- -------- -------- ------ -------- -------- ------ Gross profit.......... 19.8 24.3 24.6 21.0 25.5 22.3 19.1 Selling, general and administrative expenses............ 12.4 11.5 9.9 8.5 10.4 8.4 7.4 Write-off of acquired in-process research and development..... -- -- -- -- -- 69.9 -- Amortization of acquired intangible assets.............. -- -- -- 1.1 -- -- .9 -------- -------- -------- ------ -------- -------- ------ Income (loss) from operations.......... 7.4 12.8 14.7 11.4 15.1 (56.0) 10.8 Interest income (expense), net...... -- .4 .3 (2.6) .3 -- (2.4) -------- -------- -------- ------ -------- -------- ------ Income (loss) before provision for income taxes............... 7.4 13.2 15.0 8.8 15.4 (56.0) 8.4 Provision for income taxes............... 2.9 5.2 5.8 3.8 6.0 6.0 3.6 -------- -------- -------- ------ -------- -------- ------ Net income (loss)..... 4.5% 8.1% 9.1% 5.0% 9.4% (62.0)% 4.8% ======= ======= ======= ============ ====== ====== ============ OTHER DATA: EBITDA(3)............. 13.9% 18.4% 20.1% 16.1% 20.4% 19.6% 15.1% Capital expenditures........ 8.8 10.9 15.7 18.8 17.9 9.9 10.4 Interest expense...... .4 .2 .1 2.8 .1 .8 2.7
- --------------- (1) Net loss for the three months ended January 25, 1997 includes a non-recurring write-off relating to the acquisition of Zycon for in-process research and development. As a percentage of net sales, income from operations was 13.9%, income before provision for income taxes was 13.9%, and net income was 7.9%, all before deducting the non-recurring write-off. (2) Gives effect to the acquisition of Zycon assuming such transaction had occurred on October 29, 1995. See the Company's unaudited Pro Forma Condensed Consolidated Financial Statements beginning on page F-23 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 22 24 (3) EBITDA represents net income before interest, income taxes, depreciation and amortization, and write-off of acquired in-process research and development. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to the Company's ability to service debt. THREE MONTHS ENDED JANUARY 25, 1997 AND JANUARY 27, 1996 Net sales for the three months ended January 25, 1997 increased 45.8% over net sales for the three months ended January 27, 1996. The increase resulted from several factors including the acquisition of Zycon, which added $11.6 million in printed circuit net sales after January 10, 1997, and an increase in both backplane assembly and printed circuit net sales excluding Zycon. Backplane assembly net sales increased due to higher product volume and shipments. Printed circuit net sales increased due to higher production volume and shipments and a shift towards products with more layers and greater densities. The increase in printed circuit net sales was partially offset by a decrease in average pricing of 3.2%. Net sales from backplane assemblies increased to 16.3% of total net sales, from 10.5% in the first three months of fiscal 1996. The gross profit margin decreased to 22.3% in the three months ended January 25, 1997 from 25.5% in the comparable period in fiscal 1996. The decrease resulted from increased investment in new capacity at certain facilities, lower overall gross margins from the Zycon operations (including ongoing start-up expenses associated with the volume production facility in Malaysia) and the change in product mix related to the increase in backplane assembly operations. Selling, general and administrative (SG&A) expenses, as a percent of net sales, decreased to 8.3% in the three months ended January 25, 1997 from 10.4% in the comparable period in fiscal 1996, due to increased net sales and the fixed nature of the Company's SG&A expenses. Income from operations for the three months ended January 25, 1997 was reduced by $78 million due to a non-recurring write-off relating to acquired in-process research and development recorded in connection with the Zycon acquisition. The remaining goodwill and purchased intangibles will be amortized over 12 to 30 years, with an average amortization period of 17 years, which will reduce income from operations by approximately $1.6 million per fiscal quarter. For the three months ended January 25, 1997, income from operations was reduced by goodwill and purchased intangibles amortization of $270,000, which represented the amortization for the 15 day period following the Zycon acquisition. Excluding the non-recurring write-off of $78 million for acquired in-process research and development, operating margins decreased slightly to 13.9% for the three months ended January 25, 1997 from 15.1% in the comparable period in fiscal 1996, primarily as a result of the same factors affecting gross profit margins, and of goodwill amortization from the Zycon acquisition. Interest income increased in the three months ended January 25, 1997 as compared to the three months ended January 27, 1996, due to higher daily average cash balances available for investing. Interest expense increased in the three months ended January 25, 1997 as compared to the three months ended January 27, 1996, due to an increase in outstanding debt as a result of the Zycon acquisition. In accordance with generally accepted accounting principles, the Company provides for income taxes on an interim basis, using its effective annual income tax rate. Although the Company has incurred a loss before income taxes during the three months ended January 25, 1997, the Company has recorded an income tax provision because the write-off of acquired in-process research and development is not deductible for income tax purposes. Without taking into consideration the write-off of acquired in-process research and development, the Company anticipates an effective annual income tax rate for fiscal 1997 of 43%, which is more than the expected combined federal and state statutory rates. This difference is caused primarily by anticipated losses incurred by the Company's Malaysian 23 25 volume production facility which are not tax deductible. These items are partially offset by tax advantaged investment income, the tax benefit of the Company's foreign sales corporation and various state investment tax credits. The effective tax rate for fiscal 1997 is based on current tax laws. The Company includes in SG&A expenses charges for actual expenditures and accruals, based on estimates, for environmental matters. To the extent and in amounts Hadco believes circumstances warrant, it will continue to accrue and charge to SG&A expenses cost estimates relating to environmental matters. The Company believes the ultimate disposition of known environmental matters will not have a material adverse effect upon the liquidity, capital resources, business or consolidated financial position of the Company. However, one or more of such environmental matters could have a significant negative impact on the Company's consolidated financial results for a particular reporting period. See "Business -- Environmental Matters," "-- Legal Proceedings" and Note 9 of Notes to the Company's Consolidated Financial Statements. The Company believes that excess capacity may exist in the printed circuit and electronic assembly industries, as well as fluctuating growth rates in the electronics industry as a whole. Both factors could have a material adverse effect on future orders and pricing. The Company also believes that the potential exists for a shortage of materials in such industries, which could have a material adverse effect on future unit costs. FISCAL YEARS ENDED OCTOBER 26, 1996 AND OCTOBER 28, 1995 Net sales during 1996 increased 32.3% over 1995. The change was due to a 15.1% increase in the volume of production and shipments and a shift in product mix to higher layer, higher density products, as compared to 1995. Average pricing per unit increased 6.1% compared to 1995. Sales of backplane and other electronic assemblies increased to 17% of the Company's net sales in 1996, versus 7% for 1995. The gross profit margin increased to 24.6% in 1996 from 24.3% in 1995. The increase was a direct result of higher volume of shipments, an increase in the technology level of product mix, and improved pricing. These increases have been partially offset by increased costs relating to the implementation of new production lines and materials and the shift in mix to a higher level of value-added products. SG&A expenses, as a percent of net sales, decreased to 9.9% during 1996 from 11.5% during 1995, due to increased revenue. SG&A expenses increased to $34.6 million in 1996 from $30.6 million in 1995, primarily as a result of increased variable costs directly attributable to increased net sales. Included in SG&A expenses are charges for actual expenditures and accruals, based on estimates, for environmental matters. During 1996 and 1995, the Company made, and charged to SG&A expenses, actual payments of approximately $680,000 and $1,111,000 respectively, for environmental matters. In 1996 and 1995, the Company also accrued and charged to SG&A expenses of approximately $1,825,000 and $2,740,000, respectively, as cost estimates relating to known environmental matters. In 1996, interest income decreased as a result of lower cash balances available for investment. Interest expense decreased in 1996 from 1995 due to decreased average debt balances during the year. The annual effective tax rate for 1996 and 1995 was 39.0%, which was less than the then current combined federal and state statutory rates. This difference was caused primarily by tax advantaged investments and the tax benefits of a foreign sales corporation. FISCAL YEARS ENDED OCTOBER 28, 1995 AND OCTOBER 29, 1994 Net sales during 1995 increased 19.7% over the same period in 1994. The change was due to an 8.2% increase in the volume of production and shipments and a shift in product mix to higher layer, higher density products, as compared to fiscal 1994. Average pricing per unit increased 3.1% compared to the prior year. 24 26 The gross profit margin increased to 24.3% in 1995 from 19.8% in 1994. The increase was a direct result of higher volume of shipments, an increase in the technology level of product mix, improved pricing and improvements in operating efficiencies. Continued productivity improvements led to increased unit volume and lower unit costs. SG&A expenses, as a percent of net sales, decreased to 11.5% during 1995 from 12.4% during 1994, due to increased revenue. SG&A expenses increased to $30.6 million in 1995 from $27.5 million in 1994, as a result of increased variable costs directly attributable to increased net sales and charges for environmental related matters. Included in SG&A expenses are charges for actual expenditures and accruals, based on estimates, for environmental matters. During 1995 and 1994, the Company made, and charged to SG&A expenses, actual payments of approximately $1,111,000 and $1,040,000, respectively, for environmental matters. In 1995 and 1994, the Company also accrued and charged to SG&A expenses of approximately $2,740,000 and $2,100,000, respectively, as cost estimates relating to known environmental matters. In 1995, interest income increased as a result of higher rates of return earned on investments, and higher cash balances available for investment. Interest expense decreased in 1995 from 1994 due to decreased average debt balances during the year. The annual effective tax rate was 39.0% and 39.5% in 1995 and 1994, respectively, which was less than the then current combined federal and state statutory rates. This difference was caused primarily by tax advantaged investments and the tax benefits of a foreign sales corporation. QUARTERLY RESULTS The following table presents certain unaudited consolidated financial information for each of the Company's nine fiscal quarters for the period ended January 25, 1997, as well as certain of such information expressed as a percentage of net sales for the same period. Information for the three months ended January 25, 1997 includes the results of operations for Zycon from January 10, 1997, the date of the Zycon acquisition. In the opinion of management, this information has been prepared on the same basis as the audited Consolidated Financial Statements of the Company appearing elsewhere in this Prospectus and includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the quarterly results when read in conjunction with the Company's 25 27 Consolidated Financial Statements. The Company's operating results have been subject to fluctuations, and thus results for any quarter are not necessarily indicative of results for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------ JAN. APRIL JULY OCT. JAN. APRIL JULY OCT. 28, 29, 29, 28, 27, 27, 27, 26, JAN. 25, 1995 1995 1995 1995 1996 1996 1996 1996 1997(1) ------- ------- ------- ------- ------- ------- ------- ------- -------- (In thousands, except percentages and per share data) CONSOLIDATED STATEMENT OF OPERATIONS: Net sales.......... $56,825 $67,637 $67,752 $72,954 $76,481 $88,096 $88,225 $97,883 $111,536 Gross profit....... 11,292 16,261 17,540 19,402 19,482 21,893 21,451 23,322 24,855 Income (loss) from operations....... 4,770 8,342 9,821 10,973 11,534 12,703 12,910 14,385 (62,443) Net income (loss)........... 3,003 5,193 6,152 7,026 7,191 7,895 7,994 8,934 (69,161) Net income (loss) per share........ $.29 $.49 $.56 $.63 $.65 $.71 $.72 $.81 $(6.64) AS A PERCENTAGE OF NET SALES: Gross profit....... 19.9% 24.0% 25.9% 26.6% 25.5% 24.9% 24.3% 23.8% 22.3% Income (loss) from operations....... 8.4 12.3 14.5 15.0 15.1 14.4 14.6 14.7 (56.0) Net income (loss)........... 5.3 7.7 9.1 9.6 9.4 9.0 9.1 9.1 (62.0)
- ------------ (1) Net loss for the three months ended January 25, 1997 includes a non-recurring write-off relating to the acquisition of Zycon for in-process research and development. Income from operations was $15,557,000, net income was $8,839,000, net income per share was $.81 (based on weighted average shares outstanding of approximately 10,944,000), and, as a percentage of net sales, income from operations was 13.9% and net income was 7.9%, all before deducting the non-recurring write-off. The Company's results of operations have fluctuated and may continue to fluctuate from period to period, including on a quarterly basis. Variations in quick-turn prototype and volume production orders, in the average number of layers per printed circuit, and in the mix of products sold by the Company have significantly affected both net sales and gross profit. Gross profit declined to 22.3% in the three months ended January 25, 1997 from 26.6% in the three months ended October 28, 1995 primarily as a result of (i) costs related to increases in manufacturing capacity, (ii) an increase in backplane assembly net sales as a percentage of net sales, and (iii) factors related to the Zycon acquisition. Operating results generally may also be affected by other factors, including the receipt and shipment of large orders, plant utilization, product mix, manufacturing process yields, the timing of expenditures in anticipation of future sales, raw material availability, product and price competition, the length of sales cycles and economic conditions in the electronics industry. Many of these factors are outside the control of the Company. The Company does not obtain long term purchase orders or commitments from its customers, and a substantial portion of sales in a given quarter may depend on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. Sales for future quarters may not be predictable. 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. A significant portion of the Company's released backlog at any time may be subject to cancellation or postponement without penalty. The Company cannot assure the timely replacement of canceled, delayed or reduced orders. Significant or numerous cancellations, reductions or delays in orders by a customer or group of customers could materially adversely affect the Company's business, financial condition and results of operations. The Company's expense levels are relatively fixed and are based, in part, on expectations of future revenues. 26 28 Consequently, if revenue levels are below expectations, the Company's business, financial condition and results of operations are likely to be materially adversely affected. Due to all of the foregoing factors, it is likely that in some future quarter or quarters the Company's operating results may be below the expectations of securities analysts and investors. In such event, the price of the Company's Common Stock could likely be materially adversely affected. See "Risk Factors -- Fluctuations in Quarterly Operating Results." LIQUIDITY AND CAPITAL RESOURCES In fiscal 1996, the Company's financing requirements were satisfied principally from cash flows from operations. Cash provided by operating activities was approximately $55.6 million in fiscal 1996. These funds were sufficient to meet increased working capital needs, capital expenditures of approximately $54.0 million, and debt and lease payments of approximately $2.1 million in fiscal 1996. Cash provided by operating activities was approximately $8.3 million in the three months ended January 25, 1997. At January 25, 1997, the Company had working capital of approximately $22.1 million and a current ratio of 1.20, compared to working capital of approximately $41.7 million and a current ratio of 1.79 at January 27, 1996. Cash, cash equivalents and short-term investments at January 25, 1997 were approximately $12.1 million, a decrease of $22.6 million from approximately $34.7 million at January 27, 1996. The Company currently anticipates that its capital expenditures for fiscal 1997 will be in excess of $70 million, of which approximately $17.2 million represents commitments to purchase manufacturing equipment and leasehold improvements. The majority of these capital expenditures is expected to be completed by the end of fiscal 1997. The amount of these anticipated capital expenditures will frequently change based on future changes in business plans and conditions of the Company and changes in economic conditions. In January 1997, the Company obtained a senior revolving credit loan facility for up to $250 million from The First National Bank of Boston (the "Credit Facility") (i) primarily to finance the purchase of the shares of Common Stock of Zycon pursuant to the tender offer commenced by the Company on December 11, 1996, (ii) to refinance Zycon's existing bank credit agreements, and (iii) for working capital and other general corporate purposes. Interest on loans outstanding under the Credit Facility is, at the Company's election, payable at either (1) the higher of the lender's base rate or a floating rate equal to 1.5% over the prevailing U.S. federal funds rate, or (2) a Eurodollar Rate, which is a fixed rate equal to an applicable Eurodollar rate margin plus the prevailing Eurodollar rate for interest periods of one, two, three or six months. At January 25, 1997, $215 million was outstanding under the Credit Facility. The Credit Facility will terminate in five years. The Company currently expects that a majority of the net proceeds of the Common Stock Offering and the Note Offering will be used to repay a portion of the outstanding balance on the Credit Facility. The Company believes its existing working capital and borrowing capacity, coupled with the funds generated from the Company's operations, and the net proceeds from the Offerings, will be sufficient to fund its anticipated working capital, capital expenditure and debt payment requirements through fiscal 1997. Because the Company's capital requirements cannot be predicted with certainty, however, there is no assurance that the Company will not require additional financing during this period. There is no assurance that any additional financing will be available on terms satisfactory to the Company or not disadvantageous to the Company's securityholders, including those purchasing securities in the Offerings. 27 29 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under "Risk Factors" and elsewhere in this Prospectus. GENERAL Hadco is the largest manufacturer of advanced electronic interconnect products in North America. The Company offers a wide array of sophisticated manufacturing, engineering and systems integration services to meet its customers' electronic interconnect needs. The Company's principal products are complex multilayer rigid printed circuits and backplane assemblies. Hadco's largest customers include many of the leading and fastest growing companies in the electronics industry, such as Cabletron Systems, Cisco Systems, Intel, Solectron, Sun Microsystems and U.S. Robotics. Hadco's advanced manufacturing and assembly facilities are designed to meet the accelerated time-to-market and time-to-volume requirements of its customers whose markets and products are characterized by high growth rates, rapid technological advances and short product life-cycles. To this end, Hadco (including Zycon) has invested approximately $235 million in state-of-the-art production facilities and new technologies during the past five fiscal years. Hadco provides customers with a range of products and services that includes development, design, quick-turn prototype, pre-production, volume production and backplane assembly. Hadco is one of a small number of printed circuit manufacturers with the technology and advanced production facilities necessary to offer all of these services. The Company believes its combination of a broad product offering and advanced technology facilitates long-term relationships with existing customers, attracts new customers, helps customers meet their time-to-market and time-to-volume needs, and satisfies a larger share of customers' electronic interconnect requirements. Hadco's customers are a diverse group of electronics OEMs and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. Hadco (including Zycon) supplied its products and services to a diverse base of approximately 500 customers in fiscal 1996, including 77 customers with purchases in excess of $1 million. The Company's ten largest customers accounted for approximately 43% of net sales in fiscal 1996 on a pro forma basis including Zycon. Hadco acquired Zycon on January 10, 1997. This acquisition increased Hadco's net sales significantly, added approximately 600,000 square feet of manufacturing space (approximately a 100% increase) and substantially expanded the Company's manufacturing capabilities and geographic reach. The new manufacturing capabilities include state-of-the-art West Coast facilities for volume production of complex printed circuits and backplane assemblies, a quick-turn prototype and design facility on the East Coast, and a newly constructed facility for volume production in Malaysia. The acquisition of Zycon has also broadened the Company's customer base, expanded its involvement in many fast growing industry sectors, added new proprietary technologies, and increased its sales force. INDUSTRY OVERVIEW AND TRENDS Printed circuits are the basic platforms used to interconnect microprocessors, integrated circuits and other components essential to the functioning of electronic products. Printed circuits consist of a pattern of electrical traces etched from copper laminated on an insulated base that is typically composed of rigid fiberglass or thin flexible circuits. To meet the increasing requirements of OEMs and contract manufacturers, printed circuit manufacturers have developed more complex multilayer designs with surface mount and other attachment technologies, narrower widths and separations of copper traces, advanced materials, and smaller diameters of vias and through-holes to connect internal circuitry. Backplane assemblies are generally larger and thicker printed circuits on which connectors 28 30 are mounted to receive and interconnect printed circuits, integrated circuits and other electronic components. Electronic interconnect products are customized for specific electronic applications and are sold to OEMs and contract manufacturers in volumes that range from several units for prototypes and small quantities for pre-production to large quantities for volume production. In the 1980s, the electronic interconnect market was largely comprised of military and personal computer applications. However, the proliferation of electronics and the emergence of new technologies have significantly broadened this market and reduced the amplitude of interconnect industry cycles in the 1990s. Electronic interconnects such as rigid printed circuits, flexible circuits and backplane assemblies are now used in a wide variety of industries and products, including data communications/telecommunications, workstations, servers, personal computers, peripherals, industrial automation, instrumentation, medical, transportation and defense. As electronic products have become smaller and more complex, the manufacture of interconnect products has required increasingly sophisticated engineering and manufacturing expertise and substantial capital investment. These advanced manufacturing process and technology requirements have caused OEMs to rely more heavily on independent manufacturers and to reduce dependence on their internal captive facilities. Industry sources estimate that 85% of the domestic printed circuit market was served by independent manufacturers in 1996 (compared to 66% in 1991). Captive manufacturing facilities serve the remaining 15% of the market. Historically, electronics OEMs used independent printed circuit manufacturers as offload capacity for their captive facilities. During economic downturns, independent facilities lost production orders as captives produced a greater percentage of demand internally. However, as a result of outsourcing of OEM printed circuit production, the Company believes independents are less affected by unused captive capacity during market downturns than was previously the case. Industry sources estimate that in 1996 the world-wide market for rigid printed circuits was approximately $28.2 billion, and the domestic market for rigid printed circuits was approximately $7.1 billion. In addition, industry sources estimate that the market for more complex multilayer printed circuits (six layers and above) comprised approximately 45% of the total market in 1996, and has increased an average of 16% per year over the past two years. Despite its large size, the market for printed circuits remains highly fragmented. The Company believes that 9 North American rigid printed circuit manufacturers had annual sales in excess of $100 million in 1996, which together would represent approximately 32% of the rigid printed circuit market. According to industry sources, the domestic market for backplane assemblies was approximately $1.1 billion in 1995. This market is less fragmented than that of printed circuits. The Company estimates that the ten largest producers of backplane assemblies accounted for a majority of the backplane assembly production in 1996. As in the printed circuit market, OEMs have increasingly come to rely on independent producers of backplane assemblies, allowing OEMs to reduce their capital investments, improve inventory management and purchasing power and take advantage of the process technology expertise of manufacturing specialists. The Company considers the following trends important in understanding the electronic interconnect industry: Industry Consolidation. The Company believes the industry will continue to consolidate as a result of the substantial capital investment for advanced production facilities, engineering and manufacturing expertise and technology required to make increasingly sophisticated electronic interconnect products. The increased investment requirement for state-of-the-art production facilities has accelerated consolidation in the electronic interconnect industry and the exit of smaller companies. In addition, OEMs and contract manufacturers increasingly recognize that only a few suppliers of interconnect products can consistently provide timely delivery of required volumes of highly sophisticated electronic interconnect products. As a result, Hadco believes that companies with lesser 29 31 financial and technical resources are likely to exit the industry and larger interconnect companies with sufficient resources will continue to gain market share. Increasing Demand for Single Sourcing. To avoid delays and costs during the product life-cycle, OEMs are increasingly turning to suppliers capable of producing electronic interconnect products from development, design, quick-turn prototype and pre-production through volume production and backplane assembly. The accelerated time-to-market and time-to-volume needs of OEMs have resulted in increased collaboration with qualified suppliers capable of providing a broad and integrated offering. To meet their rapidly changing electronic interconnect requirements, many OEMs have moved to limit their vendor base to a smaller number of technically qualified suppliers capable of providing both quick-turn prototype and pre-production quantities as well as cost-competitive volume production quantities. New and Emerging Markets. The markets for electronic products are growing as a result of new product introductions, technological change, demands for a wider variety of electronic product features, and increasingly powerful and less expensive electronic components. New markets have emerged in computing, data communications/telecommunications and multimedia. Moreover, existing industries have significantly expanded applications in areas such as computer networking and peripherals, digital and mobile communications, video-on-demand, the Internet/World Wide Web, instrumentation and industrial controls. The Company believes these new and emerging electronic product markets and applications have also contributed to the reduction in the amplitude of the electronic interconnect industry cycles. Greater Demand for Complex Electronic Products. Advanced communication equipment, as well as next-generation computer chips and microprocessors, require interconnect systems that operate at greater speeds and higher frequencies with minimal signal loss and distortion. Further, electronics OEMs are designing more compact and portable high performance products. The complexity of these new products requires higher performance, smaller size, greater circuit and component density, and increased reliability. These requirements necessitate greater sophistication in printed circuit manufacturing and process technologies, including advanced materials, more layers, narrower line widths and spacing, smaller vias to connect internal circuitry, and more precise positioning of traces and pads to accommodate a greater density of surface mount components. These products require increasingly advanced packaging technologies, such as Multichip Module (MCM), Tape Automated Bonding (TAB), Direct Chip Attach (DCA) and Ball Grid Array (BGA), and high frequency materials. The trend toward increasingly sophisticated products also requires greater engineering support and investment in manufacturing and process technology for suppliers to produce high-quality electronic interconnect products on-time, in volume, and at acceptable cost. Shorter Product Life-Cycles for Electronic Products. Rapid changes in technology have significantly shortened the life-cycle of complex electronic products and placed increased pressure on OEMs to develop new products as quickly as possible. The time-to-market considerations of OEMs have increased emphasis on the engineering and quick-turn production of small unit volumes of electronic interconnects in the prototype development stage. In addition, the success of first-to-market products has heightened the emphasis on volume manufacturing expertise and technologically advanced manufacturing infrastructure. THE HADCO STRATEGY The Company's strategy is to increase sales and profitability by providing a wide range of electronic interconnect solutions and services to a broad and diversified customer base. Hadco assists customers in meeting their time-to-market and time-to-volume requirements by providing a broad and integrated offering (from development, design, quick-turn prototype and pre-production through volume production and backplane assembly). The Company believes this integrated offering gives it an important competitive advantage. 30 32 The Company's strategy is to capitalize on major industry trends as follows: Serve Diversified Customer Base in High Growth Segments. The Company concentrates its marketing efforts on OEMs and contract manufacturers in segments of the electronics market characterized by high growth, rapid technological advances, short product development cycles and accelerated time-to-market and time-to-volume requirements, such as the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. Hadco (including Zycon) supplied its products and services to a diverse base of approximately 500 customers in fiscal 1996, including 77 customers with purchases in excess of $1 million. The Company's ten largest customers accounted for approximately 43% of net sales in fiscal 1996 on a pro forma basis including Zycon. Provide a Broad and Integrated Offering. Hadco develops and maintains long-term customer relationships by providing a full range of integrated services, from development, design, quick-turn prototype and pre-production through volume production and backplane assembly. The Company believes its broad range of integrated services adds significant value to its customers by shortening their new product development cycles, helping them to meet their time-to-market and time-to-volume requirements, lowering manufacturing costs, and providing concentrated expertise. By offering development and design services, the Company also gains early access to volume production sales opportunities, and its relationships with volume production customers create additional quick-turn and development and design sales opportunities. Expand Backplane Assembly Operations. To extend its integrated offering, the Company expanded backplane assembly operations. The Company believes this investment will facilitate a broader range of manufacturing services, reduce customer costs and improve product quality. With this backplane assembly expansion, the Company intends to position itself to capture an increasing share of the interconnect requirements of its customers. Maintain High Levels of Investment. Hadco believes its financial strength allows it to maintain leadership positions in advanced materials, process technologies and packaging through both its development activities and acquisitions. The Company (including Zycon) has invested approximately $235 million in state-of-the-art production facilities and new technologies during the past five fiscal years. These investments have increased capacity and operating efficiencies, improved management control and provided more consistent product quality. As a result, the Company believes it has become one of the few interconnect manufacturers capable of satisfying volume production, time-to-market, time-to-volume, and technology requirements of customers in the electronic interconnect industry. Develop Advanced Manufacturing and Process Technologies. The Company is committed to being a leader in the manufacture of advanced materials and the development of sophisticated process technologies in the electronic interconnect industry. The Company has invested in leading process technologies that enable it to cost-effectively produce high quality and technologically advanced products, thereby attracting fast growing technology customers. The Company believes its manufacturing and process capabilities provide a competitive advantage in the manufacture of complex interconnect products. Increase Geographic Reach. Hadco believes it is the only independent North American printed circuit manufacturer with a full service offering of quick-turn and volume printed circuit manufacturing and backplane assembly on both the East and West Coasts. In addition, its volume production facility in Malaysia, which recently commenced operations, is intended to provide the Company with access to U.S. customers expanding into Asian markets. The Company also intends to broaden its European and other international sales. Pursue Strategic Acquisitions. The January 1997 acquisition of Zycon provided Hadco with state-of-the-art volume printed circuit manufacturing and backplane assembly facilities on the West Coast, a new volume production facility in Malaysia, a quick-turn prototype and design facility on the East 31 33 Coast, a broader customer base, new proprietary technologies, and additional sales personnel. The Company will consider other strategic acquisitions of companies and technologies that enhance its competitive position. PRODUCTS AND SERVICES The Company's products and services are designed to meet its customers' interconnect needs for complex multilayer printed circuits and backplane assemblies. Hadco offers complementary processes and capabilities that span the period from product conception through delivery of volume products. The Company's offering includes the following: Development. Through development groups located at various facilities, Hadco identifies, develops and markets new technologies that benefit its customers. These development groups work closely with customers during all stages of product life-cycles. For instance, process design changes and refinements required for volume production are identified and implemented prior to production. The development groups also focus on the special requirements of the Company's customers, including increasing printed circuit densities, electronic packaging and advanced materials and products. When appropriate, the development groups have coordinated the acquisition of technology licenses, filed patent disclosures and applications, and registered trademarks on behalf of the Company. Design. The Company provides design and engineering assistance in the early stages of product development which assures both mechanical and electrical considerations are integrated to achieve a high quality and cost effective product. The Company also evaluates customer designs for manufacturability and, when appropriate, recommends design changes to reduce manufacturing costs or lead times or to increase manufacturing yields or the quality of finished printed circuits. The Company believes that this long-term view of manufacturing and customer relationships distinguishes the Company from many manufacturers which compete primarily in the quick-turn market. By working closely with its customers, the Company also gains a better understanding of the future requirements of OEMs. This cooperative process shortens the time in transition from the development of the prototype design to volume manufacturing and facilitates the delivery of high quality products to customer premises in a timely fashion. Quick-Turn Prototype. Prototypes typically require lead times of three to seven days, and as short as 24 hours. The Company provides quick-turn prototype services to the product development groups of customers that require small test quantities. Hadco offers these services through its Tech Centers in Massachusetts, New Hampshire and California. Prototype development at these Centers has included multilayer printed circuits of up to 38 layers, embedded discrete components, Multichip Modules (MCM), Single Chip Carriers (SCC), planar magnetics, advanced surface finishes, and various high performance substrates for the high frequency microwave market. The Tech Centers also support advanced attachment technologies such as Tape Automated Bonding (TAB) and Direct Chip Attach (DCA). In combining the design of a printed circuit with the manufacture of the prototype, Hadco can reduce the length of the design/manufacture cycle. By working closely with customers at the design and prototype stage, the Company believes it strengthens long-term relationships with its customers and gains an advantage in securing a preferred vendor status when customers begin volume production. Pre-Production. Pre-production is the manufacture of limited quantities of electronic interconnects during the transition period from prototype to volume production. Pre-production generally requires quick-turn delivery to accommodate time-to-volume pressures or as a temporary solution for unforeseen customer demands. Pre-production is done in the Tech Centers and in volume production facilities. Volume Production. Volume production is characterized by longer lead times and increased emphasis on lower cost as the product moves to full-scale commercial production. As customers increasingly demand a quick transition from prototype to volume production, few independent manufacturers can provide complex printed circuits of 18 or more layers in the volume provided by 32 34 Hadco's larger facilities. During 1996, the Tech Centers transitioned chip attachment technologies such as Ball Grid Array (BGA), Tape Automated Bonding (TAB) and Direct Chip Attach (DCA), and other technologies including Multichip Module (MCM) and Single Chip Carriers (SCC) to volume production. The Company operates five facilities located in California, New York, New Hampshire and Malaysia for medium and high-volume printed circuit production. Backplane Assembly. Backplane assemblies are generally larger and thicker printed circuits on which connectors are mounted to interconnect printed circuits, integrated circuits and other electronic components. Hadco incorporates its own printed circuits in backplane assemblies to provide customers with a high level of printed circuit technology on a quick-turn and volume basis. Net sales of backplane assemblies accounted for 6%, 7% and 17% of total Company net sales during fiscal 1994, 1995 and 1996, respectively, and for 10% on a pro forma basis including Zycon during fiscal 1996. With its backplane assembly operations, Hadco is one of a few companies that provides its customers with the strategic advantage of an integrated offering to meet their needs from development and design through volume production and backplane assembly. The Company's advanced process capabilities enhance each of the above services and include: Manufacture of High Performance Printed Circuits. The Company produces technologically advanced printed circuits primarily for the high performance market at the Tech Centers and its volume production facilities. These printed circuits, used principally in the data communications and telecommunications industries, are designed to function in high temperature environments and at higher frequencies. Materials used by the Company for these products include Teflon(R), cyanate ester, GETEK(R), liquid crystal polymers, polymides, and bismaleimide triazine epoxies. Development of Emerging Technologies. The Company undertakes projects to develop advanced or improved processes, materials and product lines. Buried capacitance and buried resistance are advanced materials developed by the Company to provide improved electrical performance and greater interconnect densities. Sales of buried capacitance products by the Company (including Zycon) in fiscal 1996 totaled $24.0 million, and the Company believes that buried resistance materials (ResistAIR(TM)) may generate additional future revenue. In addition, the Company is developing the MicroPath(TM) family of micro via processes, which include liquid imaging, dry film imaging, plasma etching, and laser drilling. Micro vias provide a significant increase in printed circuit density. During fiscal 1996, the Company also began to produce rigid flex printed circuit products utilizing licensed HVRFlex(TM) technology. These products enable customers to fold a printed circuit and reduce the need for cable connectors in the portable computer and telecommunications markets. See "-- Manufacturing and Facilities." MARKETS AND CUSTOMERS Hadco's customers are a diverse group of OEMs and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. The following table shows, for the periods indicated, the Company's net sales and percentage of its net sales to the principal end-user markets it serves. Except for the information under 33 35 the column "Fiscal Year Ended October 26, 1996 (Pro Forma)," the information reflected in the table does not include Zycon.
OCTOBER 26, 1996 -------------- FISCAL YEAR ENDED, ------------------------------------------------------------------------- OCTOBER 29, OCTOBER 28, OCTOBER 26, MARKETS 1994 1995 1996 Pro Forma - -------------------------- -------------- ---------------- -------------- (Dollars in millions) Computing................. $ 79.8 36% $ 84.9 32% $119.2 34% $148.3 26% Contract Assembly......... 46.5 21 69.0 26 112.2 32 193.9 34 Data Communications/ Telecommunications...... 82.0 37 90.2 34 94.7 27 193.9 34 Industrial Automation..... 11.1 5 15.9 6 17.5 5 28.5 5 Other..................... 2.2 1 5.2 2 7.1 2 5.8 1 ------ --- ------ --- ------ --- ------ --- Total Net Sales........... $221.6 100% $265.2 100% $350.7 100% $570.4 100% ====== === ====== === ====== === ====== ===
The Company (including Zycon) supplied its products and services to a diverse base of approximately 500 customers in fiscal 1996, including 77 customers with purchases in excess of $1 million. The Company attempts to market its products to customers who currently have, or have the potential to achieve, significant market share in their respective industries. The following list sets forth the Company's largest customers during fiscal 1996: Bay Networks SCI Systems Cabletron Systems Solectron Cisco Systems Storage Technology Compaq Computer Sun Microsystems Jabil Circuits U.S. Robotics
During fiscal 1994, 1995 and 1996, no customer accounted for more than 7%, 7% and 15%, respectively, of Hadco's net sales and the Company's ten largest customers together accounted for approximately 48%, 46% and 48%, respectively, during the same periods, and 43% in fiscal 1996 on a pro forma basis including Zycon. In fiscal 1996, one customer, Sun Microsystems, accounted for approximately 10% of the net sales of the Company (including Zycon). SALES AND MARKETING The Company markets its products through its own sales and marketing organization and independent manufacturers' representatives. As of January 25, 1997, the Company employed 112 sales and marketing employees, of which 55 are direct sales representatives at eight locations. The Company is also represented by 17 independent manufacturers' representatives at 28 locations in North America, Europe, Mexico, Asia, Australia and the Middle East. Regional direct sales offices are located in the states of Arizona, California, Colorado, Georgia, Minnesota, New Hampshire, North Carolina, Pennsylvania, Texas and the Province of Ontario, Canada. The Company's sales organization is divided into four territories, and each direct sales representative and each manufacturer's representative works within one of the four territories. Each territory also has a support staff of sales engineers and technical service personnel responsible for technical liaison and problem solving, development of product and market opportunities, market research and marketing communications. The Company focuses on developing close relationships with customers beginning at the earliest development and design phases and continuing throughout all stages of product production. The Company's Advanced Packaging Development Group identifies, develops and markets new technologies that benefit its customers and is intended to position the Company as an important source for these solutions. This group also assists marketing efforts by hosting the Regional Technology Symposiums at which the Company's technical capabilities are presented to, and industry technical trends are discussed with, customers of the Company. These Symposiums attract engineers and designers from 34 36 electronics OEMs and facilitate an interactive discussion of the latest technologies in the manufacture of complex printed circuits. MANUFACTURING AND FACILITIES The need for high volume production of dense multilayer printed circuits has transformed the electronic interconnect industry into one that increasingly requires complex manufacturing processes and necessitates high levels of investment in facilities, advanced materials, production processes and product design capabilities. The Company has invested in production technology to manufacture large volumes of dense multilayer printed circuits utilizing advanced attachment strategies such as Surface Mount Technology (SMT), Tape Automated Bonding (TAB) and Ball Grid Array (BGA). The Company employs numerous advanced manufacturing techniques and systems, including Computer Aided Manufacturing (CAM) systems, Computer Integrated Manufacturing (CIM) systems, computer controlled drilling and routing, dry-film imaging, multi-purpose metals plating, high volume surface coating, dual-access electrical testing, automated optical inspection, high-volume photoimageable solder mask processing, and computer controlled high-volume lamination systems. These techniques enable Hadco to manufacture complex printed circuits of consistent quality, in high volume and on a timely basis. All of the Company's North American production facilities are ISO9002 certified. See "-- Products and Services." Hadco is able to provide a broad and integrated offering through a focused manufacturing strategy for each facility. The Company manufactures its products in ten facilities, consisting of five volume production facilities (in California, New Hampshire, New York and Malaysia), two backplane assembly facilities (in California and New Hampshire) and three quick-turn prototype facilities (in Massachusetts, New Hampshire and California). The production expertise of some facilities overlap, enabling Hadco to allocate production based on product type and available capacity. Each facility can focus on particular product types and respond quickly to customers' specific requirements. Hadco has pursued a strategy of expanding the capacity and geographic scope of its manufacturing facilities to better serve high growth segments of the electronics industry in key geographic markets. With the acquisition of Zycon, the Company added a 310,000 square foot volume production facility in California, a 180,000 square foot volume production facility in Malaysia, a 71,000 square foot quick-turn prototype facility in Massachusetts, and a 29,000 square foot backplane assembly facility in California expected to begin operations in the first half of calendar 1997. During fiscal 1996, the Company also expanded its backplane assembly facility from 40,000 to 60,000 square feet, and added two additional SMT lines, in-circuit testing capability, and numerous pieces of assembly equipment. In total, the Company leases or owns approximately 1.2 million square feet of manufacturing space. The Company's significant facilities are as follows:
FUNCTION LOCATION SQUARE FEET - ------------------------------------------------------------ ------------------ ----------- Volume Production........................................... Santa Clara and San Jose, CA 310,000 Owego, NY 282,000* Derry, NH 199,000 Kuching, Malaysia 180,000 Hudson, NH 52,000 Quick-Turn Prototype........................................ Haverhill, MA 71,000 Watsonville, CA 35,000 Salem, NH 27,000 Backplane Assembly.......................................... Salem, NH 60,000 Santa Clara, CA 29,000** Administrative.............................................. Salem, NH 35,000 Santa Clara, CA 29,000**
- ------------ * 27,200 feet of which is under renovation ** Under construction 35 37 The Company owns its volume production facilities in Owego, New York and Derry, New Hampshire. The Company leases its volume production and backplane assembly facilities in Santa Clara and San Jose, California, which are located in four adjacent buildings; the leases for these four buildings expire in March 2009 and contain options to extend for up to two additional periods of five years each. The Company completed construction in calendar 1996 of its volume production facility in Kuching, Malaysia and leases the land on which this facility is located for a period of 60 years, expiring in November 2055. The Hudson, New Hampshire operations are located in two separate buildings, and their leases expire in December 1997 with options to extend until December 2000. Leases for the Company's quick-turn prototype facility in Haverhill, Massachusetts expire in December 2003, with options on two of the leases to extend for an additional five years and options on the third lease to extend for an additional ten years. The lease for the Watsonville, California quick-turn prototype facility expires in December 1999. The lease for the quick-turn prototype facility in Salem, New Hampshire expires in May 1999, with an option to extend until May 2004. The lease for the backplane assembly facility in Salem, New Hampshire expires in March 2000, with options to extend until March 2006. The leases for the Santa Clara, California buildings include the 29,000 square feet of backplane assembly operations. The administrative and corporate offices in Salem, New Hampshire are located in two separate buildings, which are covered by leases that expire in October 2000, with options to extend until October 2006. The leases for the Santa Clara, California buildings include the 29,000 square feet of administrative space. The Company also owns approximately six acres of land in Salem, New Hampshire, approximately five acres of land in Derry, New Hampshire, and approximately ten acres of land in Owego, New York. In fiscal 1996, the Company's capital expenditures relating to its environmental control facilities and equipment totaled approximately $1 million. The Company estimates that it will make capital expenditures with respect to its environmental control facilities and equipment of approximately $1.8 million and $700,000 in fiscal 1997 and 1998, respectively. SUPPLIER RELATIONSHIPS Historically, the majority of raw materials used in the Company's manufacture of printed circuits and components used in backplane assemblies have been readily available. However, product changes and the overall demand for electronic interconnect products could increase the industry's use of new laminate materials, standard laminate materials, multilayer blanks, electronic components and other materials, and therefore such materials may not be readily available to the Company in the future. Zycon has experienced shortages of certain types of raw materials in the past. There can be no assurance that shortages of certain types of raw materials or components will not occur in the future. To date, material shortages or price fluctuations have not had a materially adverse effect on the Company, but there can be no assurance that material shortages or price fluctuations will not have a material adverse effect on the Company in the future. The Company works with its suppliers to develop just-in-time supply systems which reduce inventory carrying costs. The Company also maintains a Supplier Certification Program which evaluates potential vendors on the basis of such factors as quality, on-time delivery, cost, technical capability, and potential technical advancement. Certification is based on both actual performance and audits of vendors' manufacturing sites. Key suppliers are reviewed quarterly to preserve strong relationships with these suppliers and maintain regular dialogue on quality, cost and technical advancement issues. Many suppliers attend the Company's Supplier Symposium, where the Company's goals and objectives are discussed with vendors. 36 38 COMPETITION The electronic interconnect industry is highly fragmented and characterized by intense competition. The Company believes that its major competitors are the large U.S. and international independent and captive producers that also manufacture multilayer printed circuits and provide backplane and other electronic assemblies. Some of these competitors have significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than the Company. During periods of recession or economic slowdown in the electronics industry and other periods when excess capacity exists, electronics OEMs become more price sensitive, which could have a material adverse effect on interconnect pricing. In addition, the Company believes that price competition from printed circuit manufacturers in Asia and other locations with lower production costs may play an increasing role in the printed circuit markets in which the Company competes. The Company's basic interconnect technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. The demand for printed circuits has continued to be affected by the development of smaller, more powerful electronic components requiring less printed circuit area. Expansion of the Company's existing products or services could expose the Company to new competition. Moreover, new developments in the electronics industry could render existing technology obsolete or less competitive and could potentially introduce new competition into the industry. There can be no assurance that the Company will continue to compete successfully against present and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations. Hadco competes on the basis of product quality, timeliness of delivery, price, customer technical support and its integrated offering, from development and design through volume production and backplane assembly. PRODUCT PROTECTION The Company has obtained four United States and one foreign patent with respect to its buried capacitance technology. Although Hadco seeks to protect certain proprietary technology and other intangible assets through patents and trademark filings, it has relatively few patents and relies primarily on trade secret protection. There can be no assurance that the Company will be able to protect its trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. The future success of the Company will depend on the continued development of processes and capabilities. The Company believes that its accumulated experience with respect to materials and process technology is also important to its operations. RELEASED BACKLOG The Company's released backlog as of January 25, 1997 was $129.1 million (including Zycon), compared with $96.9 million (excluding Zycon) as of January 27, 1996. The Company anticipates delivering approximately 90% of its released backlog during its second quarter of fiscal 1997. Released backlog consists of orders for which artwork has been received, a delivery date has been scheduled and the Company anticipates it will manufacture and deliver the order. Cancellation and postponement charges, to the extent they exist with respect to released backlog, generally vary depending upon the time of cancellation or postponement, and a significant portion of the Company's released backlog at any time may be subject to cancellation or postponement without penalty. Variations in the size, 37 39 timing and delivery schedules of purchase orders received by the Company, as well as changes in customers' delivery requirements, may result in substantial fluctuations in released backlog from period to period. Accordingly, the Company believes that released backlog is not a meaningful indicator of future quarterly or annual financial results. EMPLOYEES As of January 25, 1997, the Company had 5,410 employees, compared to 2,487 employees as of January 27, 1996. The employees are not represented by a union, and the Company has never experienced any labor problems resulting in a work stoppage. ENVIRONMENTAL MATTERS The Company is required to comply with all federal, state, county and municipal regulations regarding protection of the environment. There can be no assurance that more stringent environmental laws will not be adopted in the future and, if adopted, the costs of compliance with more stringent environmental laws could be substantial. Waste treatment and disposal are major considerations for printed circuit manufacturers. The Company uses chemicals in the manufacture of its products that are classified by the Environmental Protection Agency (EPA) as hazardous substances. The Company is aware of certain chemicals that exist in the ground at certain of its facilities. The Company has notified various governmental agencies and continues to work with them to monitor and resolve these matters. During March 1995, the Company received a Record Of Decision (ROD) from the New York State Department of Environmental Conservation (NYSDEC), regarding soil and groundwater contamination at its Owego, New York facility. Based on a Remedial Investigation and Feasibility Study (RIFS) for apparent on-site contamination at that facility and a Focused Feasibility Study (FFS), each prepared by environmental consultants of the Company, the NYSDEC has approved a remediation program of groundwater withdrawal and treatment and iterative soil flushing. The Company recently executed a Modification of the Order on Consent to implement the approved ROD. The cost, based upon the FFS, to implement this remediation is estimated to be $4.6 million, and is expected to be expended as follows: $260,000 for capital equipment and $4.3 million for operation and maintenance costs which will be incurred and expended over the estimated life of the program of 30 years. NYSDEC has requested that the Company consider taking additional samples from a wetland area near the Company's Owego facility. Analytical reports of earlier sediment samples indicated the presence of certain inorganics. There can be no assurance that the Company and/or other third parties will not be required to conduct additional investigations and remediation at that location, the costs of which are currently indeterminable due to the numerous variables described in the fifth paragraph of this "-- Environmental Matters" section. From 1974 to 1980, the Company operated a printed circuit manufacturing facility in Florida as a lessee of property that is now the subject of a pending lawsuit ("the Florida Lawsuit") and investigation by the Florida Department of Environmental Protection (FDEP). On June 9, 1992, the Company entered into a Cooperating Parties Agreement in which it and Gould, Inc., another prior lessee of the site have agreed to fund certain assessment and feasibility study activities at the site, and an environmental consultant has been retained to perform such activities. The cost of such activities is not expected to be material to the Company. In addition to the Cooperating Parties Agreement, Hadco and others are participating in alternative dispute resolution regarding the site with an independent mediator. In connection with the mediation, in February 1992 the FDEP presented computer-generated estimates of remedial costs, for activities expected to be spread over a number of years, that ranged from approximately $3.3 million to $9.7 million. Mediation sessions were conducted in March 1992 but have been suspended during the ongoing assessment and feasibility activities. Management believes it is likely that it will participate in implementing a continuing remedial program for the site, the costs of which are currently unknown. In June 1995, Hadco was named a third-party defendant in the Florida Lawsuit. See "-- Legal Proceedings." 38 40 The Company has commenced the operation of a groundwater extraction system at its Derry, New Hampshire facility to address certain groundwater contamination and groundwater migration control issues. Because of the uncertainty regarding both the quantity of contaminants beneath the building at the site and the long-term effectiveness of the groundwater migration control system the Company has installed, it is not possible to make a reliable estimate of the length of time remedial activity will have to be performed. However, it is anticipated that the groundwater extraction system will be operated for at least 30 years. There can be no assurance that the Company will not be required to conduct additional investigations and remediation relating to the Derry facility. The total costs of such groundwater extraction system and of conducting any additional investigations and remediation relating to the Derry facility are not fully determinable due to the numerous variables described in the fifth paragraph of this "-- Environmental Matters" section. 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 the Company 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 nine 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 Hadco's copper discharge is reduced from 2.70 milligrams per liter to 1.02 milligrams per liter, and the concentration limit for Hadco'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 assurances 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. The Company accrues estimated costs associated with known environmental matters, when such costs can be reasonably estimated. The cost estimates relating to future environmental clean-up are subject to numerous variables, the effects of which can be difficult to measure, including the stage of the environmental investigations, the nature of potential remedies, possible joint and several liability, the magnitude of possible contamination, the difficulty of determining future liability, the time over which remediation might occur, and the possible effects of changing laws and regulations. Management believes the ultimate disposition of above known environmental matters described in this "-- Environmental Matters" section will not have a material adverse effect upon the liquidity, capital resources, business or consolidated financial position of the Company. However, one or more of such environmental matters could have a significant negative impact on the Company's consolidated financial results for a particular reporting period. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 9 of Notes to the Company's Consolidated Financial Statements. The Company plans additional capital expenditures during fiscal 1997 to further reduce air emissions and reduce waste generation. See discussion under "-- Manufacturing and Facilities" concerning the Company's capital expenditures relating to environmental control facilities and equipment, and under "-- Legal Proceedings" relating to lawsuits regarding environmental matters. LEGAL PROCEEDINGS The Company is one of 33 entities which have been named as potentially responsible parties in a lawsuit pending in the federal district court of New Hampshire concerning environmental conditions at the Auburn Road, Londonderry, New Hampshire landfill site. Local, state and federal entities and certain other parties to the litigation seek contribution for past costs, totaling approximately $20 39 41 million, allegedly incurred to assess and remediate the Auburn Road site. In December 1996, following publication and comment period, the EPA amended the ROD to change the remedy at the Auburn Road site from active groundwater remediation to future monitoring. Other parties to the lawsuit also allege that future monitoring will be required. The Company is contesting liability, but is participating in mediation with 27 other parties in an effort to resolve the lawsuit. In connection with the Florida Lawsuit pending in the Circuit Court for Broward County, Florida, Hadco and Gould, Inc., another prior lessee of the site of the printed circuit manufacturing facility in Florida, was each served with a third-party complaint in June 1995, as third-party defendants in such pending Florida Lawsuit by a party who had previously been named as a defendant when the Florida Lawsuit was commenced in 1993 by the FDEP. The Florida Lawsuit seeks damages relating to environmental pollution and FDEP costs and expenses, civil penalties, and declaratory and injunctive relief to require the parties to complete assessment and remediation of soil and groundwater contamination. The other parties include alleged owners of the property. "See Business -- Environmental Matters." In March 1993, the EPA notified Zycon of its potential liability for maintenance and remediation costs in connection with a hazardous waste disposal facility operated by Casmalia Resources, a California Limited Partnership, 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. Based on the total tonnage contributed by all generators, Zycon's share is estimated at approximately 0.2% of the total weight. The Casmalia site was regulated by the EPA during the period when the material was accepted. There is no allegation that Zycon violated any law in the disposal of material at the site, rather the EPA's actions stemmed from the fact that Casmalia Resources may not have the financial means to implement a closure plan for the site and because of Zycon's status as a generator of hazardous waste. In September 1996, a Consent Decree among the EPA and 48 entities (including Zycon) acting through the Casmalia Steering Committee (CSC) was lodged with the United States District Court in Los Angeles, California, which must approve the agreement. Although this approval is pending, work has started under the Consent Decree. The Consent Decree sets forth the terms and conditions under which the CSC will carry out work aimed at final closure of the site. Certain closure activities will be performed by the CSC. Later work will be performed by the CSC, if funded by other parties. Under the Consent Decree, the settling parties will work with the EPA to pursue the non-settling parties to ensure they participate in contributing to the closure and long-term operation and maintenance of the facility. The EPA will continue as the lead regulatory agency during the final closure work. Because long-term maintenance plans for the site will not be determined for a number of years, it has not yet been decided which regulatory agency will oversee this phase of the work plan or how the long-term costs will be funded. However, the agreement provides a mechanism for ensuring that an appropriate federal, state or local agency will assume regulatory responsibility for long-term maintenance. The future costs in connection with the lawsuits described in the preceding paragraphs are currently indeterminable due to such factors as the unknown timing and extent of any future remedial actions which may be required, the extent of any liability of the Company and of other potentially responsible parties, and the financial resources of the other potentially responsible parties. 40 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION - ------------------------------------ --- ------------------------------------------------------ Horace H. Irvine II(3).............. 59 Chairman of the Board of Directors Andrew E. Lietz(3).................. 58 President, Chief Executive Officer and Director Timothy P. Losik.................... 38 Vice President, Chief Financial Officer and Treasurer James R. Griffin.................... 46 Vice President Richard P. Saporito................. 43 Vice President James C. Hamilton................... 59 Clerk Lawrence Coolidge(2)(3)............. 60 Director J. Stanley Hill(1)(2)(4)............ 82 Director John O. Irvine(2)(4)................ 55 Director Mikael Salovaara.................... 42 Director John F. Smith(1)(4)................. 61 Director Oliver O. Ward(1)(2)................ 61 Director Patrick Sweeney..................... 61 Director John E. Pomeroy..................... 55 Director James C. Taylor..................... 58 Director
- ------------ (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Nominating Committee. (4) Member of Stock Option Committee. Mr. Horace H. Irvine II is a founder of the Company and has been its Chairman of the Board since the Company was incorporated in 1966, and its Chief Executive Officer from 1966 until 1986. He was President of the Company from 1966 until 1980 and Treasurer of the Company from 1966 until 1984. He is Chairman of the Nominating Committee of the Board of Directors. Mr. Lietz joined the Company in 1984 and has been President and Chief Executive Officer of the Company since October 1995. From July 1991 to October 1995 Mr. Lietz was the Chief Operating Officer and a Vice President of the Company. He has been a director of the Company since February 1993. Prior to joining the Company, Mr. Lietz spent 20 years employed by IBM where he held various sales, marketing and management positions. Mr. Losik joined the Company in 1986 and has been the Chief Financial Officer, Vice President and Treasurer of the Company since March 1994. He was the Controller of the Company from June 1992 to March 1994 and a Corporate Accounting Manager from March 1988 to June 1992. Mr. Losik is a certified public accountant. From 1979 to 1986, Mr. Losik held various positions, including partner, in public accounting firms. Mr. Griffin joined the Company in 1979 and has been a Vice President of the Company since August 1991. He was the Director of Marketing Programs of the Company from 1989 to 1991. Mr. Saporito joined the Company in 1987 and has been a Vice President of the Company since December 1991. He was the Director of Human Resources of the Company from 1989 to 1991. Mr. Hamilton has been the Clerk of the Company since 1966. He is a partner in the law firm of Berlin, Hamilton & Dahmen, LLP, general counsel to the Company. 41 43 Mr. Coolidge has been a director of the Company since 1995. He is Chairman of the Long-Term Planning and Strategy Committee of the Board of Directors. He has been the president and a private trustee of Loring, Wolcott & Coolidge Office, a fiduciary services provider, since 1962. On August 1, 1994, Mr. Coolidge became an associate of Loring, Wolcott & Coolidge Fiduciary Advisors, a registered investment advisor. Mr. Hill has been a director of the Company since 1981. He is Chairman of the Audit and Stock Option Committees of the Board of Directors. During the past 27 years, he has been president of Digiplan Inc., a private consultant to the computer users' industry. Mr. John O. Irvine has been a director of the Company since 1973. During the past six years, he has been president of Little Mountain Bancshares Inc. of Monticello, Minnesota, a bank holding company. Mr. Irvine is the brother of Horace H. Irvine II. Mr. Salovaara has been a director of the Company since 1995. He has been a founding partner of Greycliff Partners, an investment advisor, since December 1991. He was a partner of Goldman Sachs & Co., an investment banking firm, from 1988 to 1991. Mr. Salovaara is also a director of Granite Broadcasting Corporation and Circuit City Stores, Inc. Mr. Smith has been a director of the Company since 1995. He has been the president of MYCOS International, Inc., a property development corporation, since April 1993, and president of PerSeptive Biosystems, Inc., a biotechnology company, since July 1996. In April 1993, Mr. Smith retired as Senior Vice President and Chief Operating Officer of Digital Equipment Corporation, a computer company, in which capacities he had served since 1991. He began his career at Digital Equipment Corporation in 1958 and served in various other senior management positions from 1976 to 1991. Mr. Smith is also a director of Ansys Corporation, Instron Corporation, PerSeptive Biosystems, Inc. and Sequoia Systems, Inc. Mr. Ward has been a director of the Company since 1987. He is Chairman of the Compensation, Executive and Finance Committees of the Board of Directors. He was a founder and has served as chairman of the board, chief executive officer and president of Germanium Power Devices Corp., a manufacturer and marketer of germanium semiconductors, since 1973. Mr. Sweeney has been a director of the Company since 1991. He was President and Chief Executive Officer of the Company from 1991 until October 1995, and Chief Operating Officer from July 1990 to July 1991. He is currently a consultant to the Company. Mr. Pomeroy has been a director of the Company since September 1996. He has been president and chief executive officer of Dover Technologies, a group of manufacturing companies and a subsidiary of Dover Corporation, since 1987. Mr. Pomeroy is also a director of Adept Technologies, Inc. Mr. Taylor has been a director of the Company since December 1996. He has been an advisory director at Downer and Company, an investment banking firm, since 1995. He was a managing director of Burns Fry Limited, an investment banking firm, from 1988 to 1994. Mr. John O. Irvine and Mr. Salovaara are not standing for re-election as directors of the Company at the Annual Meeting of Stockholders to be held on February 26, 1997, and thus will no longer be directors of the Company effective as of that date. Directors are elected annually and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified, or until their earlier removal or resignation. Executive officers are elected to serve at the pleasure of the Board of Directors. Horace H. Irvine II and John O. Irvine are brothers. There are no other family relationships among any of the directors and executive officers of the Company. 42 44 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Company's outstanding Common Stock as of January 24, 1997, and as adjusted to reflect the sale of the Common Stock offered hereby, by (i) each person who is known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each director and executive officer of the Company, (iii) the Chief Executive Officer, and (iv) all the directors and executive officers of the Company as a group. Except as otherwise provided below, the address of each person listed below is c/o Hadco Corporation, 12A Manor Parkway, Salem, New Hampshire 03079.
PERCENT OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES ------------------------- BENEFICIALLY PRIOR TO AFTER NAMES OR GROUP OWNED(1) OFFERING OFFERING(16) - ---------------------------------------------- ---------------- -------- ------------ Horace H. Irvine II........................... 923,512(2) 8.8% 7.4% J&W Seligman & Co. Incorporated............... 702,100+ 6.7 5.6 100 Park Avenue New York, NY 10017 FMR Corp...................................... 675,800(3) 6.5 5.4 82 Devonshire Street Boston, MA 02109 Nicholas Applegate Capital Management......... 528,200+ 5.1 4.2 600 West Broadway, 29th Floor San Diego, CA 03079 Andrew E. Lietz............................... 165,146(4) 1.6 1.3 Patrick Sweeney............................... 27,000 * * Timothy P. Losik.............................. 26,775(5) * * James R. Griffin.............................. 39,746(6) * * Richard P. Saporito........................... 23,650(7) * * John O. Irvine(8)............................. 115,000(9) 1.1 * J. Stanley Hill............................... 41,000(10) * * Oliver O. Ward................................ 3,000(11) * * Lawrence Coolidge............................. 240,158(12) 2.3 1.9 Mikael Salovaara.............................. 3,100 * * John F. Smith................................. 9,000(13) * * John E. Pomeroy............................... 3,000(14) * * James C. Taylor............................... 3,000(14) * * James C. Hamilton............................. 241,408(12) 2.3 1.9 All directors and executive officers as a group (15 persons).......................... 1,635,337(15) 15.3% 12.9% ================= ======== ============
- ------------ * Represents less than 1% of the outstanding shares of the Company's Common Stock. + Information obtained from a Schedule 13G filed February 4, 1997. (1) Except as indicated in footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of Common Stock owned. (2) Includes 124,855 shares held in a voting trust for the benefit of Andrea P. Irvine. Horace H. Irvine II, who is the sole trustee of such trust and retains sole voting power with respect to the shares held in such trust, disclaims beneficial ownership of such shares. Does not include 229,158 shares held in irrevocable trusts for the benefit of members of Horace H. Irvine II's family. Horace H. Irvine II, who is not a trustee of such trusts, disclaims beneficial ownership of such 43 45 229,158 shares. James C. Hamilton, Clerk and a partner in Berlin, Hamilton & Dahmen, LLP, which is general counsel to the Company, Lawrence Coolidge, a Director of the Company, and Gilbert M. Roddy, Jr. are co-trustees of these irrevocable trusts. Horace H. Irvine II retains no voting or dispositive power with respect to these shares. All voting rights under these trusts reside in Messrs. Hamilton, Coolidge and Roddy, who have the right to dispose of such shares. Messrs. Coolidge and Hamilton own 11,000 and 12,250 shares, respectively, as individuals, in addition to the shares they hold as co-trustees. Mr. Coolidge's 11,000 shares include 6,000 shares issuable upon the exercise of stock options that will become exercisable within 60 days after January 24, 1997. (3) According to information provided to the Company by FMR Corp., as of January 24, 1997, FMR Corp. beneficially owned 675,800 shares of the Common Stock of the Company. Includes 608,200 shares beneficially owned by Fidelity Management & Research Company, as a result of its serving as an investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940 and as an investment adviser to certain other funds which are generally offered to limited groups of investors. Also includes 67,600 shares beneficially owned by Fidelity Management Trust Company as a result of its serving as trustee or managing agent for various private investment accounts, primarily employee benefit plans, and as an investment adviser to certain other funds which are generally offered to limited groups of investors. FMR Corp. has sole voting power with respect to 11,600 shares and sole dispositive power with respect to 675,800 shares. (4) Includes 134,746 shares issuable upon the exercise of stock options granted to Mr. Lietz that are currently exercisable or will become exercisable within 60 days after January 24, 1997 and 30,000 shares held by a trust of which Mr. Lietz is the sole trustee and sole beneficiary. (5) Includes 22,775 shares issuable upon the exercise of stock options granted to Mr. Losik that are currently exercisable or will become exercisable within 60 days after January 24, 1997 and 4,000 shares held jointly with Mr. Losik's spouse. (6) Includes 37,300 shares issuable upon the exercise of stock options granted to Mr. Griffin that are currently exercisable or will become exercisable within 60 days after January 24, 1997. (7) Includes 23,450 shares issuable upon the exercise of stock options granted to Mr. Saporito that are currently exercisable or will become exercisable within 60 days after January 24, 1997. (8) Horace H. Irvine II and John O. Irvine are brothers. (9) Includes 15,000 shares issuable upon the exercise of stock options granted to John O. Irvine that are currently exercisable or will become exercisable within 60 days after January 24, 1997. (10) Includes 10,000 shares issuable upon the exercise of stock options granted to Mr. Hill that are currently exercisable or will become exercisable within 60 days after January 24, 1997. Does not include 20,000 shares owned by Mr. Hill's wife, as to which Mr. Hill disclaims beneficial ownership. (11) Consists of 3,000 shares issuable upon the exercise of stock options granted to Mr. Ward that are currently exercisable or will become exercisable within 60 days after January 24, 1997. (12) See footnote (2) above. (13) Consists of 9,000 shares issuable upon the exercise of stock options granted to Mr. Smith that are currently exercisable or will become exercisable within 60 days after January 24, 1997. (14) Consists of 3,000 shares issuable upon the exercise of stock options granted to each of Messrs. Pomeroy and Taylor that are currently exercisable or will become exercisable within 60 days after January 24, 1997. 44 46 (15) Includes 229,158 shares held by Mr. Coolidge, Mr. Hamilton, and Gilbert M. Roddy, Jr., as co-trustees and 124,855 shares held by Horace H. Irvine II as trustee. Includes 6,000 shares issuable upon the exercise of stock options granted to Mr. Coolidge that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (2) above. Includes 134,746 shares issuable upon the exercise of stock options granted to Andrew E. Lietz, that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (4) above. Includes 22,775 shares issuable upon the exercise of stock options granted to Mr. Losik that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (5) above. Includes 37,300 shares issuable upon the exercise of stock options granted to Mr. Griffin that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (6) above. Includes 23,450 shares issuable upon the exercise of stock options granted to Mr. Saporito that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (7) above. Includes 15,000 shares issuable upon the exercise of currently exercisable stock options granted to Mr. John O. Irvine. See footnote (9) above. Includes 10,000 shares issuable upon the exercise of stock options granted to Mr. Hill. See footnote (10) above. Includes 3,000 shares issuable upon the exercise of stock options granted to Mr. Ward. See footnote (11) above. Includes 9,000 shares issuable upon the exercise of stock options granted to Mr. Smith that are currently exercisable or will become exercisable within 60 days after January 24, 1997. See footnote (13) above. Includes an aggregate of 6,000 shares issuable upon the exercise of currently exercisable stock options granted to each of Messrs. Pomeroy and Taylor. See footnote (14) above. (16) The above table assumes no exercise of the over-allotment options. If the Common Stock Underwriters exercise their over-allotment options in full, the number of shares offered, the number of shares beneficially owned after the Common Stock Offering, and the percent of shares beneficially owned after the offering for each of the Selling Stockholders would be: (a) Horace H. Irvine II -- 100,000, 823,515, 6.6%; (b) certain trusts for the benefit of members of Horace H. Irvine II's family -- 35,000, 194,158, 1.5%; (c) Andrew E. Lietz -- 40,000, 125,146, 1.0%; (d) J. Stanley Hill -- 10,000, 31,000,*%; (e) James C. Hamilton -- 3,000, 203,408, 1.6%; and (f) Kenneth Ogle -- 14,600,16,400,*%; and the percent of shares beneficially owned after the Common Stock Offering by all directors and executive officers as a group will be 11.3% if the Common Stock Underwriters exercise their over-allotment options in full. 45 47 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 25,000,000 shares of Common Stock, $.05 par value. As of January 24, 1997, there were 10,444,188 shares of Common Stock of the Company outstanding held by approximately 345 holders of record. COMMON STOCK Each outstanding share of Common Stock is entitled to one vote on all matters submitted to a vote of stockholders. Voting rights are not cumulative, so that the holders of a majority of the voting power of the Company could elect all the Directors standing for election at any annual or special meeting of stockholders, and the holders of the remaining shares may not be able to elect any Director. Dividends may be paid to the holders of Common Stock only when and if declared by the Board of Directors out of funds legally available therefor. No cash dividends have ever been paid by the Company on its Common Stock. See "Dividend Policy." Holders of Common Stock have no preemptive, conversion or other rights to subscribe for additional shares of stock or other securities of the Company. Shares of Common Stock are not subject to any redemption provisions. No share of Common Stock outstanding on the date hereof, sold in the Common Stock Offering or issuable on conversion of any Note is or will be subject to any call or assessment. In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Common Stock will be entitled to share ratably in all assets remaining after provision for payment of creditors. MASSACHUSETTS LAW The Company is subject to the provisions of Chapter 110F of the Massachusetts General Laws, the so-called Business Combination Statute. Under Chapter 110F, a Massachusetts corporation with over 200 stockholders, such as the Company, may not engage in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or assets sale, and other transactions resulting in a financial benefit to the stockholder. The Company is subject to the provisions of Chapter 110D of the Massachusetts General Laws, entitled "Regulation of Control Share Acquisitions." In general, this statute provides that any stockholder of a corporation subject to this statute who acquires 20% or more of the outstanding voting stock of a corporation (except in certain transactions) may not vote such stock unless the stockholders of the corporation so authorize. The Board of Directors may amend the Company's By-laws at any time to exclude the Company from this statute prospectively. On April 18, 1990, Massachusetts enacted Chapter 156B sec.50A of the Massachusetts General Laws which, in general, requires that publicly held Massachusetts corporations have a classified board of directors consisting of three classes as nearly equal in size as possible. Once the corporation is subject to the classified board provisions of this statute, directors may be removed by a majority vote of the stockholders only for cause. This statute provides that a corporation may elect to be exempt from the classified board provisions by a vote of its directors. By vote of the Board of Directors, the Company has elected to be exempt from the classified board provisions of this statute. 46 48 STOCKHOLDER RIGHTS PLAN On August 22, 1995, the Company's Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"), the adoption of which did not require stockholder approval, under which Common Stock Purchase Rights (the "Rights") were distributed as a Rights dividend on September 11, 1995 at the rate of one Right for each share of Common Stock held as of the close of business on that date. The Rights Plan is designed to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The Rights Plan was not adopted by the Board in response to any specific offer or threat, but rather is intended to protect the interests of stockholders in the event the Company is confronted in the future with takeover tactics. Each Right will entitle holders of Common Stock to buy one share of Common Stock of the Company at an exercise price of $130. The Rights will be exercisable only after 10 days following a public announcement that a person or group has acquired more than 20% (exempting the stock ownership of Horace H. Irvine II, the founder and Chairman of the Board of the Company, and certain related persons and entities) of the Common Stock (the "Stock Acquisition Date"), or 10 business days after such person or group announces a tender or exchange offer which would result in its ownership of 25% or more of the Common Stock, or 10 business days after a person owning 10% or more of the Common Stock is determined by the Board to be an "Adverse Person," as defined in the Rights Plan. If any person or group becomes the beneficial owner of 25% or more of the Company's Common Stock except pursuant to a tender offer for all shares at a price that a majority of the independent directors determines to be fair; if a more-than-20% stockholder engages in a merger with the Company in which the Company survives and its Common Stock remains outstanding and unchanged; if certain other events involving the Company and a more-than-20% stockholder occur; or, if under certain circumstances, the Board determines a 10% or more stockholder to be an Adverse Person, then each Right not owned by such person or related parties will entitle its holder to purchase, at the then current exercise price of the Right, Common Stock of the Company (or, in certain circumstances as determined by the Board, including the failure of the stockholders to increase the authorized Common Stock as proposed herein, a combination of cash, property, Common Stock or other securities or a reduction in the exercise price) having a value of twice the Right's exercise price. In such circumstances, the Company may also exchange one share of Common Stock for each Right outstanding. In addition, if the Company is involved in a merger or other business combination transaction with another person in which its Common Stock is changed or converted, or sells or transfers more than 50% of its assets or earning power to another person, each Right that has not previously been exercised will entitle its holder to purchase, at the then current exercise price of the Right, shares of Common Stock of such other person having a value of twice the Right's exercise price. In general, the Company can redeem the Rights at $0.01 per Right at any time prior to ten days following the Stock Acquisition Date. The Rights will expire on September 11, 2005, unless earlier redeemed or exchanged. The Rights have certain anti-takeover effects, in that they can cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is The First National Bank of Boston. 47 49 DESCRIPTION OF NOTES The Notes are to be issued under an indenture to be dated as of , 1997 (the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The terms of the Notes will include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "TIA"), as in effect on the date of the Indenture. The Notes will be subject to all such terms, and holders of the Notes are referred to the Indenture and the TIA for a statement of such terms. The following is a summary of important terms of the Notes and does not purport to be complete and is qualified in its entirety by reference to the Indenture and the TIA. Reference should be made to all provisions of the Indenture, including the definitions therein of certain terms and all terms made a part of the Indenture by reference to the TIA. As used in this "Description of Notes," the term "Company," unless otherwise indicated or the context otherwise requires, refers only to Hadco Corporation and does not include any of its subsidiaries including Zycon. GENERAL The Notes will be general unsecured obligations of the Company subordinate in right of payment to certain other obligations of the Company as described under "-- Subordination," and convertible into Common Stock as described under "-- Conversion." The Notes will be limited to $100,000,000 aggregate principal amount ($115,000,000 if the over-allotment option is exercised in full), will be issued in fully registered form only in denominations of $1,000 or any integral multiple thereof and will mature on , 2004, unless earlier redeemed at the option of the Company or repurchased by the Company at the option of the holder upon a Designated Event (as defined). The Notes will bear interest from , 1997 at the annual rate set forth on the cover page hereof, payable semiannually on and , commencing on , 1997, to holders of record at the close of business on the preceding and , respectively (subject to certain exceptions in the case of conversion, redemption or repurchase of such Notes prior to the applicable interest payment date). Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of and premium, if any, and interest on the Notes will be payable, and the transfer of Notes will be registrable, and the Notes may be presented for conversion, at the office or agency of the Company maintained for such purposes in the Borough of Manhattan, State of New York, which shall initially be an office or agency of the Trustee. In addition, payment of interest may, at the option of the Company, be made by check mailed to the address of the person entitled thereto as it appears in the Note register, provided that the holder of Notes with an aggregate principal amount in excess of $2,000,000 shall, at the election of such holder, be paid by wire transfer in immediately available funds. No service charge will be made for any registration or transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company is not required to exchange or register the transfer of (i) any Note for a period of 15 days next preceding any selection of Notes to be redeemed, (ii) any Note or portion thereof selected for redemption, (iii) any Note or portion thereof surrendered for conversion, or (iv) any Note or portion thereof surrendered for repurchase (and not withdrawn) in connection with a Designated Event. The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of securities of the Company or the incurrence of Senior Indebtedness. The Indenture contains no covenants or other provisions to afford protection to holders of Notes in the event of a highly leveraged transaction or a change in control of the Company except to the limited extent described under "-- Repurchase at Option of Holders Upon a Designated Event" below. 48 50 CONVERSION The holders of Notes will be entitled at any time through the close of business on the final maturity date of the Notes, subject to prior redemption or repurchase, to convert any Notes or portions thereof (in denominations of $1,000 or multiples thereof) into Common Stock of the Company, at the conversion price set forth on the cover page of this Prospectus, subject to adjustment as described below. Except as described below, no adjustment will be made on conversion of any Notes for interest accrued thereon or for dividends on any Common Stock issued. If Notes are converted after a record date for the payment of interest and on or prior to the close of business on the business day prior to the next succeeding interest payment date, such Notes, other than Notes called for redemption during such period, when submitted for conversion by the holder, must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount so converted. No such payment will be required with respect to interest payable on , 2000. The Company is not required to issue fractional shares of Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon the market price of the Common Stock on the last business day prior to the date of conversion. In the case of Notes called for redemption, conversion rights will expire at the close of business on the business day preceding the date fixed for redemption, unless the Company defaults in payment of the redemption price in which case the conversion right shall terminate on the date such default is cured and such Note is redeemed. A Note for which a holder has delivered a Designated Event purchase notice exercising the option of such holder to require the Company to repurchase such Note may be converted only if such notice is withdrawn by a written notice of withdrawal delivered by the holder to the Company prior to the close of business on the business day preceding the date fixed for repurchase. The right of conversion attaching to any Note may be exercised by the holder by delivering the Note at the specified office of a conversion agent, accompanied by a duly signed and completed notice of conversion, together with any funds that may be required as described in the preceding paragraph. The conversion date shall be the date on which the Note, the duly signed and completed notice of conversion and any funds that may be required as described in the preceding paragraph shall have been so delivered. A holder delivering a Note for conversion will not be required to pay any taxes or duties payable in respect of the issue or delivery of Common Stock on conversion, but will be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue or delivery of the Common Stock in a name other than the holder of the Note. Certificates representing shares of Common Stock will not be issued or delivered unless all taxes and duties, if any, payable by the holder have been paid. The initial conversion price of $ per share of Common Stock is subject to adjustment (under formulae set forth in the Indenture) in certain events, including: (i) the issuance of Common Stock as a dividend or distribution on Common Stock of the Company; (ii) certain subdivisions and combinations of the Common Stock; (iii) the issuance to all holders of Common Stock of certain rights or warrants to purchase Common Stock at less than the current market price of the Common Stock; (iv) the dividend or other distribution to all holders of Common Stock of shares of capital stock of the Company (other than Common Stock) or evidence of indebtedness of the Company or assets (including securities, but excluding those rights, warrants, dividends and distributions referred to above or paid exclusively in cash); (v) dividends or other distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (iv)) to all holders of Common Stock to the extent that such distributions, combined together with (A) all other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made plus (B) any cash and the fair market value of other consideration payable in respect of any tender offers by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 10% of the Company's market capitalization (being the product of the then current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date for such distribution; (vi) the purchase of Common Stock pursuant to a tender offer made by the Company or any of its subsidiaries to the extent 49 51 that the same involves an aggregate consideration that, together with (X) any cash and the fair market value of any other consideration payable in any other tender offer by the Company or any of its subsidiaries for Common Stock expiring within the 12 months preceding such tender offer in respect of which no adjustment has been made plus (Y) the aggregate amount of any such all-cash distributions referred to in clause (v) above to all holders of Common Stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 10% of the Company's market capitalization on the expiration of such tender offer; and (vii) payment in respect of a tender offer or exchange offer by a person other than the Company or any subsidiary of the Company in which, as of the closing of the offer, the Board of Directors is not recommending rejection of the offer. The adjustment referred to in clause (vii) above will only be made if the tender offer or exchange offer is for an amount which increases that person's ownership of Common Stock to more than 25% of the total shares of Common Stock outstanding, and only if the cash and value of any other consideration included in such payment per share of Common Stock exceeds the current market price per share of Common Stock on the business day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange. The adjustment referred to in clause (vii) above will not be made, however, if, as of the closing of the offer, the offering documents with respect to such offer disclose a plan or an intention to cause the Company to engage in a consolidation or merger of the Company or a sale of all or substantially all of the Company's assets. Under the terms of the Rights Plan, upon conversion of any Notes prior to the redemption or expiration of the Rights, the holders of such Notes will receive, subject to certain limited conditions, an appropriate number of Rights with respect to the shares of Common Stock issued upon such conversion. In addition, the Indenture will provide that if the Company amends the Rights Plan or implements a replacement or successor stockholders' rights plan, such rights plan must provide that upon conversion of the Notes the holders will receive, in addition to the Common Stock issuable upon such conversion, such rights whether or not such rights have separated from the Common Stock at the time of such conversion. In the case of (i) any reclassification or change of the Common Stock (other than changes in par value or resulting from a subdivision or combination) or (ii) a consolidation, merger or combination involving the Company or a sale or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety, in each case as a result of which holders of Common Stock shall be entitled to receive stock, other securities, other property or assets (including cash) with respect to or in exchange for such Common Stock, the holders of the Notes then outstanding will be entitled thereafter to convert such Notes into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, combination, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance (assuming, in a case in which the Company's stockholders may exercise rights of election, that a holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith and received per share the kind and amount received per share by a plurality of nonelecting shares). In the event of a taxable distribution to holders of Common Stock (or other transaction) which results in any adjustment of the conversion price, the holders of Notes may, in certain circumstances, be deemed to have received a distribution subject to United States income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of Common Stock. See "Certain Federal Income Tax Considerations." The Company from time to time may, to the extent permitted by law, reduce the conversion price of the Notes by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such decrease, if the Board of Directors has made a determination that such decrease would be in the best interests of the Company, which determination shall be conclusive. The Company may at its option, make such reductions in the conversion price, in addition to those set forth 50 52 above, as the Board of Directors deems advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. See "Certain Federal Income Tax Considerations." No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. OPTIONAL REDEMPTION BY THE COMPANY The Notes are not redeemable at the option of the Company prior to , 2000. At any time on or after that date the Notes may be redeemed at the Company's option on at least 20 but not more than 60 days' notice, as a whole or, from time to time in part, at the following prices (expressed in percentages of the principal amount), together with accrued interest to, but excluding, the date fixed for redemption; provided that if a redemption date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holder of record as of the relevant record date. If redeemed during the 12-month period beginning , 2000 (beginning , 2000 and ending , 2001 in the case of the first such period):
REDEMPTION YEAR PRICE ---- ------------- 2000......................................................... % 2001......................................................... 2002......................................................... 2003.........................................................
and 100% at , 2004. If fewer than all the Notes are to be redeemed, the Trustee will select the Notes to be redeemed in principal amounts of $1,000 or multiples thereof by lot or, in its sole discretion, on a pro rata basis. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a holder's Notes is selected for partial redemption and such holder converts a portion of such Notes, such converted portion shall be deemed to be taken from the portion selected for redemption. No sinking fund is provided for the Notes. REPURCHASE AT OPTION OF HOLDERS UPON A DESIGNATED EVENT The Indenture provides that if a Designated Event (as defined) occurs, each holder of Notes shall have the right, at the holder's option, to require the Company to repurchase all of such holder's Notes, or any portion thereof that is an integral multiple of $1,000, on the date (the "repurchase date") that is 40 calendar days after the date of the Company Notice (as defined below), for cash at a price equal to 100% of the principal amount of the Notes, together with accrued interest, if any, to (but excluding) the repurchase date (the "repurchase price"), provided, however, that if a repurchase date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holder of record as of the relevant record date. Within 15 days after the occurrence of a Designated Event, the Company is obligated to mail to all holders of record of the Notes a notice (the "Company Notice") of the occurrence of such Designated Event and of the repurchase right arising as a result thereof. The Company must deliver a copy of the Company Notice to the Trustee and cause a copy or a summary of such notice to be published in a 51 53 newspaper of general circulation in The City of New York. To exercise the repurchase right, a holder of such Notes must deliver, on or before the 40th day after the Company Notice, written notice to the Company (or an agent designated by the Company for such purpose) of the holder's exercise of such right, together with the Notes with respect to which the right is being exercised, duly endorsed for transfer. Such notice of exercise may be withdrawn by the holder by a written notice of withdrawal delivered to the Company at any time prior to the close of business on the last business day preceding the repurchase date. "Designated Event" means a Change in Control (as defined) or a Termination of Trading (as defined). "Change in Control" means an event or series of events after the original issuance of the Notes as a result of which (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of shares representing more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in elections of directors of the Company ("Voting Stock"); (ii) the stockholders of the Company approve any plan or proposal for the liquidation, dissolution or winding up of the Company, (iii) the Company consolidates with or merges into any other corporation, or conveys, transfers or leases all or substantially all of its assets to any person, or any other corporation merges into the Company, and in the case of any such transaction, the outstanding Common Stock of the Company is changed or exchanged into or for other assets or securities as a result, unless the stockholders of the Company immediately before such transaction own, directly or indirectly immediately following such transaction, at least 51% of the combined voting power of the outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the Voting Stock immediately before such transaction; or (iv) any time Continuing Directors (as defined) do not constitute a majority of the Board of Directors of the Company (or, if applicable, a successor corporation to the Company); provided that a Change in Control shall not be deemed to have occurred if either (x) the last sale price of the Common Stock for any five trading days during the ten trading days immediately preceding the Change in Control is at least equal to 105% of the conversion price in effect on such day or (y) in the case of a merger or consolidation, at least 95% of the consideration (excluding cash payments for fractional shares or for dissenters' appraisal rights) in such merger or consolidation otherwise constituting the Designated Event consists of common stock traded on a United States national securities exchange or quoted on the Nasdaq National Market (or which will be so traded or quoted when issued or exchanged in connection with such Change in Control) and as a result of such transaction or transactions such Notes become convertible solely into such common stock. "Continuing Director" means at any date a member of the Company's Board of Directors (i) who was a member of such board on , 1997 or (ii) who was nominated or elected by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Company's Board of Directors was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or such lesser number comprising a majority of a nominating committee if authority for such nominations or elections has been delegated to a nominating committee whose authority and composition has been approved by at least a majority of the directors who were Continuing Directors at the time such committee was formed. (Under this definition, if the current Board of Directors of the Company were to approve a new director or directors and then resign, no Change in Control would occur even though the current Board of Directors would thereafter cease to be in office.) A "Termination of Trading" shall have occurred if the Common Stock (or other common stock into which the Notes are then convertible) is neither listed for trading on a United States national securities exchange nor approved for trading on an established automated over-the-counter trading market in the United States. 52 54 No quantitative or other established meaning has been given to the phrase "all or substantially all" (which appears in the definition of Change in Control) by courts which have interpreted this phrase in various contexts. In interpreting this phrase, courts, among other things, make a subjective determination as to the portion of assets conveyed, considering such factors as the value of assets conveyed, the proportion of an entity's income derived from the assets conveyed and the significance of those assets to the ongoing business of the entity. To the extent the meaning of such phrase is uncertain, uncertainty will exist as to whether or not a Change in Control may have occurred (and, accordingly, as to whether or not the holders of Notes will have the right to require the Company to repurchase their Notes). If a Designated Event were to occur, there can be no assurance that the Company would have sufficient financial resources, or would be able to arrange financing, to pay the repurchase price for all Notes tendered by holders thereof. In addition, the terms of certain of the Company's existing debt agreements prohibit the Company from repurchasing any Notes and also identify certain events that would constitute Designated Events, as well as certain other change in control events with respect to the Company or certain of its subsidiaries, which would constitute an event of default under such debt agreements. Any future credit agreements or other agreements relating to other indebtedness (including other Senior Indebtedness) to which the Company becomes a party may contain similar restrictions and provisions. In the event a Designated Event occurs at a time when the Company is prohibited from repurchasing Notes, the Company could seek the consent of its lenders to the repurchase of the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company would remain prohibited from repurchasing Notes. Any failure by the Company to repurchase the Notes when required following a Designated Event would result in an Event of Default under the Indenture whether or not such repurchase is permitted by the subordination provisions of the Indenture. Any such default may, in turn, cause a default under Senior Indebtedness of the Company. Moreover, the occurrence of a Designated Event may cause an event of default under Senior Indebtedness of the Company. As a result, in each case, any repurchase of the Notes would, absent a waiver, be prohibited under the subordination provisions of the Indenture until the Senior Indebtedness is paid in full. See "-- Subordination" below and "Risk Factors -- Subordination of Notes and Absence of Financial Covenants." No Notes may be repurchased at the option of holders upon a Designated Event if there has occurred and is continuing an Event of Default described under "-- Events of Default and Remedies" below (other than a default in the payment of the repurchase price with respect to such Notes on the repurchase date). The foregoing provisions would not necessarily afford holders of the Notes protection in the event of a highly leveraged transaction, a change in control of the Company or other transactions involving the Company that may adversely affect holders. The Company could, in the future, enter into certain transactions, including certain recapitalizations of the Company, that would increase the amount of Senior Indebtedness (or other indebtedness) outstanding at such time or result in an actual change in control of the Company but that would not constitute a Change in Control giving rise to the right of the holders to cause the Company to repurchase the Notes. There are no restrictions in the Indenture or the Notes on the creation of additional Senior Indebtedness (or any other indebtedness) of the Company or any of its subsidiaries and the incurrence of significant amounts of additional indebtedness could have an adverse impact on the Company's ability to service its debt, including the Notes. The Notes are subordinate in right of payment to all existing and future Senior Indebtedness as described under "-- Subordination" below. Certain leveraged transactions and transactions involving a change in control of the Company sponsored by the Company's management or an affiliate of the Company could constitute a Change in Control that would give rise to the repurchase right. The Indenture does not provide the Company's Board of Directors with the right to limit or waive the repurchase right in the event of any such leveraged transaction or change in control. In addition, the right to require the Company to repurchase Notes as a result of a Change in Control could have the effect of delaying, deferring or 53 55 preventing a change of control or other attempts to acquire control of the Company unless arrangements have been made to enable the Company to repurchase all of the Notes at the repurchase date. Consequently, the right may render more difficult or discourage a merger, consolidation or tender offer (even if such transaction is supported by the Company's Board of Directors or is favorable to the stockholders), the assumption of control by a holder of a large block of the Company's shares and the removal of incumbent management. The Designated Event repurchase right, however, is not the result of management's knowledge of any specific effort to accumulate shares of Common Stock or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise. Instead, the Designated Event repurchase right has resulted from negotiations between the Company and the Note Underwriters. No modification of the Indenture regarding the provisions on repurchase at the option of any holder of a Note is permissible without the consent of the holder of the Note so affected. The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act to the extent then applicable, and otherwise comply with all federal and state securities laws in connection with any offer by the Company to purchase Notes at the option of the holders upon a Designated Event. Rule 13e-4 under the Exchange Act requires, among other things, the dissemination of certain information to security holders in the event of an issuer tender offer and may apply in the event that the repurchase option becomes available to holders of the Notes. SUBORDINATION The indebtedness evidenced by the Notes is, to the extent provided in the Indenture, subordinate to the prior payment in full of all Senior Indebtedness (as defined) whether presently outstanding or hereafter incurred or created. Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company, the payment of the principal of, or premium, if any, and interest on the Notes is to be subordinated to the extent provided in the Indenture in right of payment to the prior payment in full, in cash or in such other form of payment as may be acceptable to the holders thereof, of all Senior Indebtedness. Moreover, in the event of any acceleration of the Notes because of an Event of Default, the holders of any Senior Indebtedness then outstanding would be entitled to payment in full in cash or such other form of payment as may be acceptable to the holders thereof of all such Senior Indebtedness before the holders of the Notes are entitled to receive any payment or distribution in respect thereof. The Company also may not make any payment upon or in respect of the Notes if (i) a default in the payment of principal of, premium, if any, interest, or other payment due on Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Indebtedness (as defined below) that permits holders of the Designated Senior Indebtedness as to which such default related to accelerate its maturity and the Trustee and the Company receive a notice of such default (a "Payment Blockage Notice") from a holder of Designated Senior Indebtedness or its representative or agent. Payments on the Notes may and shall be resumed (a) in case of payment default, on the date on which such default is cured or waived and (b) in case of a nonpayment default, on the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received. No new period of payment blockage may be commenced pursuant to a Payment Blockage Notice unless (i) 365 days have elapsed since the first day of the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have become due have been paid in full in cash or the Trustee or the Noteholders shall not have instituted proceedings to enforce the Noteholders' right to receive such payments. No default (whether or not such event of default is on the same issue of Designated Senior Indebtedness) that existed or was continuing on the date of delivery of any Payment Blockage Notice shall be, or be made, the basis for a subsequent Payment Blockage Notice. 54 56 The term "Senior Indebtedness" means the principal of, premium, if any, interest on (including any interest accruing after the filing of a petition by or against the Company under any bankruptcy law, whether or not allowed as a claim after such filing in any proceeding under such bankruptcy law), and any other payment due pursuant to, any of the following, whether outstanding on the date of the Indenture or thereafter incurred or created: (a) all indebtedness of the Company for money borrowed or evidenced by notes, debentures, bonds, similar instruments or other debt securities (including, but not limited to, purchase money mortgages and any such indebtedness which is convertible or exchangeable for securities of the Company); (b) all indebtedness of the Company due and owing with respect to letters of credit, bankers' acceptances or similar credit transactions (including, but not limited to, reimbursement obligations with respect thereto); (c) all indebtedness or other obligations of the Company due and owing with respect to interest rate and currency swap agreements, cap, floor, collar and option agreements, currency spot and forward contracts and other similar agreements and arrangements; (d) all indebtedness consisting of commitment or standby fees due and payable to lending institutions with respect to credit facilities or letters of credit, bankers' acceptances or similar credit transactions; (e) all obligations of the Company for payment of money under leases required or permitted to be capitalized under generally accepted accounting principles; (f) all indebtedness or obligations of others of the kinds described in any of the preceding clauses (a), (b), (c), (d) or (e) assumed by or guaranteed in any manner by the Company or in effect guaranteed (directly or indirectly) by the Company through an agreement to purchase, contingent or otherwise, and all obligations of the Company under any such guarantee or other arrangements; and (g) all renewals, extensions, refundings, deferrals, amendments or modifications of indebtedness or obligations of the kinds described in any of the preceding clauses (a), (b), (c), (d), (e) or (f), unless in the case of any particular indebtedness, obligation, renewal, extension, refunding, amendment, modification or supplement, the instrument or other document creating or evidencing the same or the assumption or guarantee of the same expressly provides that such indebtedness, obligation, renewal, extension, refunding, amendment, modification or supplement is subordinate to, or is not superior to, or is pari passu with, the Notes; provided that Senior Indebtedness shall not include (i) any indebtedness of any kind of the Company to any subsidiary of the Company, a majority of the voting stock of which is owned, directly or indirectly, by the Company, (ii) indebtedness for trade payables or constituting the deferred purchase price of inventory, material or services incurred in the ordinary course of business or (iii) the Notes. The term "Designated Senior Indebtedness" means all Senior Indebtedness under the Credit Facility and all other Senior Indebtedness if the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such indebtedness shall be "Designated Senior Indebtedness" for purposes of the Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of holders of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). In the event that, notwithstanding the foregoing, the Trustee or any holder of Notes receives any payment or distribution of assets of the Company of any kind in contravention of any of the terms of the Indenture, whether in cash, property or securities, including, without limitation, by way of set-off or otherwise, in respect of the Notes before all Senior Indebtedness is paid in full in cash or such other form of payment acceptable to the holders of such Senior Indebtedness, then such payment or distribution will be held by the recipient in trust for the benefit of the holders of Senior Indebtedness of the Company, and will be immediately paid over or delivered to the holders of Senior Indebtedness of the Company or their representative or representatives to the extent necessary to make payment in full in cash or such other form of payment acceptable to the holders of such Senior Indebtedness of all Senior Indebtedness of the Company remaining unpaid, after giving effect to any concurrent payment or distribution, or provision therefor, to or for the holders of Senior Indebtedness of the Company. The Notes are obligations exclusively of the Company. As a significant portion of the Company's consolidated operations is conducted through subsidiaries, the cash flow and the consequent ability to 55 57 service debt, including the Notes, of the Company is partially dependent upon the earnings of such subsidiaries and the distribution of those earnings, or upon loans or other payments of funds by those subsidiaries, to the Company. Such subsidiaries are separate and distinct legal entities, and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor, whether by dividends, distributions, loans or other payments. In addition, the payment of dividends or distributions and the making of loans and advances to the Company by any such subsidiaries may be subject to statutory or contractual restrictions, and may be contingent upon the earnings of those subsidiaries and subject to various business considerations. Any right of the Company to receive assets of subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in these assets) would be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. As of January 25, 1997, the Company had approximately $218 million of indebtedness outstanding that would have constituted Senior Indebtedness and the Company's subsidiaries had outstanding indebtedness and other liabilities of approximately $57 million (excluding intercompany liabilities and liabilities of a type not required to be reflected as liabilities on the balance sheets of such subsidiaries in accordance with generally accepted accounting principles) to which the Notes would have been effectively subordinated. The Indenture will not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company can create, incur, assume or guarantee, nor will the Indenture limit the amount of indebtedness which any subsidiary of the Company can create, incur, assume or guarantee. No provision contained in the Indenture or the Notes will affect the obligation of the Company, which is absolute and unconditional, to pay, when due, principal of, premium, if any, and interest on, the Notes. The subordination provisions of the Indenture and the Notes will not prevent the occurrence of any default or Event of Default or limit the rights of any holder of Notes to pursue any other rights or remedies with respect to the Notes. As a result of these subordination provisions, in the event of the liquidation, bankruptcy, reorganization, insolvency, receivership or similar proceeding or an assignment for the benefit of the creditors of the Company or a marshaling of assets or liabilities of the Company and its subsidiaries, holders of the Notes may receive ratably less than other creditors. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the Indenture as being: (i) a default in payment of the principal of, or premium, if any, on the Notes (whether or not such payment is prohibited by the subordination provisions of the Indenture); (ii) default for 30 days in payment of any installment of interest on the Notes (whether or not such payment is prohibited by the subordination provisions of the Indenture); (iii) default by the Company for 45 days after notice given in accordance with the Indenture in the observance or performance of any other covenants in the Indenture; (iv) default in the payment of the repurchase price in respect of the Note on the repurchase date therefor (whether or not such payment is prohibited by the subordination provisions of the Indenture); (v) failure to provide timely notice of a Designated Event; (vi) failure of the Company or any Significant Subsidiary (as defined) to make any payment at maturity, including any applicable grace period, in respect of Indebtedness (which term as used in the Indenture means obligations (other than non-recourse obligations) of, or guaranteed or assumed by, the Company or any Significant Subsidiary for borrowed money or evidenced by bonds, notes or similar instruments) in an amount in excess of $10 million and continuance of such failure for 30 days after notice given in accordance with the Indenture; (vii) default by the Company or any Significant Subsidiary with respect to any Indebtedness, which default results in the acceleration of Indebtedness in an amount in excess of $10 million without such Indebtedness having been discharged or such acceleration having been rescinded or annulled for 30 days after notice given in accordance 56 58 with the Indenture; or (viii) certain events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary. The Indenture provides that the Trustee shall, within 90 days after the occurrence of a default, give to the registered holders of the Notes notice of all uncured defaults known to it, but the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the best interest of such registered holders, except in the case of a default in the payment of the principal of, or premium, if any, or interest on, any of the Notes when due or in the payment of any redemption or repurchase obligation. The Indenture provides that if any Event of Default shall have occurred and be continuing, the Trustee or the holders of not less than 25% in principal amount of the Notes then outstanding by notice to the Company and the Trustee may declare the principal of and premium, if any, on the Notes to be due and payable immediately, but if the Company shall cure all defaults (except the nonpayment of interest on, premium, if any, and principal of any Notes which shall have become due by acceleration) and certain other conditions are met, such declaration may be canceled and past defaults may be waived by the holders of a majority in principal amount of Notes then outstanding. If an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization were to occur, all unpaid principal of and accrued interest on the outstanding Notes will become due and payable immediately without any declaration or other act on the part of the Trustee or any holders of Notes, subject to certain limitations. The Indenture provides that the holders of a majority in principal amount of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, subject to certain limitations specified in the Indenture. Before proceeding to exercise any right or power under the Indenture at the direction of such holders, the Trustee shall be entitled to receive from such holders reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in complying with any such direction. The right of a holder to institute a proceeding with respect to the Indenture is subject to certain conditions precedent, including the written notice by such holder of an Event of Default and an offer to indemnify the Trustee, along with the written request by the holders of not less than 25% in principal amount of the outstanding Notes that such a proceeding be instituted, but the holder has an absolute right to institute suit for the enforcement of payment of the principal of, and premium, if any, and interest on, such holder's Notes when due and to enforce such holder's right to convert such Notes. The holders of not less than a majority in principal amount of the outstanding Notes may on behalf of the holders of all Notes waive any past defaults, except (i) a default in payment of the principal of, or premium, if any, or interest on, any Note when due, (ii) a failure by the Company to convert any Notes into Common Stock or (iii) in respect of certain provisions of the Indenture which cannot be modified or amended without the consent of the holder of each outstanding Note affected thereby. The Company is required to furnish to the Trustee annually within 120 days of the end of the fiscal year a statement of certain officers of the Company stating whether or not to the best of their knowledge the Company is in default in the performance and observation of certain terms of the Indenture and, if they have knowledge that the Company is in default, specifying such default and its status. The Company is also required, upon becoming aware of any default or Event of Default, to deliver to the Trustee a statement specifying such default or Event of Default and the action the Company has taken, is taking or proposes to take with respect thereto. LIMITATION ON MERGER, SALE OR CONSOLIDATION The Indenture provides that the Company may not, directly or indirectly, consolidate with or merge with or into another person or sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, unless (i) either (a) the Company is the surviving 57 59 entity or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by written agreement all of the obligations of the Company in connection with the Notes and the Indenture; (ii) no default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and (iii) certain other conditions are satisfied. Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein as the Company, and the Company will be released from its obligations under the Indenture and the Notes, except as to any obligations that arise from or as a result of such transaction. MODIFICATIONS OF THE INDENTURE The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in principal amount of the Notes at the time outstanding, to modify the Indenture or any supplemental indenture or the rights of the holders of the Notes, except that no such modification shall (i) extend the fixed maturity of any Note, reduce the rate or extend the time for payment of interest thereon, reduce the principal amount thereof or premium, if any, thereon, reduce any amount payable upon redemption or repurchase thereof, impair or change in any respect adverse to the holders of Notes the obligation of the Company to make repurchase of any Note upon the happening of a Designated Event, impair or adversely affect the right of a holder to institute suit for the payment thereof, change the currency in which the Notes are payable, or impair or change in any respect adverse to the holder of the Notes, the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the holders of the Notes, without the consent of the holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes, without the consent of the holders of all of the Notes then outstanding. TAXATION OF NOTES See "Certain Federal Income Tax Considerations" for a discussion of certain federal tax aspects which will apply to holders of Notes. SATISFACTION AND DISCHARGE The Company may discharge its obligations under the Indenture while Notes remain outstanding if (i) all outstanding Notes will become due and payable at their scheduled maturity within one year or (ii) all outstanding Notes are scheduled for redemption within one year and, in either case, the Company has deposited with the Trustee an amount sufficient to pay and discharge all outstanding Notes on the date of their scheduled maturity or the scheduled date of redemption. GOVERNING LAW The Indenture and Notes will be governed by and construed in accordance with the laws of the State of New York. CONCERNING THE TRUSTEE State Street Bank and Trust Company, the Trustee under the Indenture, has been appointed by the Company as the initial paying agent, conversion agent, registrar and custodian with regard to the Notes. The Company may maintain deposit accounts and conduct other banking transactions with the Trustee or its affiliates in the ordinary course of business, and the Trustee and its affiliates may from 58 60 time to time in the future provide banking and other services to the Company in the ordinary course of their business. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and the TIA will contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions, provided, however, that if it acquires any conflicting interest (as described in the TIA), it must eliminate such conflict or resign. 59 61 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain United States federal income tax considerations relevant to holders of the Notes. This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. This discussion does not purport to deal with all aspects of federal income taxation that may be relevant to a particular investor's decision to purchase the Notes, and it is not intended to be wholly applicable to all categories of investors, some of which, such as dealers in securities, banks, insurance companies, tax-exempt organizations and non-United States persons, may be subject to special rules. In addition, this discussion is limited to persons that purchase the Notes in the Note Offering and hold the Notes as a "capital asset" within the meaning of Section 1221 of the Code. ALL PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE COMMON STOCK. CONVERSION OF NOTES INTO COMMON STOCK In general, no gain or loss will be recognized for federal income tax purposes on a conversion of the Notes into shares of Common Stock. However, cash paid in lieu of a fractional share of Common Stock will result in taxable gain (or loss), which will be capital gain or loss, to the extent that the amount of such cash exceeds (or is exceeded by) the portion of the adjusted basis of the Note allocable to such fractional share. The adjusted basis of shares of Common Stock received on conversion will equal the adjusted basis of the Note converted, reduced by the portion of adjusted basis allocated to any fractional share of Common Stock exchanged for cash. The holding period of an investor in the Common Stock received on conversion will include the period during which the converted Notes were held. The conversion price of the Notes is subject to adjustment under certain circumstances. See "Description of Notes -- Conversion." Section 305 of the Code and the Treasury Regulations issued thereunder may treat the holders of the Notes as having received a constructive distribution, resulting in ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of the Company's then current and/or accumulated earnings and profits, if and to the extent that certain adjustments in the conversion price that may occur in limited circumstances (particularly an adjustment to reflect a taxable dividend to holders of Common Stock) increase the proportionate interest of a holder of Notes in the fully diluted Common Stock, whether or not such holder ever exercises its conversion privilege. Moreover, if there is not a full adjustment to the conversion price of the Notes to reflect a stock dividend or other event increasing the proportionate interest of the holders of outstanding Common Stock in the assets or earnings and profits of the Company, then such increase in the proportionate interest of the holders of the Common Stock generally will be treated as a distribution to such Common Stock holders, taxable as ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of the Company's then current and/or accumulated earnings. MARKET DISCOUNT Investors acquiring Notes pursuant to this Prospectus should note that the resale of those Notes may be adversely affected by the market discount provisions of sections 1276 through 1278 of the Code. Under the market discount rules, if a holder of a Note purchases it at a market discount (i.e., at a price below its stated redemption price at maturity) in excess of a statutorily-defined de minimis amount and thereafter recognizes gain upon a disposition or retirement of the Note, then the lesser of the gain recognized or the portion of the market discount that accrued on a ratable basis (or, if 60 62 elected, on a constant interest rate basis) generally will be treated as ordinary income at the time of the disposition. Moreover, any market discount on a Note may be taxable to an investor to the extent of appreciation at the time of certain otherwise non-taxable transactions (e.g., gifts). Any accrued market discount not previously taken into income prior to a conversion of a Note, however, may (pursuant to Committee Report) carry over to the Common Stock received on conversion and be treated as ordinary income upon a subsequent disposition of such Common Stock to the extent of any gain recognized on such disposition. In addition, absent an election to include market discount in income as it accrues, a holder of a market discount debt instrument may be required to defer a portion of any interest expense that otherwise may be deductible on any indebtedness incurred or maintained to purchase or carry such debt instrument until the holder disposes of the debt instrument in a taxable transaction. SALE, EXCHANGE OR RETIREMENT OF NOTES Each holder of Notes generally will recognize gain or loss upon the sale, exchange, redemption, repurchase, retirement or other disposition of those Notes measured by the difference (if any) between (i) the amount of cash and the fair market value of any property received (except to the extent that such cash or other property is attributable to the payment of accrued interest not previously included in income, which amount will be taxable as ordinary income), and (ii) the holder's adjusted tax basis in those Notes (including any market discount previously included in income by the holder). Each holder of Common Stock into which the Notes are converted, in general, will recognize gain or loss upon the sale, exchange, redemption, or other disposition of the Common Stock measured under rules similar to those described in the preceding sentence for the Notes. Special rules may apply to redemptions of Common Stock which may result in different treatment. Any such gain or loss recognized on the sale, exchange, redemption, repurchase, retirement or other disposition of a Note or share of Common Stock should be capital gain or loss (except as discussed under "-- Market Discount" above), and would be long-term capital gain or loss if the Note or the Common Stock had been held for more than one year at the time of the sale or exchange. An investor's initial basis in a Note will be the cash price paid therefor. BACK-UP WITHHOLDING Certain "reportable payments," including interest payments, and, under certain circumstances, principal payments on the Notes, as well as dividend payments on the Common Stock, may be subject to "back-up withholding" at a rate of 31%. These back-up withholding rules apply if the holder, among other things, (i) fails to furnish a social security number or other taxpayer identification number ("TIN") certified under penalties of perjury within a reasonable time after the request therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly interest or dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the TIN furnished is the correct number and that the holder is not subject to back-up withholding. A holder who does not provide the Company with its correct TIN also may be subject to penalties imposed by the IRS. Any amount withheld from a payment to a holder under the back-up withholding rules is creditable against the holder's federal income tax liability, provided the required information is furnished to the IRS. Back-up withholding will not apply, however, with respect to payments made to certain holders, including corporations, tax-exempt organizations and certain foreign persons, provided their exemption from back-up withholding is properly established. The Company will report to the holders of Notes and Common Stock and to the IRS the amount of any "reportable payments" for each calendar year and the amount of tax withheld, if any, with respect to such payments. 61 63 UNDERWRITING The Underwriters named below (the "Common Stock Underwriters"), acting through their representatives, Robertson, Stephens & Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Adams, Harkness & Hill, Inc. (the "Common Stock Representatives"), have severally agreed with the Company, subject to the terms and conditions of the applicable Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The Common Stock Underwriters are committed to purchase and pay for all such shares if any shares are purchased. The closing of the Common Stock Offering is not conditioned upon the closing of the Note Offering.
COMMON STOCK NUMBER UNDERWRITER OF SHARES ------------ --------- Robertson, Stephens & Company LLC......................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................ Adams, Harkness & Hill, Inc............................................... --------- Total................................................................ 2,000,000 =========
The Underwriters named below (the "Note Underwriters"), acting through their representatives, Robertson, Stephens & Company LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Note Representatives"), have severally agreed with the Company, subject to the terms and conditions of the applicable Underwriting Agreement, to purchase from the Company the principal amount of Notes set forth opposite their respective names below. The Note Underwriters are committed to purchase and pay for all such Notes if any Notes are purchased. The closing of the Note Offering is not conditioned upon the closing of the Common Stock Offering.
PRINCIPAL AMOUNT NOTE UNDERWRITER OF NOTES ---------------- ------------ Robertson, Stephens & Company LLC...................................... $ Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................. --------- Total............................................................. $100,000,000 =========
The Common Stock Representatives and the Note Representatives are sometimes referred to collectively as the "Representatives." The Common Stock Underwriters and the Note Underwriters are sometimes referred to collectively as the "Underwriters." The respective Representatives have advised the Company that the respective Underwriters propose to offer the shares of Common Stock and the Notes to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of, respectively, not in excess of $ per share, of which $ may be reallowed to other dealers, and of not more than % of the principal amount of the Notes. After the consummation of each Offering, the public offering price, concession and reallowance to dealers for such Offering may 62 64 be reduced by the respective Representatives. No such reduction shall change the amount of proceeds to be received by the Company with respect to such Offering as set forth on the cover page of this Prospectus. The Company and the Selling Stockholders have granted to the Common Stock Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 97,400 and 202,600 shares of Common Stock, respectively, to cover over-allotments, if any, at the same price per share as the Company receives for the 2,000,000 shares of Common Stock that the Common Stock Underwriters have agreed to purchase from the Company. The first 202,600 shares of Common Stock purchased by the Common Stock Underwriters pursuant to this option will be sold by the Selling Stockholders and the subsequent 97,400 shares, if any, purchased by the Common Stock Underwriters pursuant to this option will be sold by the Company. The Company also has granted to the Note Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to $15 million principal amount of Notes to cover over-allotments, if any, at the same price per Note as the Company receives for the first $100 million principal amount of Notes that the Note Underwriters have agreed to purchase from the Company. To the extent that the Common Stock Underwriters exercise such option for shares of Common Stock, each of the Common Stock Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares of Common Stock as the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 2,000,000 shares offered hereby. If purchased, such additional shares will be sold by the Common Stock Underwriters on the same terms as those on which the 2,000,000 shares of Common Stock are being sold. To the extent that the Note Underwriters exercise such option for Notes, each of the Note Underwriters will have a firm commitment to purchase approximately the same percentage of such additional Notes as the principal amount of Notes to be purchased by it shown in the above table represents as a percentage of the $100 million principal amount of Notes offered hereby. If purchased, such additional Notes will be sold by the Note Underwriters on the same terms as those on which the $100 million principal amount of Notes are being sold. The respective Underwriting Agreements contain covenants of indemnity among the respective Underwriters, the Company and, in the case of the Underwriting Agreement for the Common Stock Offering, the Selling Stockholders, against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to the terms of Lockup Agreements, all executive officers and Selling Stockholders, and certain directors, of the Company have agreed with the respective Representatives that, for a period 90 days after the date of the Offerings (the "Lock-Up Period"), they will not offer to sell, contract to sell or otherwise sell, dispose of or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock now owned or hereafter acquired directly by such holders or with respect to which they have the power of disposition, otherwise than with the prior written consent of Robertson Stephens & Company LLC which may, in its sole discretion and at any time, without notice, release all or any portion of the securities subject to Lockup Agreements. The Company has also agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or any options or warrants to purchase Common Stock other than shares or options issued under the Company's stock option plans and stock issued upon the exercise of outstanding options and warrants during the Lock-Up Period except with the prior written consent of Robertson, Stephens & Company LLC. The respective Representatives have advised the Company that the respective Underwriters do not intend to confirm any sales to accounts over which they exercise discretionary authority. The offering price of the Common Stock will be determined by negotiations among the Company and the Common Stock Representatives, based largely upon the market price for the Common Stock as reported on the Nasdaq National Market. 63 65 Certain persons participating in these Offerings may engage in transactions, including syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock and Notes on the Nasdaq National Market, the over-the-counter market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock and the Notes at levels above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. Prior to the Note Offering, there has been no trading market for the Notes. The Company expects that the Notes will trade on the over-the-counter market. However, there can be no assurance that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. Robertson, Stephens & Company LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated have advised the Company that they currently intend to make a market in the Notes, but they are not obligated to do so and may discontinue such market making at any time. There can be no assurance that an active market for the Notes will develop and continue upon completion of the Note Offering or that the market price of the Notes will not decline. Various factors such as changes in prevailing interest rates or changes in perceptions of the Company's creditworthiness could cause the market price of the Notes to fluctuate significantly. The trading price of the Notes could also be significantly affected by the market price of the Common Stock, which could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results, announcements of technological innovations or new products by the Company, its customers or its competitors, developments in patents or other intellectual property rights, general conditions in the electronics industry and general economic and market conditions. Factors creating volatility in the trading price of the Common Stock could have a significant impact on the trading price of the Notes. LEGAL MATTERS The validity of the shares of Common Stock offered hereby and the validity of the Notes offered hereby and the shares of Common Stock issuable upon conversion thereof will be passed upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts, special counsel to the Company. The validity of the shares of Common Stock offered hereby by the Selling Stockholders will be passed upon for the Selling Stockholders by Berlin, Hamilton & Dahmen, LLP, Boston, Massachusetts. A member of Testa, Hurwitz & Thibeault, LLP is the beneficial owner of 100 shares of Common Stock of the Company. James C. Hamilton, a partner at Berlin, Hamilton & Dahmen, LLP, which is general counsel to the Company, is the Company's Clerk. He is the beneficial owner of 12,250 shares of Common Stock of the Company. He is also the co-trustee of certain irrevocable trusts for the benefit of members of the family of Horace H. Irvine II, Chairman of the Board of the Company. See "Principal Shareholders." Certain legal matters relating to the Common Stock Offering and the Note Offering will be passed upon for the respective Underwriters by Hale and Dorr, LLP, Boston, Massachusetts, and the validity of the Notes offered hereby and the shares of Common Stock issuable upon conversion thereof will be passed upon for the Note Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The Company's audited consolidated financial statements and schedule included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in its reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated financial statements of Zycon Corporation included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as of December 31, 1996 and for the one-year period ended December 31, 1996 to the extent indicated in its report, and are included 64 66 herein in reliance upon the authority of such firm as experts in giving said report. The consolidated financial statements of Zycon Corporation as of December 31, 1995 and for each of the years in the two-year period ended December 31, 1995, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act with respect to the securities offered hereby (the "Registration Statement"). This Prospectus, which constitutes part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. Reference is made to such contract or other document filed, or incorporated by reference, as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. For further information pertaining to the Company and the Common Stock and Notes, reference is made to the Registration Statement and the exhibits and schedules thereto, which may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the following Regional Offices of the Commission: Seven World Trade Center, New York, New York, 10048; and 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60621. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. All such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 90 Devonshire Street, Suite 700, Boston, Massachusetts 02109; 7 World Trade Center, 13th Floor, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its public reference facilities at Boston, Massachusetts, New York, New York and Chicago, Illinois at prescribed rates. In addition, the aforementioned materials may also be inspected at the offices of the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a World-Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http.//www.sec.gov. 65 67 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- HADCO CORPORATION: Report of Independent Public Accountants........................................... F-2 Consolidated Balance Sheets at October 28, 1995, October 26, 1996 and January 25, 1997 (Unaudited)................................................................ F-3 Consolidated Statements of Operations for the Years Ended October 29, 1994, October 28, 1995 and October 26, 1996 and for the Three Months Ended January 27, 1996 (Unaudited) and January 25, 1997 (Unaudited).................................... F-4 Consolidated Statements of Stockholders' Investment for the Years Ended October 29, 1994, October 28, 1995 and October 26, 1996 and for the Three Months Ended January 25, 1997 (Unaudited).................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended October 29, 1994, October 28, 1995 and October 26, 1996 and for the Three Months Ended January 27, 1996 (Unaudited) and January 25, 1997 (Unaudited).................................... F-6 Notes to Consolidated Financial Statements......................................... F-7 PRO FORMA FINANCIAL STATEMENTS: Pro Forma Condensed Consolidated Financial Statements.............................. F-23 Pro Forma Condensed Consolidated Statement of Operations for the Fiscal Year Ended October 26, 1996 (Unaudited).................................................... F-24 Pro Forma Condensed Consolidated Statement of Operations for the Quarter Ended January 25, 1997 (Unaudited).................................................... F-25 ZYCON CORPORATION: Report of Independent Public Accountants (Arthur Andersen LLP)..................... F-26 Independent Auditors' Report (KPMG Peat Marwick LLP)............................... F-27 Consolidated Balance Sheets as of December 31, 1995 and 1996....................... F-28 Consolidated Statements of Income for the Years Ended December 31, 1994, 1995 and 1996............................................................................ F-29 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996............................................................. F-30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996........................................................................ F-31 Notes to Consolidated Financial Statements......................................... F-32
F-1 68 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Hadco Corporation: We have audited the accompanying consolidated balance sheets of Hadco Corporation (a Massachusetts corporation) and subsidiaries as of October 28, 1995 and October 26, 1996, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended October 26, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hadco Corporation as of October 28, 1995 and October 26, 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 26, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts November 15, 1996 (except for the matter discussed in Note 2, as to which the date is January 10, 1997) F-2 69 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share information)
OCTOBER 28, OCTOBER 26, JANUARY 25, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 21,307 $ 32,786 $ 8,825 Short-term investments.............................. 15,167 9,401 3,264 Accounts receivable, net of allowance of $850 in 1995, $1,100 in 1996 and $1,830 in 1997.......... 35,797 40,622 72,616 Inventories......................................... 13,304 21,786 34,107 Deferred tax asset.................................. 6,288 7,483 7,483 Prepaid and other expenses.......................... 1,696 1,483 5,607 -------- -------- -------- Total current assets........................ 93,559 113,561 131,902 PROPERTY, PLANT AND EQUIPMENT, NET.................... 67,692 103,735 203,639 DEFERRED TAX ASSET.................................... 1,646 2,117 -- ACQUIRED INTANGIBLE ASSETS, NET....................... -- -- 108,699 OTHER ASSETS.......................................... 94 88 4,314 -------- -------- -------- $ 162,991 $ 219,501 $ 448,554 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Short-term debt, current portion of long-term debt and capital lease obligations.................... $ 2,143 $ 1,907 $ 8,116 Accounts payable.................................... 27,002 42,265 69,709 Accrued payroll and other employee benefits......... 16,030 17,592 19,771 Other accrued expenses.............................. 7,341 8,236 12,234 -------- -------- -------- Total current liabilities................... 52,516 70,000 109,830 -------- -------- -------- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION..................................... 2,387 1,515 228,168 -------- -------- -------- DEFERRED TAX LIABILITY................................ -- -- 30,285 -------- -------- -------- OTHER LONG-TERM LIABILITIES........................... 7,314 9,145 9,214 -------- -------- -------- COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' INVESTMENT: Common stock, $.05 par value; Authorized -- 25,000 shares Issued and outstanding -- 9,939 shares in 1995, 10,382 in 1996 and 10,444 shares in 1997......... 497 521 523 Paid-in capital..................................... 25,077 30,939 32,283 Deferred compensation............................... (407) (240) (209) Retained earnings................................... 75,607 107,621 38,460 -------- -------- -------- Total stockholders' investment.............. 100,774 138,841 71,057 -------- -------- -------- $ 162,991 $ 219,501 $ 448,554 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 70 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
FOR THE YEARS ENDED, THREE MONTHS ENDED, ------------------------------------- ------------------------ OCTOBER 29, OCTOBER 28, OCTOBER 26, JANUARY 27, JANUARY 25, 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Net Sales.................................................. $ 221,570 $ 265,168 $ 350,685 $76,481 $ 111,536 Cost of Sales.............................................. 177,597 200,673 264,537 56,999 86,681 -------- -------- -------- ------- -------- Gross Profit............................................... 43,973 64,495 86,148 19,482 24,855 Selling, General and Administrative Expenses............... 27,491 30,589 34,616 7,948 9,298 Write-off of Acquired in-Process Research and Development.............................................. -- -- -- -- 78,000 -------- -------- -------- ------- -------- Income (Loss) From Operations.............................. 16,482 33,906 51,532 11,534 (62,443) Interest and Other Income.................................. 843 1,669 1,287 355 880 Interest Expense........................................... (891) (537) (338) (95) (933) -------- -------- -------- ------- -------- Income (Loss) Before Provision for Income Taxes............ 16,434 35,038 52,481 11,794 (62,496) Provision for Income Taxes................................. 6,491 13,664 20,467 4,603 6,665 -------- -------- -------- ------- -------- Net Income (Loss).......................................... $ 9,943 $ 21,374 $ 32,014 $ 7,191 $ (69,161) ======== ======== ======== ======= ======== Net Income (Loss) Per Share................................ $ .93 $ 1.98 $ 2.89 $ .65 $ (6.64) ======== ======== ======== ======= ======== Weighted Average Shares Outstanding........................ 10,720 10,806 11,084 11,104 10,413 ======== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 71 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (In thousands)
COMMON STOCK -------------------- NUMBER $.05 PAR PAID-IN DEFERRED RETAINED OF SHARES VALUE CAPITAL COMPENSATION EARNINGS --------- -------- ------- ------------ -------- BALANCE, OCTOBER 30, 1993.................... 9,734 $487 $21,953 $ (1,316) $ 47,307 Terminated stock options................... -- -- (225) 225 -- Exercise of stock options.................. 332 16 837 -- -- Tax benefit of exercise of nonqualified stock options........................... -- -- 319 -- -- Compensation expense associated with granting nonqualified stock options..... -- -- -- 360 -- Purchase and retirement of common stock.... (328) (16) (121) -- (2,329) Net income................................. -- -- -- -- 9,943 ------ ---- ------- ------- -------- BALANCE, OCTOBER 29, 1994.................... 9,738 487 22,763 (731) 54,921 Terminated stock options................... -- -- (37) 37 -- Exercise of stock options.................. 529 16 1,079 -- -- Tax benefit of exercise of nonqualified stock options........................... -- -- 1,597 -- -- Compensation expense associated with granting nonqualified stock options..... -- -- -- 287 -- Purchase and retirement of common stock.... (328) (6) (325) -- (688) Net income................................. -- -- -- -- 21,374 ------ ---- ------- ------- -------- BALANCE, OCTOBER 28, 1995.................... 9,939 497 25,077 (407) 75,607 Terminated stock options................... -- -- (13) 13 -- Exercise of stock options.................. 443 24 1,714 -- -- Tax benefit of exercise of nonqualified stock options........................... -- -- 4,161 -- -- Compensation expense associated with granting nonqualified stock options..... -- -- -- 154 -- Net income................................. -- -- -- -- 32,014 ------ ---- ------- ------- -------- BALANCE, OCTOBER 26, 1996.................... 10,382 521 30,939 (240) 107,621 Exercise of stock options (unaudited)...... 62 2 326 -- -- Tax benefit of exercise of nonqualified stock options (unaudited)............... -- -- 1,018 -- -- Compensation expense associated with granting nonqualified stock options (unaudited)............................. -- -- -- 31 -- Net loss (unaudited)....................... -- -- -- -- (69,161) ------ ---- ------- ------- -------- BALANCE, JANUARY 25, 1997 (Unaudited)........ 10,444 $523 $32,283 $ (209) $ 38,460 ====== ==== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 72 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE YEARS ENDED, THREE MONTHS ENDED, --------------------------------------- --------------------------- OCTOBER 29, OCTOBER 28, OCTOBER 26, JANUARY 27, JANUARY 25, 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ 9,943 $ 21,374 $ 32,014 $ 7,191 $ (69,161) Adjustments to reconcile net income (loss) to net cash provided by operating activities-- Write-off of acquired in-process research and development......................................... -- -- -- -- 78,000 Depreciation, amortization, deferred compensation and deferred taxes...................................... 12,708 11,218 17,330 3,840 6,531 Gain on sale of fixed assets.......................... (81) (415) (205) (194) -- Changes in assets and liabilities, net of acquisition of Zycon Corporation-- Increase in accounts receivable................... (2,739) (10,485) (4,825) (465) (7,158) Increase in inventories........................... (288) (3,009) (8,482) (1,166) (931) (Increase) decrease in prepaid taxes and other expenses........................................ (685) (364) 213 (775) (1,053) Decrease (increase) in other assets............... 55 25 33 15 (628) Increase in accounts payable and accrued expenses........................................ 8,661 15,291 17,720 304 2,661 Increase in long-term liabilities................. 1,710 2,714 1,831 700 70 -------- -------- -------- -------- --------- Net cash provided by operating activities....... 29,284 36,349 55,629 9,450 8,331 -------- -------- -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (purchases) sales of short-term investments......... (4,095) (2,668) 5,766 1,933 6,137 Purchases of property, plant and equipment.............. (19,510) (28,865) (53,966) (13,713) (11,011) Proceeds from sale of property, plant and equipment..... 177 429 290 194 -- Acquisition of Zycon Corporation, net of cash acquired of $2,824............................................. -- -- -- -- (209,661) -------- -------- -------- -------- --------- Net cash used in investing activities........... (23,428) (31,104) (47,910) (11,586) (214,535) -------- -------- -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital lease obligations...... (4,447) (2,584) (2,047) (630) (413) Principal payments of long-term debt.................... (92) (2,091) (92) (22) (33,690) Proceeds from issuance of long-term debt................ -- -- -- -- 215,000 Proceeds from exercise of stock options................. 853 1,095 1,738 2,952 328 Tax benefit from exercise of options.................... 319 1,597 4,161 -- 1,018 Purchase and retirement of common stock................. (2,466) (1,019) -- -- -- -------- -------- -------- -------- --------- Net cash (used in) provided by financing activities.................................... (5,833) (3,002) 3,760 2,300 182,243 -------- -------- -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 23 2,243 11,479 164 (23,961) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 19,041 19,064 21,307 21,307 32,786 -------- -------- -------- -------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 19,064 $ 21,307 $ 32,786 $ 21,471 $ 8,825 ======== ======== ======== ======== ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Machinery and equipment acquired under capital lease obligations..................................... $ -- $ -- $ 1,032 $ -- $ -- ======== ======== ======== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest.............................................. $ 859 $ 576 $ 279 $ -- $ 311 ======== ======== ======== ======== ========= Income taxes (net of refunds)......................... $ 8,939 $ 13,609 $ 16,794 $ 3,101 $ 405 ======== ======== ======== ======== ========= ACQUISITION OF ZYCON CORPORATION-- Fair value of assets acquired........................... $ 212,509 Liabilities assumed..................................... (114,993) Cash paid............................................... (204,885) Acquisition costs incurred.............................. (7,600) Write-off of acquired in-process research and development........................................... 78,000 --------- Goodwill................................................ $ (36,969) =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 73 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Hadco Corporation's (the "Company") principal products are complex multilayer rigid printed circuits and backplane assemblies. The consolidated financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the accompanying notes to consolidated financial statements. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents and Short-Term Investments The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. Short-term investments are carried at cost, which approximates market, and have maturities of less than one year. The Company classifies its investments in corporate and government debt securities as held-to-maturity given the Company's intent and ability to hold the securities to maturity. In accordance with the statement, held-to-maturity securities are carried at amortized cost. The Company's investments in held-to-maturity securities are as follows:
1995 1996 1997 ----------------- --------------- --------------- FAIR FAIR FAIR MARKET MARKET MARKET COST VALUE COST VALUE COST VALUE MATURITY ------- ------- ------ ------ ------ ------ ------------- (IN THOUSANDS) US Government Securities..... $ 6,039 $ 6,058 $1,000 $ 999 $1,000 $ 999 within 1 year State and Local Securities... 1,000 1,000 5,270 5,271 2,264 2,264 within 1 year Corporate Debt Securities.... 8,128 8,064 3,131 3,069 -- -- within 1 year ------- ------- ------ ------ ------ ------ $15,167 $15,122 $9,401 $9,339 $3,264 $3,263 ======= ======= ====== ====== ====== ======
The Company has no financial instruments requiring disclosure under Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 119, Disclosure About Derivative Financial Instruments and Fair Value of the Financial Instruments. Concentration of Credit Risk SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentration. The Company has no significant off-balance-sheet F-7 74 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) concentrations of credit risk such as foreign currency exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, short-term investments and trade accounts receivable. The Company maintains the majority of its cash and investment balances with financial institutions. The Company has not experienced any losses on these investments to date. Substantially all of the Company's accounts receivable are concentrated in the high technology and electronics industry. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in the high technology and electronics industry or by geographic region. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be inherent in the Company's accounts receivable. Depreciation and Amortization of Property, Plant and Equipment The Company provides for depreciation and amortization by charges to operations in amounts that allocate the cost of property, plant and equipment on a straight-line basis over the following estimated useful lives:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE -------------------- ----------- Land betterments....................................................... 10-18 Years Buildings and improvements............................................. 10-40 Years Machinery and equipment................................................ 3-9 Years Furniture and fixtures................................................. 5-7 Years Computer software...................................................... 3 Years Vehicles............................................................... 3 Years Capital leases......................................................... Lease term
Net Income (Loss) per Share Net income (loss) per share was computed based on the weighted average number of common and common equivalent shares outstanding during each period. Common equivalent shares include outstanding stock options and are included when dilutive. Fully diluted net income (loss) per share has not been separately presented as it would not be materially different from net income (loss) per share as presented. Revenue Recognition The Company recognizes revenue at the time products are shipped. New Accounting Standard The Company accounts for its stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company is required to adopt SFAS No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. SFAS No. 123 defines a fair- value-based method of accounting for employee stock options and other stock-based compensation. The compensation expense arising from this method of accounting can be reflected in the financial statements or, alternatively, the pro forma net income and earnings per share effect of the fair-value-based accounting can be disclosed in the financial footnotes. The Company will adopt the disclosure-only alternative. F-8 75 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Foreign Currency Translation The functional currency of the Company's Malaysian subsidiary is the United States dollar. Accordingly, all translation gains and losses resulting from transactions denominated in currencies other than United States dollars are included in the consolidated statements of operations. To date, the resulting gains and losses have not been material. Reclassification The Company has reclassified certain prior year information to conform with the current year's presentation. Interim Financial Statements The accompanying consolidated balance sheet as of January 25, 1997, the consolidated statements of operations and cash flows for the three-month periods ended January 27, 1996 and January 25, 1997 and the statement of stockholders' investment for the three-month period ended January 25, 1997 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The results of operations for the three months ended January 25, 1997 are not necessarily indicative of results to be expected for the entire year. (2) ACQUISITION OF ZYCON On January 10, 1997, the Company acquired substantially all of the outstanding common stock of Zycon Corporation ("Zycon"). The acquisition was financed by a new bank credit facility of up to $250,000,000, of which the Company borrowed approximately $215,000,000, upon consummation of the acquisition (see Note 7). The acquisition is being accounted for as a purchase in accordance with APB Opinion No. 16, and accordingly, Zycon's operating results since January 10, 1997 are included in the accompanying consolidated financial statements. In accordance with APB Opinion No. 16, the Company has allocated the purchase price based on the fair value of assets acquired and liabilities assumed. A significant portion of the purchase price, as described below, has been identified in an independent appraisal as intangible assets using proven valuation procedures and techniques, including approximately $78,000,000 of in-process research and development ("in-process R&D"). Acquired intangibles include developed technology, customer relationships, assembled workforce and trade names/trademarks. These intangibles are being amortized over their estimated useful lives of 12 to 30 years. The portion of the purchase price allocated to the in-process R&D projects that did not have a future alternative use totaled $78,000,000 and was charged to expense as of the acquisition date. Due to a difference in the bases of certain assets for financial statement and income tax purposes, deferred income taxes of $28,800,000 have been provided as part of the purchase price allocation in accordance with SFAS No. 109. F-9 76 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The aggregate purchase price of $212,485,000, including acquisition costs, was allocated as follows:
(IN THOUSANDS) -------------- Current assets........................................................ $ 41,790 Property, plant and equipment......................................... 95,193 Acquired intangibles.................................................. 72,000 In-process R&D........................................................ 78,000 Other assets.......................................................... 3,526 Goodwill.............................................................. 36,969 Liabilities assumed................................................... (114,993) --------- $ 212,485 =========
Unaudited pro forma operating results for the Company, assuming the acquisition of Zycon occurred on October 29, 1995 are as follows:
THREE MONTHS ENDED YEAR ENDED --------------------------- OCTOBER JANUARY 27, JANUARY 25, 26, 1996 1996 1997 ---------- ----------- ----------- (IN THOUSANDS) Net sales..................................... $570,345 $ 129,901 $ 172,547 Net income.................................... 28,700 8,167 8,275 Net income per share.......................... $ 2.59 $ .74 $ .76
For purposes of these pro forma operating results, the in-process R&D was assumed to have been written off prior to October 29, 1995, so that the operating results presented include only recurring costs. (3) INVENTORIES Inventories are stated at the lower of cost, first-in, first-out (FIFO), or market and consist of the following:
1995 1996 1997 ------- ------- ------- (IN THOUSANDS) Raw materials......................................... $ 6,318 $ 8,008 $12,668 Work-in-process....................................... 6,986 13,778 21,439 ------- ------- ------- $13,304 $21,786 $34,107 ======= ======= =======
The work-in-process consists of materials, labor and manufacturing overhead. F-10 77 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
1995 1996 1997 --------- --------- --------- (IN THOUSANDS) Land betterments................................ $ 1,838 $ 1,991 $ 2,174 Buildings and improvements...................... 42,885 52,961 97,895 Construction-in-progress........................ 15,173 22,543 23,841 Machinery and equipment......................... 94,611 126,878 228,099 Furniture and fixtures.......................... 11,721 14,082 15,500 Computer software............................... 2,343 2,662 3,581 Vehicles........................................ 141 159 584 Capital leases.................................. 15,048 14,972 16,620 --------- --------- --------- 183,760 236,248 388,294 Accumulated depreciation and amortization....... (116,068) (132,513) (184,655) --------- --------- --------- $ 67,692 $ 103,735 $ 203,639 ========= ========= =========
(5) INTANGIBLE ASSETS The Company assesses the realizability of intangible assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under SFAS No. 121, the Company is required to assess the valuation of its long-lived assets, including intangible assets, based on the estimated cash flows to be generated by such assets. Intangible assets are amortized on a straight-line basis, based on their estimated lives, as follows:
ESTIMATED JANUARY 25, LIFE 1997 ---------- -------------- (IN THOUSANDS) Developed technology..................................... 12 years $ 30,000 Customer relationships................................... 25 years 19,000 Assembled workforce...................................... 12 years 10,000 Trade names/trademarks................................... 30 years 13,000 Goodwill................................................. 20 years 36,969 -------- 108,969 Less -- Accumulated amortization......................... (270) -------- $108,699 ========
(6) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. F-11 78 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The provision for income taxes shown in the accompanying consolidated statements of operations is comprised of the following:
YEARS ENDED OCTOBER --------------------------- 1994 1995 1996 ------- ------- ------- (IN THOUSANDS) Federal -- Current................................................. $ 6,566 $14,331 $18,341 Deferred................................................ (1,224) (2,954) (1,206) ------- ------- ------- 5,342 11,377 17,135 ------- ------- ------- State -- Current................................................. 1,440 2,928 3,611 Deferred................................................ (291) (641) (279) ------- ------- ------- 1,149 2,287 3,332 ------- ------- ------- $ 6,491 $13,664 $20,467 ======= ======= =======
The tax rate used in the computation of the provision for federal and state income taxes differs from the statutory federal and state rates due to the following:
1994 1995 1996 ---- ---- ---- Provision for statutory rate................................. 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from -- State income taxes, net of federal tax benefit............. 4.6 4.5 4.4 Tax-exempt interest income................................. (0.4) (0.5) (0.4) Other, net................................................. 1.3 1.0 1.0 ---- ---- ---- Provision for income taxes.............................. 39.5% 39.0% 39.0% ==== ==== ====
In accordance with generally accepted accounting principles, the Company provides for income taxes on an interim basis, using its effective annual income tax rate. Although the Company has incurred a loss before income taxes during the three months ended January 25, 1997, the Company has recorded an income tax provision because the write-off of in-process R&D is not deductible for income tax purposes. Without taking into consideration the write-off of in-process R&D, the Company anticipates that the effective annual income tax rate for fiscal 1997 will be 43%, which is more than the expected combined federal and state statutory rates. This difference is caused primarily by anticipated losses incurred by the Company's Malaysian subsidiary for which the Company cannot record any tax benefit, and by amortization of goodwill and acquired intangibles which is not tax deductible. These items are partially offset by tax advantaged investment income, the tax benefit of the Company's Foreign Sales Corporation and various state investment tax credits. F-12 79 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The deferred provision for income taxes results from the following:
1994 1995 1996 ------- ------- ------- (IN THOUSANDS) Difference between book and tax depreciation........ $ (352) $ (144) $ (46) Deferred compensation............................... 143 73 266 Reserves and expenses recognized in different periods for book and tax purposes................. (1,288) (3,506) (1,658) Other, net........................................ (18) (18) (47) ------- ------- ------- $(1,515) $(3,595) $(1,485) ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the current and long-term deferred tax assets and liabilities at October 28, 1995 and October 26, 1996 are as follows:
1995 1996 ------- ------- (IN THOUSANDS) Deferred Tax Assets -- Nondeductible reserves....................................... $ 6,184 $ 7,475 Nondeductible environmental accruals......................... 3,197 3,907 Deferred compensation from issuance of nonqualified stock options................................................... 579 275 ------- ------- Total gross deferred tax assets...................... 9,960 11,657 Less -- valuation allowance.................................. 290 137 ------- ------- 9,670 11,520 Deferred Tax Liability -- Property, plant and equipment, principally due to differences in depreciation........................................... (1,736) (1,920) ------- ------- Net deferred tax asset............................... $ 7,934 $ 9,600 ======= =======
Due to the uncertainty relating to the actual value of the favorable tax benefits of deferred compensation from stock options, the Company has recorded a valuation allowance of approximately $290,000 and $137,000 as of October 28, 1995 and October 26, 1996, respectively. The reduction of this allowance for the year ended October 26, 1996 is a result of the decrease in the deferred tax asset relating to deferred compensation. (7) LINES OF CREDIT Prior to the acquisition of Zycon discussed in Note 2, the Company had an unsecured Revolving Credit and Term Loan Agreement with a bank. The agreement provided for up to $15,000,000 in revolving credit until June 30, 1997. The Company could designate the rate of interest at either the Eurodollar Rate plus 0.6%, or the bank's base rate. As of October 26, 1996, no amounts were outstanding under this line of credit. In connection with the Zycon acquisition discussed in Note 2, the Company entered into a $250,000,000 unsecured Revolving Credit Agreement (the "Agreement") with a bank, replacing the previous $15,000,000 agreement described above. The Agreement provides for direct borrowings or letters of credit and expires January 8, 2002. Borrowings under the Agreement bear interest, at the Company's option, at either; (i) the Eurodollar rate plus a margin ranging between .5% and 1.125%, based on a certain financial ratio of the Company, or (ii) the Base Rate, as defined. The Company is F-13 80 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) required to pay a quarterly commitment fee ranging from .2% to .375%, based on a certain financial ratio of the Company, of the unused commitment under the Agreement. If the Company obtains certain debt financing, as defined, the bank may require the Company to repay up to $150,000,000 of amounts outstanding under the Agreement. At January 25, 1997, borrowings of $215,000,000 were outstanding under the Agreement at a weighted average interest rate of 6.68%. The Agreement places several restrictions on the Company, including limitations on mergers, acquisitions and sales of a substantial portion of its assets, as well as certain limitations on liens, guarantees, additional borrowings, changes in the Company's capitalization, as defined, and investments. The Agreement also requires the Company to maintain certain financial covenants, including minimum levels of consolidated net worth, a maximum ratio of funded debt to EBITDA, maximum capital expenditures and interest coverage, as defined, during the term of the Agreement. At January 25, 1997, the Company was in compliance with all loan covenants. The Company has a line of credit arrangement with a Malaysian bank denominated in Malaysian ringgits and U.S. dollars for aggregate borrowings of approximately $4.4 million for the purpose of acquiring land, facilities and equipment for the Company's Malaysian subsidiary. The arrangement is renewable annually. At January 25, 1997, there was $2,929,000 outstanding under this arrangement at a weighted average interest rate of approximately 10%. (8) LONG-TERM DEBT Long-term debt consists of the following:
OCTOBER ----------------- JANUARY 1995 1996 1997 ------ ------ -------- (IN THOUSANDS) Loan agreements in connection with the expansion of a building. The loans bear interest at rates from 1% to 7% through March 2011 and are collateralized by property and an irrevocable letter of credit. Payments of principal and interest are due quarterly................. $1,008 $ 916 $ 893 Revolving credit agreement (Note 7).................................... -- -- 215,000 Loan agreements in connection with the purchase of manufacturing equipment. The loans bear interest at 7.17% to 11.37%, are payable in monthly installments of principal and interest through June 2001, and are collateralized by machinery and equipment........................ -- -- 15,331 Line of credit arrangement with a Malaysia bank (Note 7)............... -- -- 2,929 Obligations under capital leases....................................... 3,522 2,506 2,131 ------ ------ -------- 4,530 3,422 236,284 Less -- Current portion................................................ 2,143 1,907 8,116 ------ ------ -------- $2,387 $1,515 $228,168 ====== ====== ========
F-14 81 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Maturities of long-term debt and capital lease obligations are as follows as of October 26, 1996:
AMOUNT ------ Year Ending October-- 1997............................................................. $1,907 1998............................................................. 401 1999............................................................. 474 2000............................................................. 92 2001............................................................. 92 2002 and thereafter.............................................. 456 ------ $3,422 ======
(9) COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases manufacturing equipment and space under noncancelable operating leases with terms expiring through 2009. Future minimum lease payments under these leases as of January 25, 1997 (in thousands) are as follows:
REAL EQUIPMENT ESTATE TOTAL --------- ------- ------- (IN THOUSANDS) Year Ending October -- 1997 (nine months)................................ $48 $ 4,804 $ 4,852 1998.............................................. 15 4,728 4,743 1999.............................................. 5 4,641 4,646 2000.............................................. -- 4,395 4,395 2001.............................................. -- 4,088 4,088 Thereafter........................................ -- 26,175 26,175 --- ------- ------- Future minimum lease payments................ $68 $48,831 $48,895 === ======= =======
Total rental expense of approximately $1,317,000, $1,447,000, $1,434,000 and $516,000 was incurred for the fiscal years ended October 1994, 1995, 1996 and for the three months ended January 25, 1997, respectively. These operating leases include office and manufacturing space leased from a partnership in which the Chairman of the Board has an interest. Two of the leases are for terms of five years, and expire in October 2000 with options to extend until October 2006. The remaining lease expires in March 2000 with options to extend until 2006. For the fiscal years ended October 1994, 1995 and 1996 and the quarter ended January 25, 1997, the related rental expense was approximately $571,000, $479,000 $529,000 and $140,000, respectively. Environmental Matters During March 1995, the Company received a Record of Decision ("ROD") from the New York State Department of Environmental Conservation ("NYSDEC"), regarding soil and groundwater contamination at its Owego, New York facility. Based on a Remedial Investigation and Feasibility Study ("RIFS") for apparent on-site contamination at that facility and a Focused Feasibility Study ("FFS"), each prepared by environmental consultants of the Company, the NYSDEC has approved a F-15 82 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) remediation program of groundwater withdrawal and treatment and interactive soil flushing. The Company recently executed a Modification of the Order on Consent to implement the approved ROD. The cost, based upon the FFS, to implement this remediation is estimated to be $4.6 million, and is expected to be expended as follows: $260,000 for capital equipment and $4.3 million for operation and maintenance costs which will be incurred and expended over the estimated life of the program of 30 years. NYSDEC has requested that the Company consider taking additional samples from a wetland area near the Company's Owego facility. Analytical reports of earlier sediment samples indicated the presence of certain inorganics. There can be no assurance that the Company and/or other third parties will not be required to conduct additional investigations and remediation at that location, the costs of which are currently indeterminable due to the numerous variables described in the fifth paragraph of this Environmental Matters note. From 1974 to 1980, the Company operated a printed circuit manufacturing facility in Florida as a lessee of property that is now the subject of a pending lawsuit (the "Florida Lawsuit") and investigation by the Florida Department of Environmental Protection ("FDEP"). On June 9, 1992, the Company entered into a Cooperating Parties Agreement in which it and Gould, Inc., another prior lessee of the site, have agreed to fund certain assessment and feasibility study activities at the site, and an environmental consultant has been retained to perform such activities. The cost of such activities is not expected to be material to the Company. In addition to the Cooperating Parties Agreement, Hadco and others are participating in alternative dispute resolution regarding the site with an independent mediator. In connection with the mediation, in February 1997 the FDEP presented computer-generated estimates of remedial costs, for activities expected to be spread over a number of years, that ranged from approximately $3.3 million to $9.7 million. Mediation sessions were conducted in March 1992 but have been suspended during the ongoing assessment and feasibility activities. Management believes it is likely that it will participate in implementing a continuing remedial program for the site, the costs of which are currently unknown. Also see the seventh paragraph of this Environmental Matters note relating to the Company's having been named as a third-party defendant in the Florida Lawsuit. The Company has commenced the operation of a groundwater extraction system at its Derry, New Hampshire facility to address certain groundwater contamination and migration control issues. Because of the uncertainty regarding both the quantity of contaminants beneath the building at the site and the long-term effectiveness of the groundwater migration control system the Company has installed, it is not possible to make a reliable estimate of the length of time remedial activity will have to be performed. However, it is anticipated that the groundwater extraction system will be operated for at least 30 years. There can be no assurance that the Company will not be required to conduct additional investigations and remediation relating to the Derry facility. The total costs of such groundwater extraction system and of conducting any additional investigations and remediation relating to the Derry facility are not fully determinable due to the numerous variables described in the fifth paragraph of this Environmental Matters note. Included in selling, general and administrative (SG&A) expenses are charges for actual expenditures and accruals, based on estimates, for environmental matters. During fiscal 1994, 1995, 1996 and for the three months ended January 25, 1997, the Company made, and charged to SG&A expenses, actual payments of approximately $1,040,000, $1,111,000, $680,000 and $70,000, respectively, for environmental matters. In 1994, 1995 and 1996, the Company also accrued and charged to SG&A expenses approximately $2,100,000, $2,740,000 and $1,825,000, respectively, as cost estimates for environmental matters. F-16 83 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The Company accrues estimated costs associated with known environmental matters, when such costs can be reasonably estimated. The cost estimates relating to future environmental clean-up are subject to numerous variables, the effects of which can be difficult to measure, including the stage of the environmental investigations, the nature of potential remedies, possible joint and several liability, the magnitude of possible contamination, the difficulty of determining future liability, the time over which remediation might occur, and the possible effects of changing laws and regulations. The total reserve for environmental matters currently identified by the Company amounted to $8.2 million at October 28, 1995 and $10.0 million at October 26, 1996 and January 25, 1997. The current portion of these costs as of October 26, 1995, October 28, 1996 and January 25, 1997, amounted to approximately $900,000 in each period, and is included in Other accrued expenses. The long-term portion of these costs amounted to approximately $7.3 million, $9.1 million and $9.2 million as of October 28, 1995, October 26, 1996 and January 25, 1997, respectively, and is reported under the caption Other Long-Term Liabilities. Based on its assessment at the current time, management estimates the cost of ultimate disposition of the above known environmental matters to range from approximately $7.0 million to $12.0 million, and is expected to be spread over a number of years. Management believes the ultimate disposition of the above known environmental matters will not have a material adverse effect on the liquidity, capital resources, business or consolidated financial position of the Company. However, one or more of such environmental matters could have a significant negative impact on the Company's consolidated financial results for a particular reporting period. The Company is one of 33 entities which have been named as potentially responsible parties in a lawsuit pending in the federal district court of New Hampshire concerning environmental conditions at the Auburn Road, Londonderry, New Hampshire landfill site. Local, state and federal entities and certain other parties to the litigation seek contribution for past costs, totaling approximately $20 million, allegedly incurred to assess and remedy the Auburn Road site. In December 1996, following publication and comment period, the U.S. Environmental Protection Agency (EPA) amended the ROD to change the remedy at the Auburn Road site from active groundwater remediation to future monitoring. Other parties to the lawsuit also allege that future monitoring will be required. The Company is contesting liability, but is participating in mediation with 27 other parties in an effort to resolve the lawsuit. In connection with the Florida Lawsuit (as described in the second paragraph of this Environmental Matters section), pending in the Circuit Court of Broward County, Florida, Hadco and Gould, Inc., another prior lessee of the site of the printed circuit manufacturing facility in Florida, was each served with a third-party complaint in June 1995, as third-party defendants in such pending Florida Lawsuit by a party who had previously been named as a defendant when the Florida Lawsuit was commenced in 1993 by the FDEP. The Florida Lawsuit seeks damages relating to environmental pollution and FDEP costs and expenses, civil penalties, and declaratory and injunctive relief to require the parties to complete assessment and remediation of soil and groundwater contamination. The other parties include alleged owners of the property. In March 1993, the EPA notified Zycon of its potential liability for maintenance and remediation costs in connection with a hazardous waste disposal facility operated by Casmalia Resources, a California Limited Partnership, 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. Based on the total tonnage contributed by all generators, Zycon's share is estimated at approximately 0.2% of the total weight. The Casmalia site was regulated by the EPA during the period when the material was accepted. There is no allegation that Zycon violated any law in the disposal of material at the site, rather the F-17 84 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) EPA's actions stemmed from the fact that Casmalia Resources may not have the financial means to implement a closure plan for the site and because of Zycon's status as a generator of hazardous waste. In September 1996, a Consent Decree among the EPA and 48 entities (including Zycon) acting through the Casmalia Steering Committee ("CSC") was lodged with the United States District Court in Los Angeles, California, which must approve the agreement. Although this approval is pending, work has started under the Consent Decree. The Consent Decree sets forth the terms and conditions under which the CSC will carry out work aimed at final closure of the site. Certain closure activities will be performed by the CSC. Later work will be performed by the CSC, if funded by other parties. Under the Consent Decree, the settling parties will work with the EPA to pursue the non-settling parties to ensure they participate in contributing to the closure and long-term operation and maintenance of the facility. The future costs in connection with the lawsuits described in the above paragraphs are currently indeterminable due to such factors as the unknown timing and extent of any future remedial actions which may be required, the extent of any liability of the Company and of other potentially responsible parties, and the financial resources of the other potentially responsible parties. Management currently believes, based on the facts currently known to it, that it is probable that the ultimate dispositions of the above lawsuits will not have a material adverse effect on the Company's business and financial condition; however, there can be no assurance that this will be the case. Purchase Commitments The Company had commitments to purchase approximately $15,668,000 of manufacturing equipment and approximately $1,520,000 of leasehold improvements as of January 25, 1997. The majority of these commitments is expected to be completed by the end of fiscal 1997. F-18 85 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (10) STOCKHOLDERS' INVESTMENT Stock Options The following table summarizes stock option activity with respect to the nonqualified stock options:
EXERCISE PRICE RANGE NUMBER --------------- OF SHARES -------------- (IN THOUSANDS) Outstanding, October 30, 1993.......................... 1,921 $2.00 - $ 9.00 Options granted...................................... 340 8.00 - 8.81 Options exercised.................................... (332) 2.00 - 4.94 Options canceled..................................... (239) 2.00 - 9.00 ----- --------------- Outstanding, October 29, 1994.......................... 1,690 2.00 - 9.00 Options granted...................................... 223 8.50 - 25.69 Options exercised.................................... (320) 2.00 - 11.06 Options canceled..................................... (147) 2.10 - 8.81 ----- --------------- Outstanding, October 28, 1995.......................... 1,446 2.00 - 25.69 Options granted...................................... 150 27.00 - 31.50 Options exercised.................................... (443) 2.00 - 11.06 Options canceled..................................... (45) 2.00 - 31.50 ----- --------------- Outstanding, October 26, 1996.......................... 1,108 2.00 - 31.50 Options granted...................................... 174 47.44 Options exercised.................................... (62) 2.00 - 31.50 ----- --------------- Outstanding, January 25, 1997.......................... 1,220 $2.00 - $47.44 ===== ===============
The Company has the following nonqualified stock option plans: DECEMBER 1985 PLAN AND DECEMBER 1986 PLAN The options under these plans are exercisable immediately, and have various vesting periods up to 10 years according to each individual option agreement with an expiration date no later than 10 years and 90 days from the date of grant. Upon termination of employment under certain circumstances, the Company may, at its option, repurchase the exercised but unvested shares at the original purchase price. DECEMBER 1987 PLAN The options under this plan become exercisable according to each option agreement and expire no later than June 30, 1997. SEPTEMBER 1990 PLAN This plan provides for the granting of options at a price equal to the fair market value at the date of grant. The options vest over periods of up to seven years and become exercisable according to each option agreement, and they expire no later than 10 years from the date of grant. F-19 86 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) DECEMBER 1991 DIRECTOR PLAN This plan provides for the granting of options to purchase up to 150,000 shares of common stock at a price equal to the fair market value at the date of grant. These options are exercisable ratably over a five-year period and expire no later than seven years from the date of grant. The Board of Directors has amended this plan, subject to the approval of the shareholders in February 1997, (i) to increase the number of shares available to 300,000, (ii) provide that any current non-employee director who will have five years of service in such capacity on February 26, 1997 be automatically granted, on such date and on each anniversary of service thereafter, a vested option to purchase 3,000 shares and (iii) provide that any current non-employee director who does not have five years of service in such capacity on March 15, 1997 and any future non-employee director each be automatically granted, on the date such non-employee director achieves five years of service in such capacity and on each anniversary of service thereafter, a vested option to purchase 3,000 shares. NOVEMBER 1995 PLAN This plan provides for the granting of options to purchase up to 1,000,000 shares of common stock at a price equal to fair market value at the date of grant. The options vest according to each option agreement and they expire no later than 10 years from the date of grant. The status of the stock option plans at January 25, 1997 is as follows:
AVERAGE OPTIONS OPTIONS EXERCISE PLAN OUTSTANDING EXERCISABLE PRICE ------------------------------------------------ ----------- ----------- -------- (IN THOUSANDS) *December 1985 and 1986 Plans................... 203 203 $ 2.92 *December 1987 Plan............................. 75 75 3.00 *September 1990 Plan............................ 691 263 11.99 December 1991 Director Plan.................... 88 37 18.49 November 1995 Plan............................. 163 -- 46.93 ----- --- ------ 1,220 578 $15.06 ===== === ======
- ------------ * The Board of Directors has determined to make no further grants under the December 1985 Plan, December 1986 Plan, December 1987 Plan and September 1990 Plan. The Company had reserved as of January 25, 1997, a total of 2,062,829 shares of common stock for issuance under the nonqualified stock option plans listed in the above chart. During fiscal 1994, 1995 and 1996 and the quarter ended January 25, 1997, approximately $360,000, $287,000, $154,000 and $32,000, respectively, were charged against income as compensation expense associated with the granting of these options. The Company adopted a Stockholder Rights Plan in August 1995 pursuant to which the Company declared the distribution of one Common Stock Purchase Right ("Right") for each share of outstanding common stock. Under certain conditions, each Right may be exercised for one share of common stock at an exercise price of $130, subject to adjustment. Under circumstances defined in the Stockholder Rights Plan, the Rights entitle holders to purchase stock having a value of twice the exercise price of the Rights. Until they become exercisable, the Rights are not transferable apart from the common stock. The Rights may be redeemed by the Company at any time prior to the occurrence of certain events at $.01 per Right. The Stockholder Rights Plan will expire on September 11, 2005, unless the Rights are earlier redeemed by the Company. F-20 87 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (11) RETIREMENT PLAN The Hadco Corporation Retirement Plan (the "Plan"), as amended, covers all employees with at least six months of continuous service, as defined. Annual profit sharing contributions are determined at the discretion of the Board of Directors but cannot exceed the amount allowable for federal income tax purposes. The Company made profit sharing contributions of $1,074,000, $2,285,000 and $3,335,000 to the Plan for the years ended October 1994, 1995 and 1996, respectively. The Company has provided $1,100,000 for the three months ended January 25, 1997 for profit sharing contributions. The Plan permits participants to elect to have contributions made to the Plan in the form of reductions in salary under Section 401(k) of the Internal Revenue Code subject to limitations set out in the Plan. Under the Plan, the Company will match employee contributions up to a set percentage. Employee contributions become vested when made, and Company contributions become vested at the rate of 33 1/3 for each year of service with the Company. The Company matched employee contributions in the amount of approximately $500,000, $600,000 and $736,000 during fiscal 1994, 1995 and 1996, respectively. The Company has provided $178,000 for matching contributions during the quarter ended January 25, 1997. (12) QUARTERLY RESULTS (UNAUDITED) The following summarized unaudited results of operations for the fiscal quarters in the years ended October 1995 and 1996 have been accounted for using generally accepted principles for interim reporting purposes and include adjustments (consisting of normal recurring adjustments) that the Company considers necessary for the fair presentation of results for these interim periods. F-21 88 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1995 1996 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) First Fiscal Quarter -- Net sales........................................................... $56,825 $76,481 Gross profit........................................................ 11,292 19,482 Net income.......................................................... 3,003 7,191 Net income per share................................................ .29 .65 Weighted average shares outstanding................................. 10,446 11,104 Second Fiscal Quarter -- Net sales........................................................... $67,637 $88,096 Gross profit........................................................ 16,261 21,893 Net income.......................................................... 5,193 7,895 Net income per share................................................ .49 .71 Weighted average shares outstanding................................. 10,626 11,135 Third Fiscal Quarter -- Net sales........................................................... $67,752 $88,225 Gross profit........................................................ 17,540 21,451 Net income.......................................................... 6,152 7,994 Net income per share................................................ .56 .72 Weighted average shares outstanding................................. 11,034 11,100 Fourth Fiscal Quarter -- Net sales........................................................... $72,954 $97,883 Gross profit........................................................ 19,402 23,322 Net income.......................................................... 7,026 8,934 Net income per share................................................ .63 .81 Weighted average shares outstanding................................. 11,124 11,008
(13) CUSTOMERS During fiscal years 1994, 1995 and 1996 and the quarter ended January 25, 1997, no customer accounted for more than 7%, 7%, 15% and 14% of consolidated net sales, respectively. The Company's five largest customers accounted for 28%, 28%, 34% and 33% of consolidated net sales during fiscal 1994, 1995 and 1996 and the quarter ended January 25, 1997, respectively. For the first quarter of fiscal 1997 and the 1996 fiscal year, one customer accounted for more than 10% of consolidated net sales. F-22 89 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In January 1997, Hadco purchased substantially all of Zycon's common stock for approximately $205 million in cash. The Company also incurred approximately $7.5 million in acquisition related costs resulting in a total purchase price of approximately $212.5 million. The acquisition was financed by a new Credit Facility of up to $250 million. The Company borrowed approximately $215 million under the new Credit Facility, upon consummation of the transaction. This acquisition is being accounted for as a purchase, and due to the different bases in certain assets for book and tax purposes, deferred taxes have been provided for as part of the purchase price allocation in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. A significant portion of the purchase price, as outlined in the attached notes to these pro forma financial statements, has been identified in an appraisal as intangible assets, including approximately $78 million of in-process R&D (see discussion in Note 1 to October 26, 1996 Pro Forma Condensed Consolidated Statement of Operations). The accompanying Pro Forma Condensed Consolidated Statements of Operations for the year ended October 26, 1996 and the three months ended January 25, 1997 assume that the acquisition of Zycon took place on October 29, 1995, the beginning of Hadco's fiscal year ended October 26, 1996. The Pro Forma Condensed Consolidated Statements of Operations do not include the effect of any non-recurring write-offs directly attributable to the acquisition. The accompanying pro forma information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations which would actually have been reported had the acquisition been in effect during the periods presented, or which may be reported in the future. The accompanying Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the historical financial statements and related notes thereto for Hadco and Zycon. F-23 90 HADCO CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 26, 1996 (Unaudited) (In thousands, except per share data)
HISTORICAL ------------------------------------ HADCO ZYCON YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA OCTOBER 26, 1996 DECEMBER 31, 1996 ADJUSTMENTS COMBINED ---------------- ----------------- ----------- --------- Net Sales......................... $350,685 $ 219,660 $570,345 Cost of Sales..................... 264,537 186,314 450,851 -------- -------- -------- Gross Profit...................... 86,148 33,346 119,494 Selling, General and Administrative Expenses......... 34,616 16,079 (2,637)(2) 48,058 Amortization of Acquired Intangible Assets............... -- -- 6,468 (3) 6,468 -------- -------- -------- -------- Income from Operations............ 51,532 17,267 (3,831) 64,968 Interest and Other Income......... 1,287 726 (805)(4) 1,208 Interest Expense.................. (338) (2,567) (13,292)(5) (16,197) Other Expense..................... -- (6,019) 6,019 (1) -- -------- -------- -------- -------- Income Before Provisions for Income Taxes.................... 52,481 9,407 (11,909) 49,979 Provision for Income Taxes........ 20,467 6,518 (5,706)(6) 21,279 -------- -------- -------- -------- Net Income (Loss)................. $ 32,014 $ 2,889 $ (6,203) $ 28,700 ======== ======== ======== ======== Net Income per Share.............. $ 2.89 $ 2.59 ======== ======== Weighted Average Shares Outstanding..................... 11,084 11,084 ======== ========
NOTE 1: For purpose of this Pro Forma Condensed Consolidated Statement of Operations, the acquired in-process R&D was assumed to have been written off prior to the period presented herein, so that the statement of operations includes only recurring costs. NOTE 2: PRO FORMA ADJUSTMENTS The following is a description of each of the pro forma adjustments. (1) Eliminate non-recurring acquisition costs incurred by Zycon. (2) Eliminate non-recurring Zycon management salaries and certain bonuses. (3) Amortization of acquired intangible assets over lives ranging from 12 to 30 years. (4) Reduce interest income as a result of utilizing cash for acquisition. (5) Interest expense on debt issued to finance acquisition. (6) Related tax effect of adjustments (1) through (5). F-24 91 HADCO CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED JANUARY 25, 1997 (Unaudited) (In thousands, except per share data)
HISTORICAL ------------------------------------- HADCO ZYCON QUARTER ENDED QUARTER ENDED PRO FORMA PRO FORMA JANUARY 25, 1997 DECEMBER 31, 1996 ADJUSTMENTS COMBINED ---------------- ----------------- ----------- --------- Net Sales......................... $111,536 $61,011 $172,547 Cost of Sales..................... 86,681 52,925 139,606 -------- ------- -------- Gross Profit...................... 24,855 8,086 32,941 Selling, General and Administrative Expenses......... 9,028 4,342 (659)(3) 12,711 Amortization of Acquired Intangible Assets............... 270 136 1,188 (4) 1,594 Write-off of In-process Research and Development................. 78,000 -- (78,000)(1) -- -------- ------- -------- -------- Income (Loss) From Operations..... (62,443) 3,608 77,472 18,637 Interest and Other Income......... 880 167 (496)(5) 551 Interest Expense.................. (933) (1,033) (2,703)(6) (4,669) Other Expense..................... -- (6,019) 6,019 (2) -- -------- ------- -------- -------- Income (Loss) Before Provision for Income Taxes.................... (62,496) (3,277) 80,291 14,518 Provision for Income Taxes........ 6,665 1,247 (1,669)(7) 6,243 -------- ------- -------- -------- Net Income (Loss)................. $(69,161) $(4,524) $ 81,960 $ 8,275 ======== ======= ======== ======== Net Income (Loss) per Share....... $ (6.64) $ 0.76 ======== ======== Weighted Average Shares Outstanding..................... 10,413 10,944 ======== ========
NOTE 1: PRO FORMA ADJUSTMENTS The following is a description of each of the pro forma adjustments: (1) Eliminate non-recurring write-off of in-process R&D. (2) Eliminate non-recurring acquisition costs incurred by Zycon. (3) Eliminate non-recurring Zycon management salaries and certain bonuses. (4) Amortization of acquired intangible assets over lives ranging from 12 to 30 years. (5) Reduce interest income as a result of utilizing cash for acquisition. (6) Interest expense on debt issued to finance acquisition. (7) Related tax effect of adjustments (1) through (6). F-25 92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Zycon Corporation: We have audited the accompanying consolidated balance sheet of Zycon Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Zycon Corporation and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California January 17, 1997 F-26 93 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Zycon Corporation: We have audited the accompanying consolidated balance sheet of Zycon Corporation and subsidiary as of December 31, 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zycon Corporation and subsidiary as of December 31, 1995 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP January 19, 1996 F-27 94 ZYCON CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1995 1996 ------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................. $11,264 $ 7,549 Receivables, net of allowances of $250 in 1995 and $255 in 1996....... 20,886 28,430 Inventories........................................................... 6,131 11,343 Prepaid expenses and other current assets............................. 1,734 2,569 -------- ------- Current assets................................................ 40,015 49,891 PLANT AND EQUIPMENT, net................................................ 52,130 95,297 DEPOSITS AND OTHER ASSETS............................................... 2,830 3,304 EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated amortization of $272 in 1996....................................................... -- 5,396 -------- ------- $94,975 $153,888 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and bank borrowings................. $ 2,567 $ 9,122 Accounts payable...................................................... 17,624 26,192 Accrued liabilities................................................... 5,021 7,479 Income taxes payable.................................................. 1,770 870 -------- ------- Current liabilities........................................... 26,982 43,663 LONG-TERM DEBT AND LIABILITIES, net of current portion.................. 5,458 43,777 DEFERRED INCOME TAXES................................................... 6,634 7,003 -------- ------- Total liabilities............................................. 39,074 94,443 -------- ------- COMMITMENTS AND CONTINGENCIES (see Note 7) 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; 11,000,000 and 11,056,600 shares issued and outstanding in 1995 and 1996, respectively................................................. 11 11 Additional paid-in capital............................................ 32,369 33,024 Retained earnings..................................................... 23,521 26,410 -------- ------- Total stockholders' equity.................................... 55,901 59,445 -------- ------- $94,975 $153,888 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-28 95 ZYCON CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 -------- -------- -------- Net Sales.................................................. $149,151 $180,944 $219,660 Cost of Sales.............................................. 133,043 153,109 186,314 -------- -------- -------- Gross Profit............................................... 16,108 27,835 33,346 Selling, General and Administrative Expenses............... 8,350 11,233 16,079 -------- -------- -------- Income from Operations..................................... 7,758 16,602 17,267 -------- -------- -------- Other Income (Expense): Interest Income............................................ 264 711 726 Interest Expense........................................... (2,250) (2,427) (2,567) Other Expense.............................................. -- -- (6,019) -------- -------- -------- Other Income (Expense)..................................... (1,986) (1,716) (7,860) -------- -------- -------- Income Before Income Taxes................................. 5,772 14,886 9,407 Provision For Income Taxes................................. 97 7,409 6,518 -------- -------- -------- Net Income................................................. $ 5,675 $ 7,477 $ 2,889 ======== ======== ======== Pro Forma Net Income Data (Unaudited): Income Before Income Taxes, as reported.................... $ 5,772 $ 14,886 Pro Forma Provision for Income Taxes....................... 2,333 5,925 -------- Pro Forma Net Income....................................... $ 3,439 $ 8,961 ========
The accompanying notes are an integral part of these consolidated financial statements. F-29 96 ZYCON CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE TOTAL --------------- PAID-IN FROM RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS EQUITY ------ ------ ---------- ------------ -------- ------------- BALANCES AS OF DECEMBER 31, 1993........ 8,000 $ 8 $ 22 $ -- $23,483 $23,513 Stockholder distributions............. -- -- -- -- (3,859) (3,859) Issuance of stockholder notes......... -- -- -- (575) -- (575) Collections on stockholder notes...... -- -- -- 45 -- 45 Net income............................ -- -- -- -- 5,675 5,675 ------ --- ------- ----- ------- ------- BALANCES AS OF DECEMBER 31, 1994........ 8,000 8 22 (530) 25,299 24,799 Sale of common stock, net of $3,650 issuance costs..................... 3,000 3 32,347 -- -- 32,350 Stockholder distributions............. -- -- -- -- (9,255) (9,255) Collections on stockholder notes...... -- -- -- 530 -- 530 Net income............................ -- -- -- -- 7,477 7,477 ------ --- ------- ----- ------- ------- BALANCES AS OF DECEMBER 31, 1995........ 11,000 11 32,369 -- 23,521 55,901 Issuance of common stock in connection with Alternate Circuit Technology, Inc. (ACT) acquisition............. 50 -- 600 -- -- 600 Issuance of common stock pursuant to the stock option plan.............. 7 -- 55 -- -- 55 Net income............................ -- -- -- -- 2,889 2,889 ------ --- ------- ----- ------- ------- BALANCES AS OF DECEMBER 31, 1996........ 11,057 $ 11 $ 33,024 $ -- $26,410 $59,445 ====== === ======= ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-30 97 ZYCON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
1994 1995 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 5,675 $ 7,477 $ 2,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................... 9,199 9,691 11,016 Deferred income taxes............................................. -- 5,618 38 Changes in operating assets and liabilities, net of effects from purchase of ACT: Increase in receivables......................................... (4,234) (5,723) (5,538) (Increase) decrease in inventories.............................. 156 (1,661) (3,106) (Increase) decrease in prepaid expenses, deposits and other assets......................................................... 339 (2,491) 2,134 Increase in accounts payable.................................... 772 7,010 7,862 Increase in accrued liabilities................................. 204 1,708 1,060 Increase (decrease) in income taxes payable..................... -- 1,770 (607) -------- -------- -------- Net cash provided by operating activities.................... 12,111 23,399 15,748 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of ACT, net of cash acquired................................ -- -- (8,888) Purchases of plant and equipment..................................... (13,060) (22,365) (52,156) Sale of short-term investments....................................... 2,026 -- -- -------- -------- -------- Net cash used for investing activities....................... (11,034) (22,365) (61,044) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank borrowings, net................................................. 1,000 (7,000) 2,543 Proceeds from long-term debt......................................... 11,378 1,761 46,206 Repayment of long-term debt.......................................... (7,685) (14,863) (7,223) Proceeds from sale of common stock................................... -- 32,350 55 Issuance of stockholder notes........................................ (575) -- -- Collections on stockholder notes..................................... 45 530 -- Distribution paid to stockholders.................................... (3,185) (10,765) -- -------- -------- -------- Net cash provided by financing activities.................... 978 2,013 41,581 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 2,055 3,047 (3,715) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 6,162 8,217 11,264 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 8,217 $ 11,264 $ 7,549 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............................................... $ 2,149 $ 2,427 $ 2,351 Cash paid for income taxes........................................... $ 20 $ 60 $ 6,357 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Issuance of common stock in connection with ACT acquisition.......... $ -- $ -- $ 600 Assets of $8,802 acquired, net of related liabilities of $4,961 assumed from ACT.................................................. $ -- $ -- $ 3,841 Stockholder distributions declared but not paid...................... $ 1,510 $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. F-31 98 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company and Consolidation Zycon Corporation (the "Company") manufactures multilayer printed circuit boards for original equipment manufacturers and contract manufacturers of sophisticated electronic equipment. The Company's principal customers serve diverse market segments, including data communications, telecommunications, advanced storage systems, workstation, servers and personal computers. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist primarily of money market funds and highly liquid debt instruments with original maturity dates up to 90 days. Short-Term Investments In 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Short-term investments are classified as available for sale under the provisions of SFAS No. 115 and are stated at fair value. Any unrealized gains and losses are reported as a separate component of stockholders' equity, but to date have not been significant. Inventories Inventories are stated at the lower of first-in, first-out cost or market. The Company periodically reviews its inventories for potential slow-moving and obsolete items and writes down impaired items to net realizable value. Plant and Equipment Plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 40 years. Leasehold improvements are amortized over the shorter of the respective lease terms, ranging from 10 to 20 years, or their estimated useful lives. Intangible Assets Excess of cost over net assets acquired (goodwill) from the ACT acquisition (see Note 5) is amortized using the straight-line method over ten years. In order to comply with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived F-32 99 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assets and for Long-Lived Assets to be Disposed of," the realizability is evaluated periodically by management as events or circumstances indicate a possible inability to recover its carrying amount. Such evaluation is based on various analyses, including cash flow and profitability projections that incorporate, as applicable, the impact on existing lines of business. The analysis necessarily involves significant management judgment to evaluate the ability of an acquired business to perform within projections. Revenue Recognition Sales are recognized upon shipment. Product returns and warranty costs have been insignificant. Other Expense The Company incurred other expense of $6,019,000 during the year ended December 31, 1996 relating to the acquisition of the Company by Hadco Corporation (see Note 8). Income Taxes The Company accounts for income taxes using the liability method under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. The Company was an S corporation for Federal and state income tax reporting purposes prior to the initial public offering on September 26, 1995. Federal and state income taxes on the income of an S corporation are generally payable by the individual stockholders rather than the corporation. Accordingly, only the California S corporation franchise tax was provided while the Company was as S corporation. Upon termination of the Company's S corporation status, the Company established its net deferred tax liability and recorded an accompanying charge of $4.5 million to income tax expense in 1995. The accompanying consolidated statements of income for the years ended December 31, 1994 and 1995 include provisions for income taxes on an unaudited pro forma basis, using the asset and liability method, as if the Company had been a C corporation, fully subject to Federal and state income taxes. Environmental Remediation Costs The Company accrues for expenses associated with environmental remediation obligations when such expenses are probable and can be reasonably estimated. Accruals for estimated expenses for environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information becomes available or circumstances change. Estimates of future expenditures for environmental remediation obligations are not discounted to their present value. Concentration of Credit Risk Financial instruments potentially subjecting the Company to concentration of credit risk consist primarily of cash equivalents and accounts receivable. By policy, the Company limits the amounts F-33 100 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) invested in any one type of investment. Management believes the financial risks associated with such investments are minimal. Substantially all of the Company's accounts receivable are derived from domestic sales to original equipment manufacturers and contract assemblers of workstations, networking products, computers, telecommunications equipment and instrumentation devices. A significant percentage of the Company's receivables are concentrated with a few customers. Historically, the Company has not incurred material credit-related losses. Foreign Currency Translation The functional currency of the Company's Malaysian subsidiary is the United States dollar. Accordingly, all translation gains and losses resulting from transactions denominated in currencies other than United States dollars are included in the consolidated statements of income. To date, the resulting gains and losses have not been material. Reclassifications Certain 1994 and 1995 balances have been reclassified to conform with the 1996 consolidated financial statement presentation. 2. BALANCE SHEET COMPONENTS: Cash Equivalents Cash equivalents include certain investments classified as available-for-sale securities as follows as of December 31 (in thousands):
1995 1996 ------- ------ Money market funds................................................ $ -- $3,574 U.S. governmental treasury bills.................................. 1,995 1,975 Commercial paper.................................................. 11,000 2,000 ------- ------ $12,995 $7,549 ======= ======
These securities all have original maturity dates of 90 days or less, with fair values approximating their cost. Inventories A summary of inventories follows as of December 31 (in thousands):
1995 1996 ------ ------- Raw materials..................................................... $1,392 $ 5,599 Work in process................................................... 4,739 5,744 ------ ------- $6,131 $11,343 ====== =======
F-34 101 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Plant and Equipment A summary of plant and equipment follows as of December 31 (in thousands):
1995 1996 ------- -------- Machinery and equipment......................................... $61,975 $ 98,699 Leasehold improvements.......................................... 23,704 25,744 Building and building improvements.............................. -- 15,458 Office furniture and equipment.................................. 520 553 Construction in progress........................................ 3,250 813 Other........................................................... 580 -- ------- -------- 90,029 141,267 Less -- Accumulated depreciation and amortization............... (37,899) (45,970) ------- -------- $52,130 $ 95,297 ======= ========
Plant and equipment with a cost of approximately $32 million are located at the Company's wholly owned subsidiary in Malaysia. Accrued Liabilities Accrued liabilities consisted of the following as of December 31 (in thousands):
1995 1996 ------ ------ Vacation........................................................... $1,883 $2,120 Payroll............................................................ 1,099 1,764 Bonuses............................................................ 1,170 1,104 Health care and workers compensation............................... 530 1,150 Other.............................................................. 339 1,341 ------ ------ $5,021 $7,479 ====== ======
Long-Term Debt and Liabilities and Bank Borrowings Long-term debt and liabilities and bank borrowings consisted of the following as of December 31 (in thousands):
1995 1996 ------- ------- Line of credit arrangement with a U.S. bank...................... $ -- $16,136 Line of credit arrangement with a Malaysian bank................. -- 2,543 Notes payable to financial lending companies and banks........... 8,025 32,857 Long-term liabilities............................................ -- 1,363 ------- ------- 8,025 52,899 Less -- Current maturities....................................... (2,567) (9,122) ------- ------- Long-term debt and liabilities................................... $ 5,458 $43,777 ======= =======
The Company has available a revolving bank line of credit arrangement with a U.S. bank aggregating the lesser of $28,000,000 or a specified percentage of eligible accounts receivable. As of December 31, 1996, there was $16,136,000 outstanding under the line of credit agreement. The line of credit agreement expires on July 1, 1998. Borrowings under the line of credit agreement incur interest at the bank's prime rate (8.25% as of December 31, 1996) and are secured by receivables, inventories F-35 102 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and machinery and equipment. The maximum balance outstanding during the year under this arrangement was $20,752,000, and the average outstanding balance during the year was $10,490,000. The Company also has a line of credit arrangement with a Malaysian bank for aggregate borrowings of approximately $4.3 million for the purpose of acquiring land, facilities and equipment for the Company's Malaysian subsidiary. The arrangement is renewable annually. As of December 31, 1996, there was $2,543,000 outstanding under this arrangement and the weighted average interest rate was 10%. Notes payable to financial lending companies and banks are secured by machinery and equipment and are generally payable in equal monthly installments, bearing interest ranging from approximately 7.2% to 11.4% (8.3% weighted average). Annual maturities of the notes payable are as follows (in thousands):
YEAR ENDING DECEMBER 31, ------------ 1997.......................................................... $ 6,450 1998.......................................................... 6,788 1999.......................................................... 6,125 2000.......................................................... 5,260 2001.......................................................... 8,234 ------ $32,857 ======
In connection with the acquisition of the Company by Hadco Corporation (see Note 8), approximately $33.5 million of these notes payable and borrowings under the line of credit arrangement with the U.S. bank were repaid subsequent to year end. The Company has a commitment from a bank for a $15.5 million term loan facility which expires in 2005 for the purpose of acquiring equipment and for working capital to be invested in the Company's Malaysia subsidiary. Borrowings are to be repaid over five years with interest payable at either a fixed rate equal to the bank's cost of funds at the time of borrowing plus 3.25% or an adjustable rate equal to the bank's prime rate plus 1.75%. As of December 31, 1996, there were no borrowings outstanding under this facility. Upon the acquisition of the Company by Hadco (see Note 8), the commitment under this facility was decreased to $4.4 million. 3. STOCKHOLDERS' EQUITY: Stockholder Distributions On September 26, 1995, the Company elected C corporation status for Federal and state income tax reporting purposes. Simultaneously with the election of C corporation status, the Company declared a distribution payable to existing stockholders of the Company. This distribution represented undistributed S corporation earnings of the Company through the completion of the Company's initial public offering and the amount of the stockholders' S corporation tax bases. Stock-Based Compensation Plan In 1993, the Company adopted the 1993 Long-Term Equity Incentive Plan (the "Stock Plan"). The Company accounts for this Stock Plan under APB Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation expense has been recognized. Had compensation expense for the Stock Plan been determined consistent with Statement of Financial Accounting Standards F-36 103 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company's net income would have been reduced to the following pro forma amounts (in thousands):
1995 1996 ------ ------ As Reported........................................................ $7,477 $2,889 Pro Forma.......................................................... $6,975 $1,579
The Company may grant up to 1,100,000 shares of stock to its employees and consultants under the Stock Plan. The Company grants options with an exercise price at least equal to the fair market price at date of grant. Options granted under the Stock Plan vest between 20% and 60% at the end of the first year and ratably thereafter for a period of four years. There was no activity under the Stock Plan during 1994. A summary of the activity under the Stock Plan during 1995 and 1996 follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE --------- -------- Outstanding at December 31, 1994............................. -- $ -- Granted.................................................... 707,600 10.36 ------- ------ Outstanding at December 31, 1995............................. 707,600 10.36 Granted.................................................... 105,200 10.50 Exercised.................................................. (6,600) 8.36 Cancelled.................................................. (36,900) 11.54 ------- ------ Outstanding at December 31, 1996............................. 769,300 $10.35 ======= ======
As of December 31, 1996, 765,800 of the 769,300 options outstanding have exercise prices between $8 and $12.00, with a weighted average exercise price of $10.34 and a weighted average remaining contractual life of 3.7 years. 230,200 of these options are exercisable as of December 31, 1996. The remaining 3,500 options have an exercise price and a weighted average exercise price of $13.25 and a weighted average remaining contractual life of 3.88 years. 700 of these options are exercisable as of December 31, 1996. There was no options exercisable as of December 31, 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1995 and 1996; risk-free interest rate of 6 percent; expected dividend yields of 0 percent; expected lives of 7 years; expected volatility of 35 percent. Weighted average fair values of options granted in 1995 and 1996 were $4.30 and $3.00, respectively. In connection with the acquisition of the Company by Hadco Corporation (see Note 8), the vesting for all outstanding options as of January 9, 1997 was immediately accelerated pursuant to the terms of the Stock Plan and then redeemed for cash equal to the difference between the exercise price of the vested option and $18.00 per share. 4. INCOME TAXES The components of income tax expense, as presented in the accompanying consolidated statements of income, comprise California S corporation franchise taxes for 1994 and through September 26, 1995, and Federal and state taxes for the remainder of 1995 and all of 1996. The pro forma provision for income taxes reflects the income tax expense that would have been reported if the F-37 104 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company had been a C corporation in 1994 and all of 1995. The components of the provision for income taxes and unaudited pro forma provision for income taxes are as follows (in thousands):
YEARS ENDED DECEMBER 31 ------------------------------------------------ ACTUAL PRO FORMA -------------------------- ----------------- 1994 1995 1996 1994 1995 ---- ------ ------ ------ ------ Current Federal..................................... $-- $1,349 $4,835 $1,431 $3,547 State....................................... 97 342 483 453 975 ---- -- ------ --- ------ ------ Total current....................... 97 1,691 5,318 1,884 4,522 ---- -- ------ --- ------ ------ Deferred Federal..................................... -- 1,123 928 368 1,271 State....................................... -- 116 272 81 132 Termination of S corporation status......... -- 4,479 -- -- -- ---- -- ------ --- ------ ------ Total deferred...................... -- 5,718 1,200 449 1,403 ---- -- ------ --- ------ ------ Net tax provision............................. $97 $7,409 $6,518 $2,333 $5,925 ====== ====== === ====== ======
The following table reconciles the expected Federal income tax expense to the Company's actual income tax expense and unaudited pro forma income tax expense (in thousands):
YEARS ENDED DECEMBER 31 --------------------------------------------------- ACTUAL PRO FORMA ----------------------------- ----------------- 1994 1995 1996 1994 1995 ------ ------- ------ ------ ------ Expected Federal income tax expense.......... $1,962 $ 5,061 $3,292 $1,962 $5,061 State income taxes, net of Federal tax benefit.................................... 97 337 569 352 776 Nondeductible foreign subsidiary loss........ -- -- 721 -- -- Nondeductible acquisition costs.............. -- -- 2,107 -- -- Termination of S corporation status.......... -- 4,479 -- -- -- Effect of S corporation earnings taxable to stockholders............................... (1,962) (2,557) -- -- -- Other, net................................... -- 89 (171) 19 88 ------ ------- ------- ------ ------ $ 97 $ 7,409 $6,518 $2,333 $5,925 ====== ======= ======= ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liability are presented below as of December 31 (in thousands):
1995 1996 ------- ------- Deferred income tax assets: Reserves and accruals.................................................. $ 749 $ 1,013 State income taxes..................................................... 167 234 ------- ------- Total deferred income tax assets............................... 916 1,247 Deferred income tax liability: Depreciation and amortization.......................................... (6,634) (7,003) ------- ------- Net deferred income tax liability........................................ $(5,718) $(5,756) ======= =======
Deferred income tax assets are classified in other current assets in the accompanying consolidated balance sheets. F-38 105 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACQUISITION OF ALTERNATIVE CIRCUIT TECHNOLOGY, INC.: On June 7, 1996, the Company completed the acquisition of the assets of Alternate Circuit Technology, Inc. (ACT). ACT was in the business of owning, operating and managing a quick turnaround printed circuit board manufacturing facility in Massachusetts. The purchase price consisted of cash of $8,641,000, 50,000 shares of the Company's common stock with a total market value of $600,000 and a covenant not to compete arrangement to two ACT shareholders amounting to $200,000. 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 was $5,668,000, and this goodwill is being amortized over ten years. The operating results of ACT have been included in the Company's consolidated financial statements since the date of acquisition. 6. CUSTOMERS: In 1994, one customer accounted for 15%, one for 11% and one for 10% of consolidated net sales. In 1995, one customer accounted for 13% and two companies each accounted for 10% of the Company's consolidated net sales. These three customers comprised 35% of accounts receivable at December 31, 1995. In 1996, one customer accounted for 12% of the Company's consolidated net sales. Of the accounts receivable balance at December 31, 1996, 9% is related to this customer. 7. COMMITMENTS AND CONTINGENCIES: Operating Leases The Company occupies its facilities under various operating lease agreements. In addition, the Company leases certain machinery and equipment under operating leases. Future minimum lease payments required under operating leases in the years subsequent to December 31, 1996 will be as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------ 1997.................................................. $ 3,984 1998.................................................. 3,830 1999.................................................. 3,926 2000.................................................. 4,022 2001.................................................. 4,091 2002 and thereafter................................... 26,175 ------- $46,028 =======
Facility and equipment rent expense was approximately $4,452,000, $4,566,000 and $4,609,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Approximately $360,000 and $135,000 of these amounts in 1994 and 1995, respectively were paid to a partnership whose partners were also stockholders of the Company. Purchase Commitments Purchase commitments aggregated $4,126,000 as of December 31, 1996, primarily for the acquisition of machinery and equipment. F-39 106 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stockholders' Benefit and Deferred Compensation Plan The Company has agreements with its original four stockholders providing for payment aggregating two years salary per stockholder in the event of death in service or disability and for payments in the event of an adjustment of the Company's taxable income for any period the corporation was subject to S corporation status under the Federal or state income tax laws. To date, no payments have been required under these agreements. Subsequent to the year end and upon the acquisition of the Company by Hadco Corporation, the Company entered into a deferred compensation plan with key executive employees (none of whom was a director of the Company). The plan will provide these key executive employees with certain deferred compensation under certain circumstances. Workers' Compensation The Company self-insures its workers' compensation plan and accrues for incurred claims development and estimated incurred but not reported claims. If future incurred claims development substantially exceeds historical claim patterns used to estimate the accrual, the Company could incur significant additional obligations. Environmental Matters In March 1993, the U.S. Environmental Protection Agency (EPA) notified Zycon of its potential liability for maintenance and remediation costs in connection with a hazardous waste disposal facility operated by Casmalia Resources, a California Limited Partnership, 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. Based on the total tonnage contributed by all generators, Zycon's share is estimated at approximately 0.2% of the total weight. The Casmalia site was regulated by the EPA during the period when the material was accepted. There is no allegation that Zycon violated any law in the disposal of material at the site, rather the EPA's actions stemmed from the fact that Casmalia Resources may not have the financial means to implement a closure plan for the site and because of Zycon's status as a generator of hazardous waste. In September 1996, a Consent Decree among the EPA and 48 entities (including Zycon) acting through the Casmalia Steering Committee ("CSC") was lodged with the United States District Court in Los Angeles, California, which must approve the agreement. Although this approval is pending, work has started under the Consent Decree. The Consent Decree sets forth the terms and conditions under which the CSC will carry out work aimed at final closure of the site. Certain closure activities will be performed by the CSC. Later work will be performed by the CSC, if funded by other parties. Under the Consent Decree, the settling parties will work with the EPA to pursue the non-settling parties to ensure they participate in contributing to the closure and long-term operation and maintenance of the facility. 8. ACQUISITION BY HADCO CORPORATION: In December 1996, Hadco Corporation ("Hadco") agreed to acquire all of the outstanding shares of the Company's common stock at a purchase price of $18.00 per share upon the terms and subject to the conditions set forth in the Tender Offer Statement. The Tender Offer Statement was made pursuant to an Agreement and Plan of Merger dated as of December 4, 1996 between Hadco and the Company. The offer expired on January 9, 1997 after which substantially all of the outstanding shares of the Company's common stock were acquired by Hadco. The Company incurred costs aggregating $2,869,000 which represented investment banking, financial advisory and legal fees incurred relating to F-40 107 ZYCON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the acquisition by Hadco. These costs have been expensed in the accompanying consolidated statement of income for the year ended December 31, 1996 as other expense. The Company paid approximately $2,100,000 of the total costs incurred to a financial advisory firm in which the president of such firm was also a member of the Company's Board of Directors. Prior to entering into the Agreement and the Plan of Merger with Hadco, the Company and certain of its principal shareholders had entered into an agreement to sell all of the outstanding shares of the Company's common stock at $16.25 per share to an unrelated party, but the Company subsequently terminated this agreement. In connection with this termination, the Company incurred break-up fees and legal costs amounting to approximately $3,150,000, which was expensed in the accompanying consolidated statement of income for the year ended December 31, 1996 as other expense. F-41 108 HADCO The Largest Interconnect Manufacturer in North America Backplane Assembly - Hadco provides backplane assembly services utilizing advanced automated manufacturing systems. - Advanced systems include split axis assembly, "smart" feeder systems, and optical centering for high density electronic packages. - Hadco's backplane assembly facilities are located in California and New Hampshire. Includes pictures of various assembled backplane products and a backplane assembly line. 109 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following statement sets forth the amounts of expenses in connection with the offering of the Common Stock and Notes pursuant to this Registration Statement, all of which shall be borne by the Company. SEC Registration Fee..................................................... $ 72,921 NASD Fee................................................................. 25,064 Nasdaq Listing Fee....................................................... 25,000 Blue Sky Fees and Expenses............................................... 30,000 Printing and Engraving Expenses.......................................... 10,000 Accounting Fees and Expenses............................................. 175,000 Legal Fees and Expenses.................................................. 525,000 Transfer Agent and Registrar Fees........................................ 10,000 Miscellaneous Expenses................................................... 237,015 -------- Total.......................................................... $1,200,000 ========
All of the expenses listed above, except the SEC Registration Fee and NASD Fee, represent estimates only. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Reference is made to Article V, Section 2 of the By-Laws of the Registrant and to Section 67 of the Massachusetts Business Corporation Law. Article V, Section 2 of the Company's By-Laws provides: "2. Indemnification. Each Director, officer, employee and other agent of the corporation, and any person who, at the request of the corporation, serves as a director, officer, employee or other agent of another organization in which the corporation directly or indirectly owns shares or of which it is a creditor shall be indemnified by the corporation against any cost, expense (including attorney's fees), judgment, liability and/or amount paid in settlement reasonably incurred by or imposed upon him in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency), to which he may be made a party or otherwise involved or with which he shall be threatened, by reason of his being, or related to his status as, a director, officer, employee or other agent of the corporation or of any other organization in which the corporation directly or indirectly owns shares or of which the corporation is a creditor, which other organization he serves or has served as director, officer, employee or other agent at the request of the corporation (whether or not he continues to be an officer, director, employee or other agent of the corporation or such other organization at the time such action, suit or proceeding is brought or threatened), unless such indemnification is prohibited by the Business Corporation Law of the Commonwealth of Massachusetts. The foregoing right of indemnification shall be in addition to any rights to which any such person may otherwise be entitled and shall inure to the benefit of the executors or administrators of each such person. The corporation may pay the expenses incurred by any such person in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by such person to repay such payment if it is determined that such person is not entitled to indemnification hereunder. This section shall be subject to amendment or repeal only by action of the stockholders." II-1 110 Section 67 of the Massachusetts Corporation Law provides: "Indemnification of directors, officers, employees and other agents of a corporation, and persons who serve at its request as directors, officers, employees or other agents of another organization, or who serve at its request in any capacity with respect to any employee benefit plan, may be provided by it to whatever extent shall be specified in or authorized by (i) the articles of organization or (ii) a by-law adopted by the stockholders or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. Except as the articles of organization or by-laws otherwise require, indemnification of any persons referred to in the preceding sentence who are not directors of the corporation may be provided by it to the extent authorized by the directors. Such indemnification may include payment by the corporation of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he shall be adjudicated to be not entitled to indemnification under this section which undertaking may be accepted without reference to the financial ability of such person to make repayment. Any such indemnification may be provided although the person to be indemnified is no longer an officer, director, employee or agent of the corporation or of such other organization or no longer serves with respect to any such employee benefit plan. No indemnification shall be provided for any person with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation or to the extent that such matter relates to service with respect to any employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. The absence of any express provision for indemnification shall not limit any right of indemnification existing independently of this section. A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or other agent of another organization or with respect to any employee benefit plan, against any liability incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability." The Registrant's Restated Articles of Organization, as amended, provide: "The Corporation eliminates the personal liability of each director to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any statutory provision or other law imposing such liability; provided, that nothing in this paragraph shall eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section sixty-one or sixty-two of Chapter 156B of the Massachusetts General Laws, or (iv) for any transaction from which the director derived an improper personal benefit." II-2 111 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. This Registration Statement includes the following exhibits:
EXHIBIT NO. - ----------- 1.1* Form of Common Stock Underwriting Agreement by and among Registrant, certain stockholders of the Company and Robertson, Stephens & Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Adams, Harkness & Hill, Inc., as representatives of the several Underwriters. 1.2* Form of Note Underwriting Agreement by and among Registrant and Robertson, Stephens & Company LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several Underwriters. 3.1 Restated Articles of Organization of Registrant. 3.2 By-laws, as amended, of Registrant. 4* Form of Indenture (including Form of Note). 5* Opinion of Testa, Hurwitz & Thibeault, LLP as to the legality of the securities to be offered. 10.1 Leases for premises located at 435-445 El Camino Real, Santa Clara, California, by and between Zycon Corporation and University Research Center and addenda thereto dated March 1, 1988; July 8, 1988; February 27, 1989; August 30, 1989; May 19, 1993; and August 9, 1993. 10.2 Provisional Lease dated November 14, 1995 for the premises located at the Muara Tebas Land of Kuching East Malaysia by and between Sudarsono Osman and Zycon Corporation Sendirian Berhad. 10.3* Construction Agreement dated August 3, 1995 by and between Zycon Corporation and Hiti Engineering Sdn.Bhd. 10.4 Facilities Agreement dated February 9, 1996 by and among the Zycon Corporation Sdn.Bhd., Bank Bumiputra Malaysia Berhad and BBMB Kewangan Berhad. 10.5 Corporate Guarantee dated February 9, 1996 issued by Zycon Corporation in favor of Bank Bumiputra Malaysia Berhad and BBMB Kewangan Berhad. 10.6 Lease for the three acre premises located in Santa Clara, California by and between Zycon Corporation and Sobrato Interests III, dated January 4, 1996. 11 Statement re: Computation of Earnings per Share. 12 Statement re: Computation of Ratios. 23.1* Consent of Testa, Hurwitz & Thibeault, LLP (included as part of Exhibit 5). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of KPMG Peat Marwick LLP. 24 Power of Attorney (included on signature page). 25 Statement of Eligibility of Trustee on Form T-1. 27 Financial Data Schedule.
- --------------- * To be filed by amendment. FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on Schedule Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 112 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes as follows: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 113 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Salem, State of New Hampshire, on February 18, 1997. HADCO CORPORATION By /s/ ANDREW E. LIETZ ---------------------------------- ANDREW E. LIETZ President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Each person whose signature appears below in so signing also makes, constitutes and appoints Andrew E. Lietz and Timothy P. Losik, and each of them, his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments and post-effective amendments to this Registration Statement, with exhibits thereto (including any subsequent Registration Statement for the same offering which may be filed under Rule 462(b)), and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE - -------------------------------- -------------------------------------------- ------------------ /s/ HORACE H. IRVINE II Chairman of the Board and Director February 18, 1997 - -------------------------------- (HORACE H. IRVINE) /s/ ANDREW E. LIETZ President, Chief Executive Officer and February 18, 1997 - -------------------------------- Director (Principal Executive Officer) (ANDREW E. LIETZ) /s/ TIMOTHY P. LOSIK Vice President, Chief Financial Officer February 18, 1997 - -------------------------------- and Treasurer (Principal Financial Officer (TIMOTHY P. LOSIK) and Principal Accounting Officer) /s/ LAWRENCE COOLIDGE Director February 18, 1997 - -------------------------------- (LAWRENCE COOLIDGE) /s/ J. STANLEY HILL Director February 18, 1997 - -------------------------------- (J. STANLEY HILL) /s/ JOHN O. IRVINE Director February 18, 1997 - -------------------------------- (JOHN O. IRVINE) /s/ MIKAEL SALOVAARA Director February 18, 1997 - -------------------------------- (MIKAEL SALOVAARA) /s/ JOHN F. SMITH Director February 18, 1997 - -------------------------------- (JOHN F. SMITH) /s/ OLIVER O. WARD Director February 18, 1997 - -------------------------------- (OLIVER O. WARD)
II-5 114
SIGNATURE TITLE DATE - -------------------------------- -------------------------------------------- ------------------ /s/ PATRICK SWEENEY Director February 18, 1997 - -------------------------------- (PATRICK SWEENEY) /s/ JOHN E. POMEROY Director February 18, 1997 - -------------------------------- (JOHN E. POMEROY) /s/ JAMES C. TAYLOR Director February 18, 1997 - -------------------------------- (JAMES C. TAYLOR)
II-6 115 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Hadco Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Hadco Corporation included in this registration statement and have issued our report thereon dated November 15, 1996 (except with respect to the matter discussed in Note 2, as to which the date is January 10, 1997). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein, in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts November 15, 1996 S-1 116 SCHEDULE II HADCO CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND FROM END OF OF PERIOD EXPENSES RESERVES(1) PERIOD ---------- ---------- ------------ ---------- Allowance for Doubtful Accounts October 29, 1994........................... $600 234 (109) $ 725 October 28, 1995........................... $725 277 (152) $ 850 October 26, 1996........................... $850 329 (79) $1,100
- --------------- (1) Amounts deemed uncollectible. S-2 117 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- ----------------------------------------------------------------------- -------- 1.1* Form of Common Stock Underwriting Agreement by and among Registrant, certain stockholders of the Company and Robertson, Stephens & Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Adams, Harkness & Hill, Inc., as representatives of the several Underwriters........................................................... 1.2* Form of Note Underwriting Agreement by and among Registrant and Robertson, Stephens & Company LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several Underwriters..... 3.1 Restated Articles of Organization of Registrant. ...................... 3.2 By-laws, as amended, of Registrant..................................... 4* Form of Indenture (including form of Note)............................. 5* Opinion of Testa, Hurwitz & Thibeault, LLP as to the legality of the securities to be offered............................................... 10.1 Leases for premises located at 435-445 El Camino Real, Santa Clara, California, by and between Zycon Corporation and University Research Center and addenda thereto dated March 1, 1988; July 8, 1988; February 27, 1989; August 30, 1989; May 19, 1993; and August 9, 1993............ 10.2 Provisional Lease dated November 14, 1995 for the premises located at the Muara Tebas Land of Kuching East Malaysia by and between Sudarsono Osman and Zycon Corporation Sendirian Berhad. ......................... 10.3* Construction Agreement dated August 3, 1995 by and between Zycon Corporation and Hiti Engineering Sdn.Bhd............................... 10.4 Facilities Agreement dated February 9, 1996 by and among the Zycon Corporation Sdn.Bhd., Bank Bumiputra Malaysia Berhad and BBMB Kewangan Berhad................................................................. 10.5 Corporate Guarantee dated February 9, 1996 issued by Zycon Corporation in favor of Bank Bumiputra Malaysia Berhad and BBMB Kewangan Berhad. ............................................................... 10.6 Lease for the three acre premises located in Santa Clara, California by and between Zycon Corporation and Sobrato Interests III, dated January 4, 1996. .............................................................. 11 Statement re: Computation of Earnings per Share........................ 12 Statement re: Computation of Ratios.................................... 23.1* Consent of Testa, Hurwitz & Thibeault, LLP (included as part of Exhibit 5)..................................................................... 23.2 Consent of Arthur Andersen LLP......................................... 23.3 Consent of KPMG Peat Marwick LLP....................................... 24 Power of Attorney (included on signature page)......................... 25 Statement of Eligibility of Trustee on Form T-1........................ 27 Financial Data Schedule................................................
- --------------- * To be filed by amendment. EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 Exhibit 3.1 FEDERAL IDENTIFICATION NO.: 04-2393279 ------------- The Commonwealth of Massachusetts MICHAEL JOSEPH CONNOLLY Secretary of State ONE ASHBURTON PLACE, BOSTON, MASS: 02108 RESTATED ARTICLES OF ORGANIZATION General Laws, Chapter 156B, Section 74 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the restated articles of organization. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. We, Jon F. Kropper, President; and James C. Hamilton, Clerk of HADCO CORPORATION - -------------------------------------------------------------------------------- Located at: c/o James C. Hamilton, One Court Street, Boston, MA 02108 -------------------------------------------------------------------- do hereby certify that the following restatement of the articles of organization of the corporation was duly adopted at a meeting held on March 1, 1989, by vote ------------- of 8,978,423 shares of Common out of 10,850,497 shares outstanding, --------- ------- ----------- (Class of Stock) shares of out of shares outstanding, - ------ ------------------------- (Class of Stock) shares of out of shares outstanding, - ------ ------------------------- (Class of Stock) shares of out of shares outstanding, - ------ ------------------------- (Class of Stock) Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. 2 FEDERAL IDENTIFICATION NO.: 04-2393279 ------------- being at least two-thirds of each class of stock outstanding and entitled to vote and of each class or series of stock adversely affected thereby: - 1. The name by which the corporation shall be known is: - Hadco Corporation 2. The purposes for which the corporation is formed are as follows: - To carry on a general manufacturing and merchandising business and any business incidental thereto or in any way connected therewith, including, but without limiting the generality of the foregoing purpose, the trade or business of designing, producing, manufacturing, adapting, developing, forming, processing, converting, testing and otherwise acquiring, owning, holding consuming, disposing of and dealing in, and an interest in, printed circuits and all types of electronic and communications equipment and any and all other goods, articles, materials, equipment or compounds required for, or convenient in connection with, or incidental to any of the foregoing, and any other trade or business which can conveniently be carried on in conjunction with any of the materials aforesaid in or upon the premises of the Corporation, and to carry on any business permitted by the laws of the Commonwealth of Massachusetts to a corporation organized under Chapter 156B. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. 3 FEDERAL IDENTIFICATION NO.: 04-2393279 ------------- *We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation as heretofore amended, except amendments to the following articles: -------------- 3 and 4 - -------------------------------------------------------------- (*If there are no such amendments, state "None".) Briefly describe amendments in space below: The amendment abolishes toe previously existing class of Convertible Preferred Stock and accordingly, amends Article 3 of the Restated Articles of Organization to delete reference to the Convertible Preferred Stock. Because the class of Convertible Preferred Stock has been eliminated and there remains only a single class of Common Stock of Hadco Corporation, Article 4, which had previously described the different classes of stock and the differing rights and privileges of such class, is deleted, in its entirety. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we hereto signed our names this 1st day of March in the year 1989. /s/ Jon F. Kropper - ------------------------------------ Jon F. Kropper, President /s/ James C. Hamilton - ------------------------------------ James C. Hamilton, Clerk Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. EX-3.2 3 BY-LAWS 1 Exhibit 3.2 As Adopted 9/26/83 and Revised and Amended 6/12/87 * * * * * * * * * * * * BY-LAWS OF HADCO CORPORATION * * * * * * * * * * * * ARTICLE I --------- Stockholders ------------ 1. ANNUAL MEETING. The annual meeting shall be held within six months after the end of the fiscal year of the corporation on a date and time fixed from time to time by the corporation's Board of Directors. The purposes for which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization or by these By-laws, may be specified by the Directors or the President in the event that no date for the annual meeting is so fixed by the corporation's Board of Directors or the annual meeting has not been held on the date so fixed by the Board of Directors, a special meeting in lieu of the annual meeting may be held with all the force and effect of an annual meeting. 2. SPECIAL MEETINGS. Special meetings of stockholders may be called by the President or by the Directors. Upon written application of one or more stockholders who hold at least 10% of the capital stock entitled to vote at a meeting, a special meeting shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer. 3. PLACE OF MEETINGS. All meetings of stockholders shall be held at the principal office of the Corporation unless a different place (within or without Massachusetts, but within 2 -2- the United States) is fixed by the Directors or the President and stated in the notice of the meeting. 4. NOTICE OF MEETINGS. A written notice of the place, date and hour of all meetings of stockholders stating the purpose of the meeting shall be given by the Clerk or an Assistant Clerk or by the person calling the meeting at least seven days or such longer period as may be required by law before the meeting to each stockholder entitled to vote thereat and to each stockholder who under the law, under the Articles of Organization or under these By-laws, is entitled to such notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. Whenever notice of a meeting is required to be given a stockholder under any provision of the Massachusetts Business Corporation Law or of the Articles of Organization of these By-laws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. 5. QUORUM. The holders of a majority in interest of all stock issued, outstanding and entitled to vote at a meeting shall constitute a quorum but a lesser number may adjourn any meeting from time to time without further notice; except that, if two or more classes of stock are outstanding and entitled to vote as separate classes, then in the case of each such class, a quorum shall consist of the holders of a majority in interest of the stock of that class issued, outstanding and entitled to vote. 6. VOTING AND PROXIES. Each stockholder shall have one vote for each share of stock entitled to vote owned by him and a proportionate vote for a fractional share, unless otherwise provided by the Articles of Organization in the case that the corporation has two or more classes 3 -3- or series of stock. Capital stock shall not be voted if any installment of the subscription therefor has been duly demanded in accordance with the law of the Commonwealth of Massachusetts and is overdue and unpaid. Stockholders may vote either in person or by written proxy dated not more than six months before the meeting named therein. Proxies shall be filed with the clerk of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the persons named therein to vote at any adjournment of such meeting but shall not be valid if executed by any one of them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. 7. ACTION AT MEETING. When a quorum is present, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter), except where a larger vote is required by law, the Articles of Organization or these By-laws, shall decide any matter to be voted on by the stockholders. Any election of directors or officers by the stockholders shall be determined by a plurality of the votes cast by stockholders entitled to vote at the election. Any such elections shall be by ballot if so requested by any stockholder entitled to vote thereon. The corporation shall not directly or indirectly vote any share of its own stock. 8. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records 4 -4- of the meetings of stockholders. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE II ---------- Directors --------- 1. POWERS. The business of the corporation shall be managed by a Board of Directors who may exercise all the powers of the corporation except as otherwise provided by law, by the Articles of Organization or by these By-laws. In the event of vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2. ELECTION. A Board of Directors shall be elected by the stockholders at the annual meeting. The number of directors shall be fixed by the stockholders (except as that number may be enlarged by the Board of Directors acting pursuant to Section 4 of this Article), but shall be not less than three, except that whenever there shall be only two stockholders the number of directors shall be not less than two and whenever there shall be only one stockholder or prior to the issuance of any stock, there shall be at least one director, and there shall be not more than twelve. 3. VACANCIES. Any vacancy in the Board of Directors, however occurring, including a vacancy resulting from the enlargement of the Board, may be filled by the stockholders or, in the absence of stockholder action, by the Directors. 4. ENLARGEMENT OF THE BOARD. The Board of Directors may be enlarged by the stockholders at any meeting or by vote of a majority of the Directors then in office. 5. TENURE. Except as otherwise provided by law, by the Articles of Organization or by these By-laws, Directors shall hold office until the next annual meeting of stockholders and 5 -5- until their successors are chosen and qualified. Any Director may resign by delivering his written resignation to the corporation at its principal office or to the President, Clerk or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 6. REMOVAL. A Director may be removed from office (a) with or without cause by vote in the election of Directors, provided that the Directors of a class elected by a particular class of stockholders may be removed only by the vote of the holders of a majority of the shares of the particular class of stockholders entitled to vote for the election of such Directors; or (b) for cause by vote of a majority of the Directors then in office. A Director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him. 7. MEETINGS. Regular meetings of the Directors may be held without call or notice at such places and, at such times as the Directors may from time to time determine, provided that any Director who is absent when such determination is made shall be given notice of the determination. A regular meeting of the Directors may be held without a call or notice at the same place as the annual meeting of stockholders. Special meetings of the Directors may be held at any time and place designated in a call by the Chairman of the Board of Directors, President or two or more Directors. 8. TELEPHONE CONFERENCE MEETINGS. Members of the Board of Directors may participate in a meeting of the board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. 6 -6- 9. NOTICE OF MEETINGS. Notice of all special meetings of the Directors shall be given to each Director by the Secretary, or Assistant Secretary, or if there be no secretary or Assistant Secretary, by the Clerk, or Assistant Clerk, or in case of the death, absence, incapacity or refusal or such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by telephone or by telegram sent to his business or home address at least twenty-four hours in advance of the meeting, or by written notice mailed to his business or home address at least forty-eight hours in advance of the meeting. Notice of a meeting need not be given to any Director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a Directors' meeting need not specify the purposes of the meeting. 10. QUORUM. At any meeting of the Directors, a majority of the Directors then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time without further notice. 11. ACTION AT MEETING. At any meeting of the Directors at which a quorum is present, a majority of the Directors present may take any action on behalf of the Board except to the extent that a larger number is required by law or the Articles of organization or these By-laws. 12. ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting, if all the Directors consent to the action in writing and the written consents are filed with the records of the meetings of Directors. Such consents shall be treated for all purposes as a vote at a meeting. 13. COMMITTEES. The Directors may, by vote of a majority of the Directors then in office, elect from their number an executive or other committees and may by like vote delegate 7 -7- thereto some or all of their powers except those which by law, the Articles of Organization or these Bylaws they are prohibited from delegating to such committee. Except as the Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Directors or in such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these By-laws for the Directors. ARTICLE III ----------- Officers -------- 1. ENUMERATION. The officers of the corporation shall consist of a President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board of Directors, one or more Vice-Presidents, Assistant Treasurers, Assistant Clerks, Secretary and Assistant Secretaries as the Directors may determine. 2. ELECTION. The President, Treasurer and Clerk shall be elected annually by the Directors at their first meeting following the annual meeting of stockholders. Other officers may be chosen by the Directors at such meeting or at any other meeting. 3. QUALIFICATION. The President may, but need not be, a Director. No officer need be a stockholder. Any two or more offices may be held by the same person, provided that the President and Clerk shall not be the same person. The Clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the Directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the Directors may determine. 4. TENURE. Except as otherwise provided by law, by the Articles of Organization or by these By-laws, the President, Treasurer and Clerk shall hold office until the first meeting of the Directors following the next annual meeting of stockholders and until their successors are 8 -8- chosen and qualified; and all other officers shall hold office until the first meeting of the Directors following the next annual meeting of stockholders and until their successors are chosen and qualified, unless a shorter term is specified in the vote choosing or appointing them. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the President, Clerk or Secretary, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 5. REMOVAL. The Directors may remove any officer with or without cause by vote of a majority of the Directors then in office; provided, that an officer may be removed for cause only after a reasonable notice and opportunity to be heard before the Board of Directors. 6. PRESIDENT, CHAIRMAN OF THE BOARD AND VICE-PRESIDENT. The President shall, unless otherwise provided by the Directors, be the chief executive officer of the corporation and shall, subject to the direction of the Directors, have general supervision and control of its business. Unless otherwise provided by the Directors he shall preside, when present, at all meetings of stockholders and, unless a Chairman of the Board has been elected and is present, of the Directors. If a Chairman of the Board of Directors is elected he shall preside at all meetings of the Board of Directors at which he is present. The Chairman shall have such other powers as the Directors may from time to time designate. Any Vice-President shall have such powers as the Directors may from time to time designate. 7. TREASURER AND ASSISTANT TREASURER. The Treasurer shall, subject to the direction of the Directors, have general charge of the financial affairs of the corporation and shall cause 9 -9- accurate books of account to be kept. He shall have custody of all funds, securities, and valuable documents of the corporation, except as the Directors may otherwise provide. Any assistant treasurer shall have such powers as the Directors may from time to time designate. 8. CLERK AND ASSISTANT CLERKS. The Clerk shall record all proceedings of the stockholders in a book to be kept therefor. Unless a transfer agent is appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the principal office of the corporation or at his office, the stock and transfer records of the corporation, in which are contained the names of all stockholders and the record address and the amount of stock held by each. In case a Secretary is not elected, the Clerk shall record all proceedings of the Directors in a book to be kept therefor. In the absence of the Clerk from any meeting of the stockholders, an Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. Any Assistant Clerk shall have such additional powers as the Directors may from time to time designate. 9. SECRETARY AND ASSISTANT SECRETARIES. If a Secretary is elected, he shall keep a record of the meetings of the Directors and in his absence, an Assistant Secretary, if one be elected, otherwise a Temporary Secretary designated by the person presiding at the meeting, shall keep a record of the meetings of the Directors. Any Assistant Secretary shall have such additional powers as the Directors may from time to time designate. 10. OTHER POWERS AND DUTIES. Each officer shall, subject to these By-laws, have in addition to the duties and powers specifically set forth in these By-laws, such duties and powers 10 -10- as are customarily incident to his office, and such duties and powers as the Directors may from time to time designate. ARTICLE IV ---------- Capital Stock ------------- 1. CERTIFICATES OF STOCK. Subject to the provisions of Section 2 below, each stockholder shall be entitled to a certificate of the capital stock of the corporation in such form as may be prescribed from time to time by the Directors. The certificate shall be signed by the President or a Vice-President, and by the Treasurer or an Assistant Treasurer; provided, however, such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. Every certificate issued for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the Articles of Organization, these By-laws or any agreement to which the corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every stock certificate issued by the corporation at a time when it is authorized to issue more than one class or series of stock shall set forth upon the face or back of the certificate either the full text of the preferences, voting powers, qualification and special and relative rights of the shares of each class and series, if any, authorized to be issued, as set forth in 11 -11- the Articles of Organization, or a statement of the existence of such preferences, powers, qualifications, and rights, and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. 2. STOCKHOLDER ACCOUNTS. The corporation may maintain or cause to be maintained stockholder open accounts in which may be recorded all stockholders' ownership of stock and all changes therein. Certificates need not be issued for shares so recorded in a stockholder open account unless requested by the stockholder. 3. TRANSFERS. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred in the records of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor, properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed. and with such proof of the authenticity of signature as the corporation or its transfer agent may reasonably require. When such stock certificates are thus properly surrendered to the corporation or its transfer agent, the corporation or transfer agent shall cause the records of the corporation to reflect the transfer of the shares of stock. Except as may be otherwise required by law, by the Articles of Organization or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown in its records as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereof, regardless of any transfer, pledgee or other disposition of such stock, until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the corporation of his post office address. 12 -12- 4. RECORD DATE. The Directors may fix in advance a time which shall be not more than sixty (60) days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment therefor or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date without fixing such record date the Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss, mutilation or destruction of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms and conditions as the Directors may prescribe. 6. ISSUE OF COMMON STOCK. The whole or any part of the then authorized but unissued shares of Common Stock may be issued at any time or from time to time by the Board of Directors without action by the stockholders. 13 -13- 7. REACQUISITION OF STOCK. Shares of stock previously issued which have been reacquired by the corporation, may be restored to the status of authorized but unissued shares by vote of the Board of Directors, without amendment of the Articles of Organization. ARTICLE V --------- Provisions Relative to Directors, Officers, Stockholders and Employees ------------------------------------ 1. CERTAIN CONTRACTS AND TRANSACTIONS. In the absence of fraud or bad faith, no contract or transaction by this corporation shall be void, voidable or in any way affected by reason of the fact that the contract or transaction is (a) with one or more of its officers, Directors, stockholders or employees, (b) with a person who is in any way interested in this corporation or (c) with a corporation, organization or other concern in which an officer, Director, stockholder or employee of this corporation is an officer, director, stockholder, employee or in any way interested. The provisions of this section shall apply notwithstanding the fact that the presence of a Director or stockholder, with whom a contract or transaction is made or entered into or who is an officer, director, stockholder or employee of a corporation, organization or other concern with which a contract or transaction is made or entered into or who is in any way interested in such contract or transaction, was necessary to constitute a quorum at the meeting of the Directors (or any authorized committee thereof) or stockholders at which such contract or transaction was authorized and/or that the vote of such Director or stockholder was necessary for the adoption of such contract or transaction, provided that if said interest was material, it shall have been known or disclosed to the Directors or stockholders voting at said meeting on said contract or transaction. A general notice to any person voting on said contract or transaction that an officer, Director, stockholder or employee has a material interest in any corporation, organization or other concern shall be sufficient disclosure as to such officer, Director, stockholder or employee with respect to all contracts and transactions with such corporation, organization or 14 -14- other concern shall be sufficient disclosure as to such officer, Director, stockholder or employee with respect to all contracts and transactions with such corporation, organization or other concern. This section shall be subject to amendment or repeal only by action of the stockholders. 2. INDEMNIFICATION. Each Director, officer, employee and other agent of the corporation, and any person who, at the request of the corporation, serves as a director, officer, employee or other agent of another organization in which the corporation directly or indirectly owns shares or of which it is a creditor shall be indemnified by the corporation against any cost, expense (including attorneys, fees), judgment, liability and/or amount paid in settlement reasonably incurred by or imposed upon him in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency), to which he may be made a party or otherwise involved or with which he shall be threatened, by reason of his being, or related to his status as a director, officer, employee or other agent of the corporation or of any other organization in which the corporation directly or indirectly owns shares or of which the corporation is a creditor, which other organization he serves or has served as director, officer, employee or other agent at the request of the corporation (whether or not he continues to be an officer, Director, employee or other agent of the corporation or such other organization at the time such action, suit or proceeding is brought or threatened), unless such indemnification is prohibited by the Business Corporation Law of the Commonwealth of Massachusetts. The foregoing right of indemnification shall be in addition to any rights to which any such person may otherwise be entitled and shall inure to the benefit of the executors or administrators of each such person. The corporation may pay the expenses incurred by any such person in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit, 15 -15- or proceeding upon receipt of an undertaking by such person to repay such payment if it is determined that such person is not entitled to indemnification hereunder. This section shall be subject to amendment or repeal only by action of the stockholders. ARTICLE VI ---------- Miscellaneous Provisions ------------------------ 1. FISCAL YEAR. Except as from time to time otherwise determined by the Directors, the fiscal year of the corporation shall be the twelve (12) months ending the last Saturday of October. Following any change in the fiscal year previously adopted, a certificate of such change, signed under the penalties of perjury, by the Clerk or an Assistant Clerk, shall be filed forthwith with the state secretary. 2. SEAL. The seal of this corporation shall, subject to alteration by the Directors, bear its name, the word "Massachusetts", and the year of its incorporation. 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers, contracts, bonds, notes and other obligations authorized to be executed by an officer of the corporation in its behalf shall be signed by the President or the Treasurer except as the Directors may generally or in particular cases otherwise determine. 4. VOTING OF SECURITIES. Except as the Directors may otherwise designate, the President or Treasurer may waive notice of, and appoint any person or persons to act as proxy or attorney in fact for this corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5. CORPORATE RECORDS. The original, or attested copies, of the Articles of Organization, By-laws and records of all meetings of incorporators and stockholders and the 16 -16- stock and transfer records which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the corporation or at an office of its transfer agent or of the Clerk or of its resident agent. Said copies and records need not all be kept in the same office. They shall be available at all reasonable times to the inspection of any stockholder for any proper purpose but not to secure a list of stockholders or other information for the purpose of selling said list or information or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. 6. ARTICLES OF ORGANIZATION. All references in these By-laws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the corporation as amended and in effect from time to time. 7. AMENDMENTS. These By-laws, to the extent provided in these By-laws, may be amended or repealed, in whole or in part, and new By-laws adopted either (a) by the stockholders at any meeting of the stockholders by the affirmative vote of the holders of at least a majority in interest of the capital stock presence and entitled to vote, provided that notice of the proposed amendment or repeal or of the proposed making of new By-laws shall have been given in the notice of such meeting, or (b) if so authorized by the Articles of Organization, by the Board of Directors at any meeting of the Board by the affirmative vote of a majority of the Directors then in office, but no amendment or repeal of a By-law shall be voted by the Board of Directors and no new By-law shall be made by the Board of Directors which alters the provisions of these By-laws with respect to removal of Directors, or the election of committees by Directors and the delegation of powers thereto, nor shall the Board of Directors make, amend or repeal any provision of the By-laws which by law, the Articles of Organization or the By-laws requires 17 -17- action by the stockholders. Not later than the time of giving notice of the meeting of stockholders next following the making, amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. Any By-law or amendment of a By-law made by the Board of Directors may be amended or repealed by the stockholders by affirmative vote as above provided in this Section 7. EX-10.1 4 LEASE FOR PREMISES 1 EXHIBIT 10.1 LEASE 1. PARTIES: THIS LEASE, is entered into on this 1st day of March, 1988, between University Research Center, a California General Partnership, and Zycon, a California Corporation, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises described on the preliminary site plan proposed by Dennis Kobza and Associates dated February 26, 1986 attached hereto, situated in the City of Santa Clara, County of Santa Clara State of California, including a building of: Approximately 126,816 square foot on ground level industrial building, with parking for approximately four hundred (400) automobiles, described on plans prepared by Dennis Kobza and Associates, attached hereto as Exhibit "A." To be constructed at Landlord's expense. The Premises are part of the project known as University Research Center, consisting of two buildings totaling approximately 222,000 square feet to be constructed on approximately 13.5 acres as shown on the Site Plan prepared by Dennis Kobza and Associates (The Project). 3. USE: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Research, Office, and Light Manufacturing purposes including but not limited to the manufacturing of printed circuit boards. 4. TERM: The term shall be for one hundred forty-four (144) months, commencing on the 1st day of February, 1989, and ending on the 31st day of January, 2001, at the total rent or sum of FOURTEEN MILLION SEVEN HUNDRED NINETY ONE THOUSAND EIGHT HUNDRED TWENTY FOUR AND 00/100 ($14,791,824.00) DOLLARS, payable, without deduction or offset, in monthly installments of ONE HUNDRED TWO THOUSAND SEVEN HUNDRED TWENTY ONE AND 00/100 DOLLARS: $102,721.00 Subject to increases for Consumer Price Index adjustments every forty-eight (48) months as provided in Article 41 herein. due on or before the first day of each calendar month during the term hereof. Said rental shall be paid in lawful money of the United States of America, without offset or deduction, and shall be paid to Landlord at such place or places as may be designated in writing from time to time by Landlord. Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Concurrently with Tenants, execution of this Lease, Tenant shall pay to Landlord the sum of ONE HUNDRED TWO THOUSAND SEVEN HUNDRED TWENTY ONE AND 00/100 ($102,721.00) DOLLARS as prepared rent for first month's rent. Tenant to receive a credit on its second month's rental for interest earned on such pre-paid rent in the amount of five percent (5%) per year. 2 -2- 5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease, Tenant has deposited with Landlord the sum of ONE HUNDRED THOUSAND AND 00/100 ($100,000.00) DOLLARS as a security deposit. If Tenant defaults, as defined in Paragraph 24, with respect to any provisions of this lease, including but not limited to the provisions relating to payment of rent or other charges, Landlord may, to the extent reasonably necessary to remedy Tenant's default, use all or any part of said deposit for the payment of rent or other charges in default or the payment of any other payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefore, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount hereinabove stated and shall pay to Landlord such other sums as shall be necessary to reimburse Landlord for any sums paid by landlord. Said deposit shall be returned to Tenant within fifteen (15) days after the expiration of the term hereof less any amount deducted in accordance with this paragraph, together with Landlord's written notice itemizing the amounts and purposes for such retention. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. Tenant shall receive an annual rental credit equal to five percent (5%) interest on such security deposit applied to the first month's rent of each year of this lease. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, administrative, processing, accounting charges, and late charges, which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to three (3%) percent of such overdue amount which shall be due and payable with the payment then delinquent. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. 7. CONSTRUCTION AND POSSESSION: The Tenant Interior Improvements and Building Shell shall be constructed by independent contractors to be employed by and under the supervision of Landlord, as general contractor. The final plans for such Interior Improvements and Building Shell shall be prepared as expeditiously as possible and shall be subject to the reasonable approval by the parties, which approval shall not be unreasonably withheld or delayed. Landlord shall construct the Tenant Interior Improvements and Building Shell in 3 -3- accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. The Building Shell and Tenant Interior Improvements are generally described in Exhibit E. The final plans shall be consistent with Exhibit E and shall be based upon and consistent with the plan for the Building Shell attached as Exhibit A, and with the Tenant Floor Plans to be submitted as provided in Exhibit E. "Cost" of the Tenant Interior Improvements is defined in Exhibit E. Landlord shall be responsible for and shall pay the entire cost of the Building Shell and the cost of the Tenant Interior Improvements up to the amount of THREE MILLION EIGHT HUNDRED FOUR THOUSAND FOUR HUNDRED EIGHTY AND 00/100 ($3,804,480.00) DOLLARS ("Tenant Interior Improvement Allowance"). In the event the cost of Tenant Interior Improvements is less than THREE MILLION EIGHT HUNDRED FOUR THOUSAND FOUR HUNDRED EIGHTY AND 00/100 ($3,804,480.00) DOLLARS, the monthly rental under the Lease shall be reduced at the rate of FIFTEEN DOLLARS ($15.00) per month for each ONE THOUSAND DOLLARS ($1,000.00) of the Tenant Interior Improvement Allowance not used to a minimum of TWO MILLION FOUR HUNDRED THOUSAND AND 00/100 ($2,400,000.00) DOLLARS. Costs, as defined in Exhibit "E," in excess of said Tenant Interior Improvement Allowance, if any, shall be paid for by Tenant in cash within ten (10) days after Landlord has provided Tenant with written evidence that Landlord's progress payments to sub-contractors has exceeded said Tenant Interior Improvement budget. All costs for Tenant Interior Improvements shall be fully documented to and verified by Tenant. Tenant reserves the right to require Landlord to secure three competitive bids from sub-contractors on any item costing in excess of TWENTY FIVE THOUSAND AND 00/100 ($25,000.00) DOLLARS. Landlord and Tenant to execute a standard construction contract containing provisions customarily contained in such contracts providing reasonable protection to the interests of the parties. The final selection of the successful sub-contractors for the interior improvements shall be subject to Tenant's approval. Upon receipt of all competitive bids, Tenant shall retain the right to negotiate with any sub-contractor subject to the reasonable approval of Lessor. Tenant to have the right to record a chattel mortgage, personal property lease, or other security interest on that portion of leasehold improvements that it has paid for, and that have not become an integral part of the real estate, and that are of a specific nature unique to Tenant's business, that are not needed for the normal operation of the building or heating and cooling for personnel within the building. If Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession. The term of the Lease shall not commence until the Premises are Substantially Complete as defined herein. "Substantially Complete" shall mean that: (i) all necessary governmental approvals, permits, 4 -4- consents, and certificates have been obtained by or for Landlord for the lawful construction by Landlord, and occupancy by Tenant, (ii) all of the Premises interior fully meet all of the Tenant Floor Plans, (iii) all of the Premises exterior substantially meets the applicable Tenant Floor Plans, including paved parking areas, and (iv) said interior is in a "broom clean" finished condition. If necessary, Landlord reserves the right to post a bond for the uncompleted portion of the landscaping. Notwithstanding the above, if Landlord has not commenced construction of the Building Shell by September 1, 1988, Tenant may terminate this lease by giving Landlord written notice. Commencement of construction shall mean that Landlord has obtained all permits necessary to construct the Building Shell given the use contemplated hereby, has executed Ground Lease (see Paragraph 47) and has commenced substantial excavation. The September 1, 1988 date contemplates that Tenant shall have provided Landlord with one-line drawings of Tenant wall layout and Basement Details by march 15, 1988 and if it fails to do so the above date shall be extended by one day for each day after March 31, 1988 until Tenant delivers such drawings. Provided further that Landlord shall complete the shell and interior improvements by March 1, 1989 unless it has been delayed for causes beyond its reasonable control such as, but not limited to, strikes, unavailable equipment or materials, changes made by Tenant, or delays caused securing approval of governmental agencies. In the event of a delayed commencement date beyond March 1st plus additional time for the unavoidable delays described above, Tenant is to receive one day of free rent for every day beyond March 1, 1989 that the Premises are not ready for Tenant's occupancy. Tenant's obligations under this Lease are conditioned upon Tenant's reasonable satisfaction before May 1, 1988, that the Building Shell and Tenant's Interior Improvements will be approved by all applicable public authorities so as to permit Tenant to conduct the business contemplated without having to incur additional engineering or construction costs not customarily incurred by companies in the printed circuit business as a result of the Premises' proximity to residential property or from the property's proximity to the San Jose City Limit. 8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: When Tenant enters hereunder, Tenant shall accept the Premises as being in good and sanitary order, condition and repair, except for latent defects except for the "punch list" to be provided Landlord within thirty (30) days after Tenant's occupancy. The Tenant agrees on the last day of the term hereof, or on the sooner termination of this Lease, to surrender the Premises unto Landlord in good condition and repair, reasonable wear and tear excepted. "Good condition" shall mean that the interior walls of all office and warehouse areas, the floors of all office and warehouse areas, all suspended ceilings and any carpeting will be cleaned. Tenant shall ascertain from Landlord at least thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition as of the Lease commencement date or to cause Tenant to surrender all alterations, additions, and improvements in place to landlord. Tenant may request Landlord's decision at any time within six (6) months before the end of the Lease term and Landlord shall respond within thirty (30) days of Tenant's inquiry. Landlord's failure to respond within such period shall be deemed an election that 5 -5- Tenant surrender the Premises in their then current condition. If Landlord shall so desire, then Tenant shall remove such alterations, addition, and improvements as Landlord may require and shall repair and restore said Premises or such part or parts thereof before the termination of this Lease at Tenant's sole cost and expense. Tenant on or before the end of the term or sooner termination of this Lease, shall remove all his or its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed to be abandoned by Tenant. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, reasonable claims made by any succeeding tenant founded on such delay. Provided further that Landlord hereby warrants that all work will be performed in a good workmanlike manner free of all defects in construction and/or materials for a period of one year after Tenant accepts possession plus a period of two years from acceptance for the roof membrane or any other waterproof conditions. Landlord to further assign all subcontractor and material supplier's warranties to Tenant. 9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed, any waste upon the said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in the project or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purposes, or place any loads upon the floor, walls, or ceiling which endanger the structure, or place any harmful liquids, waste materials, or hazardous materials in the domestic drainage system of or soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature or any waste materials, refuse, scrap or debris shall be stored upon or permitted to remain on any portion of the Premises outside the Building proper or appropriately screened area. See Paragraph 20. 10. ALTERATIONS AND ADDITIONS: Tenant shall not make, or suffer to be made, any alteration or addition to the said Premises, or any part thereof, without the written consent of Landlord first had and obtained based upon Tenant's delivering to Landlord the proposed architectural and structural plans for all such alterations; any addition or alteration to the said Premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord. Alterations and additions which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. After having obtained Landlord's consent, Tenant agrees that it will not proceed to make such alterations or additions, until three (3) days from the receipt of such consent, or ten (10) working days after request for such consent, whichever is sooner, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant acknowledges Landlord's right to and hereby consents to construction of additional building(s) in the Project, excepting the premises demised by this lease, and on adjacent land owned by Landlord subject, always, to recalculation of Tenant's Allocable share of Costs as set forth below. Provided further that Tenant may make non-structural modifications to 6 -6- the premises costing less than TWENTY FIVE THOUSAND AND 00/100 ($25,000.00) DOLLARS per modification with a total of four (4) such modifications per year as long as Tenant provides Landlord an "As Built" drawing within ten (10) days following completion of the work. 11. LANDLORD'S AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS: Tenant acknowledges that this lease is a net lease and the rental shall be paid to Landlord net of all taxes (as and to the extent provided in Article 14), utilities (as and to the extent provided in Article 15), insurance expenses (as and to the extent provided in Article 13), maintenance, service, janitorial, security and repair expenses (as and to the extent provided in Article 12) and other operating expenses commonly borne by tenants of like commercial buildings. Tenant shall pay all such expenses accruing after the lease commencement date and during the term of this lease. Lease costs and costs of management, financing and construction shall be Landlord's responsibility, except as otherwise provided in this lease. Landlord will use its best efforts to obtain separate tax assessments and insurance billings and separate utility meters for Tenant's building leasehold improvements therein. Tenant will have the right to approve all vendors selected by Landlord that provide common area maintenance. It is contemplated that certain expenses such as gardening, outside lighting and parking lot maintenance will be shared by Tenant and other Tenants in the Project. Such expenses shall be prorated on a mutually acceptable basis reflecting the services provided and in the absence of such agreement, on the basis of the rentable square footage of the Premises compared to the rentable square footage of the Project. It is understood and agreed that Tenant's obligation to share in Common Area Costs shall be adjusted to reflect the commencement and termination dates of the Lease Term and are subject to recalculation in the event of expansion of the Building or Project. 12. MAINTENANCE OF PREMISES: Except as provided in paragraph 11 or below, Tenant shall, at its sole cost, keep and maintain, repair and replace, said Premises and appurtenances and every part hereof, including but not limited to, exterior walls, roof, glazing, sidewalks, parking areas, plumbing, electrical and HVAC systems, and all the Tenant Interior Improvements in good and sanitary order, condition, and repair. Tenant shall provide Landlord with a copy of a service contract between Tenant and a licensed air-conditioning and heating contractor which contract shall provide for bi-monthly maintenance of all air conditioning and heating equipment at the Premises. Tenant shall pay the cost of all air-conditioning and heating equipment repairs or replacements which are either excluded from such service contract or any existing equipment warranties. Tenant shall be responsible for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if (i) Tenant contracts with a licensed roof contractor who is reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the roof membrane at least annually, with the first inspection due the sixth (6th) month after the Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within 7 -7- a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide to Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. Landlord to be responsible for repairs or replacements of foundation, exterior walls (except painting), the structural portions of the roof, any problems caused by subsidence, and any defects in construction, workmanship or materials unless caused by Tenant's fault. All vinyl wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements, reasonable wear and tear excepted. Tenant agrees to limit attachments to vinyl wall surfaces exclusively to V-joints. The Tenant agrees to water, maintain and replace, when necessary, any shrubbery and landscaping. Landlord to be responsible for landscape material replacement required for the first twelve (12) months of this lease. 13. INSURANCE: Tenant shall not use, or permit said Premises, or any part thereof, to be used, for any purposes other than that for which the said Premises are hereby leased; and no use shall be made or permitted to be made of the said Premises, nor acts done, which will cause a cancellation of any insurance policy covering said Building, or any part thereof. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said Building and appurtenances. The Landlord agrees to purchase and keep in force fire, earthquake (if commercially available and if required by Institutional Lenders from time to time on the majority of similar industrial buildings in the City of Santa Clara), and extended coverage insurance covering the Premises in amounts not to exceed the actual insurable value of the Building, including the Premises, as determined by Landlord's insurance company's appraisers. Tenant's obligation to pay for Earthquake coverage shall be limited to a maximum additional cost over a normal fire and extended coverage policy of $50,000.00 per year subject to adjustment for Consumer Price Index increases utilizing February 1988 as the base period. In addition, Tenant agrees to insure its additions, alterations, and for those leasehold improvements paid for by Tenant which have become an integral part of the building or real estate for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises of $10,000,000.00 combined single limit for bodily injury and property damage. Tenant shall name Landlord and Santa Clara University, or any future owner of the fee interest, and the Institutional Lender on the building as loss payees as their interests may appear on the property insurance and as an additional insured on the liability insurance, shall deliver a Certificate of Insurance and renewal certificates to Landlord, fee owner, and Lender. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation or termination. 8 -8- Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to the Landlord or the Tenants as the case may be, or to the Premises or its contents, and which arise from any risk covered by their respective insurance policies, as set forth above. The parties shall obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against the Landlord or the Tenant, as the case may be. 14. TAXES: Tenant shall be liable for all taxes levied against personal property and trade or business fixtures, and agrees to pay, as additional rental, all real estate taxes and special assessment installments levied on the Premises, upon the occupancy of the Premises and including any substitute or additional charges which may be imposed during the Lease term including real estate tax increases due to a sale or other transfer of the Premises, as they appear on the City and County tax bills during the Lease term, and as they become due. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the commencement and termination dates of this Lease. Tenant's obligation for taxes shall not apply to taxes accruing before the Commencement Date of this lease. In any time during the term of this Lease a tax, excise on rents, business license tax, or any other tax, however described, is levied or assessed against Landlord, as a substitute or addition in whole or in part for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge his prorata share of such tax or excise on rents or other tax before it becomes delinquent, except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon the Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that the Tenant cannot pay and discharge his prorata share of such tax on behalf of the Landlord, then at the sole election of the Landlord, the Landlord may increase the rental charged hereunder by the exact amount of such tax. 15. UTILITIES: Except as provided in paragraph 11, Tenant shall pay directly to the providing utility all water, gas, heat, light, power, telephone and other utilities supplied to the Premises. Tenant to pay for all sewer discharge fees charged by the City of Santa Clara above the cost for an industrial shell as defined by the City of Santa Clara net of any credit due from the prior use of the property equitably prorated between Tenant's parcel and adjacent parcel leased by Landlord. 16. WAIVER OF LIABILITY: Failure by Landlord to perform any defined services, or any cessation thereof, when such failure is caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord, shall not render Landlord liable in any respect for damages to either person or property, nor be construed as an eviction of Tenant, nor cause an abatement of rent nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any of the equipment or machinery utilized in supplying the services listed herein break down, or for any cause cease to function properly, upon receipt of written notice from Tenant of any deficiency or failure of any defined Services, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no right to terminate this Lease, and shall have no claim for rebate of rent or damages, on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant waives the provisions of California Civil 9 -9- Code Sections 1941 and 1942 concerning the Landlord's obligation of tenantability and Tenant's right to make repairs and deduct the cost of such repairs from the rent. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or its failure to furnish any of the foregoing. 17. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any time during the term; and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 18. FREE FROM LIENS: Tenant shall keep the Premises and the Building in which the Premises are situated, free form any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Provide further that Tenant shall have the right to contest such lien provided it posts a bond indemnifying Landlord in an equivalent amount at Tenant's sole cost and expense. 19. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to the said Premises, and shall faithfully observe in the use of the Premises all Municipal ordinances and State and Federal statues now in force or which may hereafter be in force provided further that Tenant reserves the right to contest such requirement and as a condition of such contest Landlord may require a bond be posted in a sufficient sum as Landlord reasonably determines is necessary to protect and indemnify Landlord's interest. All costs for such bond will be at Tenant's expense during the period of protest. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Landlord and Tenant. 20. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: Except as permitted by governmental laws, regulations, and ordinances, Tenant shall not bring, allow, use or permit upon the Premises, or generate or create at or emit or dispose from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosively, reactivity, or extraction procedure toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Sections 66680 through 66685 of Title 22 of the California Administrative code as the same may be amended from time to time. Tenant shall comply, at its sole cost, with all laws pertaining to, and shall indemnify and hold Landlord harmless from any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from such bringing, allowing, using, permitting, generating, crating, or emitting or disposing of any such materials. Tenant's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any 10 -10- private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the cleanup or containment of wastes, the identification of scope of any environmental contamination, the removal of pollutants from soils, riverbeds or aquifers, the provision of an alternative public drinking water source, or the long term monitoring of ground water and surface waters, and (iii) all costs of defending such claims. Tenant will provide Landlord with copies of all applications and supporting documentation supplied to any governmental agency for the permission to use toxic material upon the premises. Notwithstanding the above, Tenants shall not be liable nor responsible for any toxic condition that it can prove existed prior to its initial occupancy of the Premises. 21. INDEMNITY: As a material part of the consideration to be rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause arising at any time, and Tenant will hold Landlord exempt and harmless from any damage or injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises by Tenant, or from the failure of Tenant to keep the Premises in good condition and repair, as herein provided, except for Landlord's proven negligence. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. This paragraph shall not apply to an injury or damage to person or property arising out of any construction defect. 22. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the said Premises any unusual or extraordinary signs, or any signs not approved by the city or other governing authority. The Tenant will not place, or permit to be placed, upon the Premises, any signs, advertisements or notices without the written consent of the Landlord as to type, size, design, lettering, coloring and location, and such consent will not be unreasonably withheld. Any sign so placed on the Premises shall be so placed upon the understanding and agreement that Tenant will remove same at the termination of the tenancy herein created and repair any damage or injury to the Premises caused thereby, and if not so removed by Tenant then Landlord may have same so removed at Tenant's expense. 23. ATTORNEY'S FEES: In case suit should be brought for the possession of the Premises, for the recovery of any sum due hereunder, or because of the breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee as part of its costs which shall be deemed to have accrued on the commencement of such action. 24. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a default and breach of this Lease by Tenant: a) Any failure by Tenant to pay the rental or to make any other payment required to be made by Tenant hereunder, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; b) The abandonment or vacation 11 -11- of the Premises by Tenant; c) A failure by Tenant to observe and perform any other provision of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion; d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed after the filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. 24.(a) REMEDIES: In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus b) the worth at the time of award of the amount by which the unpaid rent would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform his obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, and e) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. The term "rent", as used herein, shall be deemed to be and to mean the minimum monthly installments of rent and all other sums required to be paid by Tenant pursuant to the terms of this Lease, all other such sums being deemed to be an additional rental due hereunder. As used in (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. 24.(b) RIGHT TO RE-ENTER: In the event of any uncured monetary default as defined above or a default involving a breach of Article 20 herein by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and 12 -12- remove all persons and property from the Premises; such property can be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 24.(c) ABANDONMENT: In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in paragraph 24.(b) above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in paragraph 24.(a) above, then the provisions of California Civil Code Section 1951.4, as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any prorated cost of such reletting; third, to the payment of the cost of any prorated alterations and repairs to the Premises; fourth, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less that the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefore by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 24.(d) NO TERMINATION: No re-entry or taking possession of the Premises by Landlord pursuant to 24. (b) or 24. (c) of this Article 24 shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 25. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Building and Premises. Instead, at the option of Landlord, Tenant's surrender may terminate all or any existing sublease or subtenancies, or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 26. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in paragraph 24, 24 (a) (b) (c) and (d), the parties hereto agree that if the Tenant shall have defaulted in the performance of any monetary default or a default involving a breach of Article 20 herein of this Lease for three or more times during any twelve month period during the term 13 -13- hereof, then such conduct shall, at the election of the Landlord, represent a separate event of default which cannot be cured by the Tenant. Tenant acknowledges that the purpose of this provision is to prevent repetitive defaults by the Tenant under the Lease, which work a hardship upon the Landlord, and deprive the Landlord of the timely performance by the Tenant hereunder. 27. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord the reasonable opportunity to cure such failure prior to any claim for breach or for damages resulting from such failure. 28. NOTICES: All notices given to Tenant may be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed to Tenant at the said Premises, or such other address advised by Tenant in writing, whether or not the Tenant has departed from, abandoned or vacated the Premises. All notices shall be deemed received three (3) days after posting. 29. ENTER BY LANDLORD: Tenant shall permit Landlord and his agents to enter into and upon said Premises at all reasonable times subject to any security regulations of Tenant for the purpose of inspecting the same or for the purpose of maintaining the Premises or the Building in which said Premises are situated or for the purposes of making repairs, alterations to the Premises, or building on adjacent land leased by Landlord, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required without any rebate of rent or without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned. In the event of a substantial disruption to Tenant during such entry, Tenant will be entitled to reasonable reduction in rent determined by the percentage of the floor area of the building that cannot be utilized by the Tenant; and Tenant shall permit Landlord and his agents, at any time within ninety (90) days prior to the expiration of this Lease, to place upon said Premises any "For Sale" or "to lease" signs and exhibit the Premises to prospective tenants at reasonable hours. 30. DESTRUCTION OF PREMISES: If the Premises are damaged or destroyed from any cause during the term of this lease (including option periods) Landlord will within thirty (30) days of the destruction, notify Tenant in writing: 1) whether or not the repairs can be made within one hundred fifty (150) days; 2) whether the destruction is a partial destruction as defined below; 3) if the destruction is an uninsured loss as defined below which Landlord declines to repair. Within thirty (30) days of such notice, either party may be written notice to the other terminate this lease if the repairs cannot be made within one hundred fifty (150) days, or if the loss is an uninsured loss unless the Landlord elects to repair the same or if destruction exceeds more than one-half (1/2) of the replacement cost of the premises. If Landlord fails to timely give the notice, Tenant shall have ninety (90) days after destruction to give notice of termination. In the event of a partial destruction of the Premises from any cause then, unless the Lease is terminated as provided above, Landlord shall forthwith repair the same, provided such repairs can be made within one hundred fifty (150) days under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this 14 -14- Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the said Premises in the reasonable judgment of Landlord. In the event that Landlord does not elect to make such repairs, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of Tenant. For purposes of this paragraph "partial destruction" shall mean destruction to the extent of one-half (1/2) of the Replacement Cost of the Premises or less. In the event the Premises are more than partially destroyed, Landlord, or Tenant, may elect to terminate this Lease. If not so terminated, Landlord shall proceed with repairs, this Lease continuing in full force and the rent to be proportionately reduced as aforesaid. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Tenant. In all events a total or partial destruction of the Premises by an uninsured casualty with damage costing in excess of $500,000.00 to repair, such event shall terminate this Lease at the option of Landlord. In the event of any dispute between Landlord and Tenant relative to the provision s of this paragraph, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding upon both the Landlord and Tenant, who shall bear the cost of such arbitration equally between them. In all events Landlord shall not be required to restore additions, alterations or improvements made by Tenant after commencement of this lease or replace Tenant's fixtures or personal property. If the Landlord does not rebuild the Premises, then Tenants shall be entitled to the prorated portion of insurance proceeds under the policy it carries under Paragraph 13. The prorated portion shall be determined on a straight line basis over the original term of the Lease. 31. ASSIGNMENT OR SUBLEASE: In the event Tenant should desire to assign this Lease or any interest therein including, without limitation, a pledge, mortgage or other hypothecation, except as provided in Paragraph 7, or sublet the Premises or any part thereof, Tenant shall give Landlord written notice of such desire at least thirty (30) days in advance of the date on which Tenant desires to make such assignment or sublet. After Tenant has located a sub-tenant satisfactory to Tenant, it shall provide further notice to Landlord. This further notice shall give the name and current address of the proposed assignee/subtenant, proposed use of the Premises, rental rate and current financial statement, and upon request to Tenant, Landlord shall be given additional information as reasonably required to determine whether it will consent to the proposed assignment or sublease. Landlord shall then have a period of five (5) working days following receipt of such notice within which to notify Tenant in writing that Landlord elects (i) to terminate this Lease as to the space so affected as of the date so specified by Tenant in which event Tenant will be relieved of all further obligations hereunder as to such space, (ii) to permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice, or (iii) refuse consent. If Landlord should fail to notify Tenant in writing of such election within said five (5) working day period, Landlord shall be deemed to have elected option (ii) above. Except as provided below, any rent or other consideration realized by Tenant under any such sublease and assignment in excess of the monthly rental 15 -15- installments payable hereunder, and all expenses payable under Paragraph 11 less reasonable subletting and assignment costs, AND COSTS PAYABLE BY TENANT TO MODIFY THE PREMISES TO SUIT THE SUB-TENANT, SHALL BE DIVIDED AND PAID FIFTY PERCENT (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration shall constitute an obligation for additional rent hereunder. TENANT SHALL FIRST RECEIVE ITS SUBLETTING AND MODIFICATION COSTS WITHOUT INTEREST BEFORE DIVIDING ANY EXCESS PROFITS WITH LANDLORD. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. If Landlord exercises its option to terminate this Lease in part in the event Tenant desires to sublet or assign part of the Premises, then (a) this Lease shall end and expire, with respect to such part of the Premises, on the date upon which the proposed sublease was to commence, and (b) from and after such date, the rent and Tenant's allocable share of all other costs and charges shall be adjusted, based upon the proportion that the rentable area of the Premises remaining bears to the total rentable return of the Premises. If Landlord does not exercise its option to terminate this Lease, Landlord's consent to the proposed assignment or sublease shall not unreasonably withheld provided and upon condition that: (a) In Landlord's reasonable judgment the proposed assignee or subtenant is engaged in such a business, and the Premises, or the relevant part thereof, will be used in such a manner, that: (ii) is limited to the use expressly permitted under this Lease; (b) The proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (c) THIS PARAGRAPH INTENTIONALLY LEFT BLANK (d) The proposed sublease shall be in form reasonably satisfactory to Landlord; (e) There shall not be more than two (2) subtenants of the Premises at any one time; (f) THIS PARAGRAPH INTENTIONALLY LEFT BLANK (g) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and reasonable legal costs incurred in connection with the granting of any requested consent; and Any sublease or assignment executed with the consent of Landlord shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptancy of rent or additional rent by 16 -16- Landlord from any subtenant or assignee, Tenant shall and will remain fully liable for the payment of the rent and additional rent due, and to become due hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant shall further indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs, as described in paragraph 24 above. Any assignment or transfer shall be made only if and shall not be effective until the assignee shall execute, acknowledge and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed. If Tenant is a corporation or partnership, all the above provisions shall apply to a transfer (by one or more transfers) of a majority of the stock of the corporation or the majority of ownership or control of the partnership, as if such transfer were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation or partnership that controls, is controlled by, or is under common control with Tenant, provided that, in any of such events: (i) the successor to Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the net worth of Tenant immediately prior to such transfer; and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. Notwithstanding the above, the sale or transfer of a majority of the Tenant's shares shall not constitute an assignment so long as immediately after such sale or transfer the corporation meets the new worth criteria set forth above. Notwithstanding the above, Tenant may assign this lease without Landlord's consent to any corporation resulting from the merger or consolidation with Tenant or to any person or entity which acquires all or substantially all the assets of Tenant as a going concern of the business that is being conducted on the premises provided that the assignee meets the net worth criteria set forth above and provided such assignee agrees in writing to abide by all of the terms of this lease. Only the amount allocated to the lease in the agreement between Tenant and the purchaser of the business shall be considered rent for purposes of the 50150 sharing provided in the first paragraph of this Section 31. 17 -17- The termination of this Lease due to Tenant's default shall not automatically terminate any assignment or sublease then in existence. At the sole election of Landlord, the assignee or subtenant shall attorn to Landlord and Landlord shall undertake the obligations of the Tenant under the sublease or assignment; provided the Landlord shall not be liable for prepaid rent, security deposits or other defaults of the Tenant to the subtenant or assignee. 32. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser and the rent payable hereunder shall be adjusted so that the Tenant shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Landlord shall have the option to terminate this Lease as of the date when title to the part so taken vests in the condemnor or purchaser. Tenant to be notified in writing by Landlord of any pending or threatened condemnation proceedings within a reasonable period of time after Landlord's knowledge of same and whether Landlord intends to terminate the lease so as to give Tenant a reasonable opportunity to locate new facilities. If all of the Premises, or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall there upon terminate. If a part of all of the Premises be taken, then Landlord and Tenant shall share in the balance of the compensation remaining after the application of the condemnation provisions of the Ground Lease and of the Lease Mortgage and that is payable to Landlord. The compensation shall be divided between Landlord and Tenant in proportion to the relative amounts spent by Landlord and Tenant for Tenant improvements as provided in this lease. Tenant's share of the compensation shall not exceed the depreciated value of the improvements as provided in this lease installed and paid for by Tenant less any amounts received or to be received by Tenant outside of the award as compensation for Tenant's interest in those improvements. If Tenant elects to remove some or all of the improvements pursuant to California Code of Civil Procedure Section 1263.260, then the value of such improvements removed shall be excluded from the calculation. Landlord shall have the exclusive right to negotiate or litigate the award with the authority exercising the power of eminent domain. Landlord shall cooperate with Tenant in Tenant's efforts to recover compensation for relocation costs, loss of personal property not treated as improvements pertaining to realty and loss of goodwill. Tenant waives the provisions of California Code of Civil Procedure Section 1265.130. 33. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the Ground Lessee for the time being of the land and Building, containing the Premises, so that, in the event of any sale of the Ground Lease, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of the Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, if the purchaser of the Ground Lease has agreed in writing to carry out any and all covenants and obligations of the Landlord hereunder. Landlord shall transfer and deliver Tenant's security deposit, to the purchaser at any such sale or the master tenant of the Building, and thereupon the Landlord shall be discharged from any further liability in reference thereto. 18 -18- 34. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of trust, or other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Tenant agrees to promptly execute any documents which may be required to effectuate such subordination. Notwithstanding such subordination, Tenant's right to quiet possession of the premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease. At the request of any lender, Tenant agrees to execute and deliver any reasonable modifications of this Lease which do not adversely affect the leasehold or Tenant's rights hereunder. 35. WAIVER: The waiver by Landlord of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 36. HOLDING OVER: Any holding over after the termination or expiration of the said term, shall be construed to be a hold over tenancy and Tenant shall pay rent to Landlord at a rate equal to ONE AND ONE-HALF (1 1/2) times the monthly rental installment due in the month preceding the termination or expiration of the Lease and shall otherwise be on the terms and conditions herein specified, except those provisions relating to the term and any options to extend or renew, which terms are expressly waived during any hold over. Furthermore, no holding over shall be deemed or construed to exercise any option to extend or renew this Lease in lieu of full and timely exercise of any such option as required hereunder. 37. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 38. ESTOPPEL CERTIFICATES: Tenant shall at any time during the term of this Lease, upon not less than five (5) business days prior written notice from Landlord, execute and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrances of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that: (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are not uncured defaults in Landlord's performance. 19 -19- 39. OPTION TO EXTEND: Tenant shall have the option and right to extend the term of this Lease for two (2) separate additional and successive option periods of five (5) years each, (each such period being referred to as the "Renewal Term") commencing with rent at "Fair Market Value," as defined in paragraph 40 below, and subject to adjustment in accordance with paragraph 41 only under the following conditions precedent: (i) Tenant alone is in occupation of and is conducting the business in at least sixty six and two-thirds percent (66 2/3%) of the Premises and Tenant, for itself and its successors and assigns, hereby expressly acknowledges and agrees that this Option to Extend is personal to Tenant; and (ii) and Tenant has delivered written notice by certified mail to Landlord not less than one hundred and twenty (120) days prior and not more than one hundred and eighty (180) days prior to the expiration of the then existing term of the Lease of Tenant's intention to extend the term of the Lease. 40. FAIR MARKET VALUE: For purposes of this Lease the term "Fair Market Value" shall mean the going market rental as of the date of commencement of each Renewal Term, for equivalent space of similar age and construction, with improvements and equipment in similar condition and for a lessee proposing to sign five (5) year lease and having financial qualifications similar to Tenant, it being understood that in determining "Fair Market Value" the parties shall negotiate in good faith in order to reach agreement; and in the event the parties are unable to reach agreement, the matter shall be referred to arbitration by three (3) M.A.I. appraisers, experienced in the evaluation of similar rental properties in the County of Santa Clara, State of California. Landlord and Tenant shall each appoint one such arbitrator within thirty (30) days of a written request for arbitration from the other, and the two arbitrators so selected shall select a third arbitrator within fifteen (15) days after the selection of the second arbitrator. Should either party fail to appoint an arbitrator as provided above, the decision of the remaining arbitrators shall be final. The arbitrators shall be instructed to disregard any Fair Market Value directly attributable to leasehold improvements paid for by Tenant that can be documented and supported by generally accepted accounting methods. All specialized leasehold improvements paid for by Landlord shall be included in Fair Market value. The determination of the three arbitrators shall be made by the vote of two (2) or more of the three arbitrators within thirty (30) days from the date of the appointment of the third arbitrator and shall be final for all purposes. The cost of arbitration shall be shared equally. In no event shall such "Fair Market value" be less than the rental paid during the year immediately preceding the commencement of the current extension. If, after the determination of fair rental value by appraisal, Tenant rejects such value in a writing delivered to Landlord within five (5) days after the date of such determination. Tenant's notice of exercise of the option shall be deemed null and void, and the lease shall terminate effective as of the date six (6) months after Landlord's receipt of Tenant's rejection notice. During this six (6) month period, Tenant shall continue to pay rental at the fair rental value determined by the arbitrators. In addition, Tenant shall bear and pay, upon Landlord's request, all fees, costs and "out-of-pocket" expenses incurred by Landlord in connection with the determination of fair rental value by appraisal. 41. RENTAL ADJUSTMENTS DURING ORIGINAL TERM: The rent during the Original Term shall be subject to adjustments beginning the FORTY-NINTH (49TH) MONTH AND 20 -20- EVERY FORTY EIGHTH MONTH THEREAFTER THROUGHOUT THE BALANCE OF THE ORIGINAL TERM BASED on the Consumer Price Index Adjustment ("Adjustment Date"). The basis for computing the Adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistics' Consumer Price Index for All urban Consumers, All items, 1982-84=100, for the San Francisco-Oakland area, ("Index"). The Index most recently published preceding the Lease commencement date and the commencement of each Renewal Term shall be considered the "Beginning Index." If the Index most recently published preceding the Adjustment Date ("Comparison Index") is greater than the Beginning Index, the monthly rent shall be increased by multiplying the monthly rent by a fraction, the numerator of which is the Comparison Index and the denominator of which is the Beginning Index. Notwithstanding any subsequent decrease in the Index, the new monthly rent shall never be less than the rent for the month immediately preceding the Adjustment Date. On adjustment of the monthly rent Landlord shall notify Tenant by letter stating the new monthly rent. If the Index base year is changed so that it differs from 1982-84=100, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the Renewal Term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. Provided further that for each forty-eight (48) month adjustment period, in no event shall the rent determined in this manner be less than on a compound annual increase of three percent (3%) per year nor more than on a compounded annual increase of six percent (6%) per year. Furthermore, should Tenant believe that this increase does not reflect actual market conditions, the Tenant reserves the rights to hire three (3) M.A.I. appraisers at its expense as described in Article 40 to determine the market rent for similar industrial buildings in the City of Santa Clara. If the determination of market rental value by the appraisers results in a lower increase then that increase arrived at based on the Consumer Price Index adjustment, including the floor and ceiling figures set forth above, the opinion of the three appraisers shall be utilized to arrive at the adjusted rent for the period. In no event shall the rental for the adjustment period be less than the rental paid during the year immediately preceding the commencement of the adjustments period. 42. OPTIONS: Except as provided in Paragraph 39, all Options provided Tenant in this Lease are personal and granted to original Tenant and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord's sole discretion. In the event that Tenant hereunder has any multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. Notwithstanding the above, if the assignment is a result of the transfer of Tenant's stock as permitted by Paragraph 31, the options to extend will survive the assignment. 43. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease, Tenant shall quietly have and hold the Premises for the term and any extensions thereof. 21 -21- 44. BROKERS. Tenant represents it has not utilized or contracted a real estate broker or finder with respect to this Lease, EXCEPT FOR TED LUCE REAL ESTATE, INC. AND BISHOP HAWK, and Tenant agrees to indemnify and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any broker or finder claiming through Tenant except for $300,000.00 in commission which Landlord shall pay and which shall be divided equally between such Brokers. One half of such commission will be payable upon commencement of construction and one half upon Tenant's occupancy. 45. LANDLORD'S LIABILITY. If Tenant should recover a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of Landlord's interest in the Premises including the improvements and real property and neither Landlord or any of its partners shall be liable personally for any deficiency. 46. AUTHORITY OF PARTIES: If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 47. GROUND LEASE. Landlord is the Tenant under a Ground Lease affecting the Premises. This Lease is subordinate to the Ground Lease and is subject to all of the terms and conditions of the Ground Lease. A true and correct copy of the Ground Lease has been attached as Exhibit "B," and the terms of the Ground Lease are incorporated into this Lease. Tenant shall not commit or permit to be committed on the Premises any act or omission which shall violate any term or condition of the Ground Lease. Tenant shall perform all actions required to be performed by it under the terms of the Ground Lease. Tenant shall indemnify and hold Landlord harmless from any claim, loss or damage (including any expenditures for attorneys fees reasonably incurred by Landlord) sustained by Landlord as the result of any act or omission by Tenant, its agents, employees, invitees or contractors in violation of the provisions of the Ground Lease. The provisions of this paragraph shall survive the expiration or termination of this Lease. 48. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights and remedies in law and in equity. If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated hereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. This Lease shall be governed by and construed in accordance with California law. Tenant shall not permit or condone any nuisance or disturbance of any kind on the Premises which annoys or disturbs other occupants of the Project. 22 -22- All sums due hereunder, including rent and additional rent, if not paid when due, shall bear interest at the maximum rate permitted under California law accruing from the date due until the date paid to Landlord. Time is of the essence hereunder. The headings or titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof nor shall any phrases in capital letters have any increased emphasis. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may without notice perform such obligation, in which event Tenant shall pay landlord as additional rent all sums paid by Landlord in connection with such substitute performance within ten (10) days following Landlord's written notice for such payment. Any delinquent sum shall bear interest at the maximum lawful contract rate permitted to be charged under California law. If Landlord becomes a party to any litigation concerning this Lease, the Premises, the Building or the Project by reason of any act or omission of Tenant or Tenant's authorize representatives, Tenant shall be liable to Landlord for reasonable attorneys' fees, court costs and litigation expenses incurred by Landlord in the litigation, whether such litigation leads to actual court action. All monetary sums due from Tenant to landlord under this Lease shall be deemed to be rent. Whenever a consent of a party to this lease is required, such consent will not be arbitrarily or unreasonably withheld or delayed. IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day and year first above written. 23 -23- LANDLORD: UNIVERSITY RESEARCH CENTER TENANT: Zyca Corporation A California General Partnership a California Corporation BY: BY: /s/ John A. Sobrato ----------------------------- John A. Sobrato ITS: President ITS: General Partner BY: /s/ ----------------------------- ITS: General Partner EX-10.2 5 PROVISIONAL LEASE 1 EXHIBIT 10.2 PROVISIONAL LEASE OF STATE LAND Whereas, I, SUDARSONO OSMAN, the Superintendent of Lands and Surveys, Kuching Division (hereinafter called "the said Superintendent") have agreed to lease to ZYCON CORPORATION SENDIRIAN BERHAD, a company incorporated and registered under the Companies Act, 1965, all that parcel of land situate in the Muara Tebas Land District and known as Lot Number 1072 (in Block/Section Number 12) containing approximately 7.31 hectares; and Whereas a lease in accordance with the provision of the Land Code cannot be given because the immediate survey of the land has not yet been practicable; Now therefore, I, the said Superintendent, hereby agreed to the said ZYCON CORPORATION SENDIRIAN BERHAD entering into possession of the said land and holding it as tenant from the fourteenth day of November, 1995 subject to the payment therefor of the annual rent of dollars Fourteen Thousand and Thirty-Five only (RM14,035.00) of the payment of such revised rent as may hereafter be determined under section 30 of the Land Code, and subject to the following terms and conditions: (1) Upon the completion of a properly survey of the land the holder of this provisional lease will be given a lease in accordance with the provisions of the Land Code, and subject to the following express conditions and restrictions (including any modifications of implied conditions and restrictions): (i) This land is to be used only for industrial purposes; (ii) The development or re-redevelopment of this land shall be in accordance with plans and sections and elevations approved by the superintendent of Lands and Surveys, Kuching Division; (iii) The erection of a building or buildings on this land shall be in accordance with detailed drawings and specifications approved by The Council of the City of Kuching South and shall be completed with two (2) years from the date of registration of this lease; (iv) No residential accommodation other than accommodation for a watchman with a maximum floor area of 37.2 square metres may be permitted on this land; (v) No transfer affecting this land may be effected without the consent in writing of the Director of Lands and Surveys; and (vi) No sublease affecting this land may be effected without the consent in writing of the Director of Lands and Surveys during the initial period of five (5) years from the date of registration of this lease. 2 Premium: Ringgit three hundred and ninety three thousand four hundred twelve and cents forty only (RM393,412.40) (payable by five (5) installments as follows: (a) The first installment of RM118,023.00 to be paid on the registration of this lease; and (b) Fourth (4) subsequent equal installments of RM83,145.80 to be paid annually thereafter on the 1st day of January of each succeeding year.) [SKETCH] EX-10.4 6 FACILITIES AGREEMENT 1 Exhibit 10.4 DATED THIS 9TH DAY OF FEBRUARY 1996 BETWEEN ZYCON CORPORATION SDN. BHD. As Borrower BANK BUMIPUTRA MALAYSIA BERHAD As Arranger BANK BUMIPUTRA MALAYSIA BERHAD, As Working Capital Lender BANK BUMIPUTRA MALAYSIA BERHAD, BBMB KEWANGAN BERHAD, As Lending Banks BANK BOMIPUTRA MALAYSIA BERHAD As Funding Lender BANK BUMIPUTRA MALAYSIA BERHAD As Facility Agent AND BANK BUMIPUTRA MALAYSIA BERHAD As Security Agent --------------------------------------------- RM50,400,000.00 FACILITIES AGREEMENT FOR 1. RM5,900,000.00 Working Capital Facilities 2. RM29,200,000.00 Term Loan I Facility 3. USD4,000,000.00 Term Loan Facility 4. USD2,000,000.00 Revolving Credit Facility --------------------------------------------- Prepared by: SKRINE & CO. ADVOCATES & SOLICITORS 4, LEECH PASAR BESAR 50050 KUALA LUMPUR File No. PTW/ag/1518780/95(TC) February 7, 1996-1i4 H:\PTW\CORP\1518780\FAC-AG 2 THIS AGREEMENT is made the 9th day of February, 1996 BETWEEN (1) ZYCON CORPORATION SDN. BHD., a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma Damansara, Jalan Semantan, Damansara Heights 50490 Kuala Lampur ("Borrower"); (2) BANK BUMIPUTRA MALAYSIA BERHAD, ("Arranger"); (3) BANK BUMIPUTRA MALAYSIA BERHAD, ("Working Capital Lender"); (4) BANK BUMIPUTRA MALAYSIA BERHAD and, BBMB KEWANGAN BERHAD ("Lending Banks"); (5) BANK BUMIPUTRA MALAYSIA BERHAD ("Funding Lender"); (6) BANK BUMIPUTRA MALAYSIA BERHAD, as facility agent for itself and the Lenders (as hereinafter defined) (in such capacity, the "Facility Agent," which expression shall include any of its successors in such capacity); and (7) BANK BUMIPUTRA MALAYSIA BERHAD, as security agent for itself, the Facility Agent and the Lenders (in such capacity, the "Security Agent," which expression shall include any of its successors in such capacity). WHEREAS, as a result of arrangements by the Arranger made at the request of the Borrower: (1) the Working Capital Lender will make available to the Borrower the Working Capital Facilities (as hereinafter defined) upon the security granted or created in its favour under, pursuant to and/or in connection with the Security Documents (as hereinafter defined). (2) the Lending Banks will make available to the Borrower the TL I Facility (as hereinafter defined) upon the security granted or created in favour of each of them under, pursuant to and/or in connection with the Security Documents; and (3) the Funding Lender will make available to Borrower the Dollar Advances Facility (as hereinafter defined) and the Dollar RC Facility (as hereinafter defined) upon the security granted or created in its favour under, pursuant to and/or in connection with the Security Documents. 3 -2- IT IS AGREED as follows: 1. INTERPRETATION -------------- 1.1 Definition ---------- In this Agreement, unless the context otherwise requires: "Advance Margin" means one point seven five per centum (1.75%) per annum or such other rate as is varied by the Funding Lender as specifically permitted by this Agreement; "Agents" means the Facility Agent and the Security Agent; "Assignment" means an assignment of all the Borrower's rights interest benefit and title in respect of the Land Letter of Offer and Acceptance and in and to the Land; "Available Dollar Advances Commitment" means, in relation to the Funding Lender at any particular time, the Dollar Advances Commitment less the Dollar Advances Outstanding at that time; "Available Dollar RC Commitment" means in relation to the Funding Lender at any particular time, the Dollar RC Commitment less the Dollar RC Loan at that time; "Available Ringgit Advances Commitment" means the Available Ringgit Advances Commitment (TL I); "Available Ringgit Advances Commitment (TL I)" means, in relation to a Lending Bank at any particular time, the Ringgit Advances Commitment (TL I) less the Ringgit Advances Outstanding (TL I) at that time; "Available Working Capital Commitment" means, in relation to the Working Capital Lender at any particular time, its Working Capital Commitment less the aggregate principal amount comprised in its Working Capital Outstanding Amount at that time; "BAFIA" means the Banking and Financial Institutions Act, 1989; "Base Lending Rate" means the rate of interest which is from time to time stipulated by BBMB as its minimum or lowest lending rate or where such rate is not available for any reason whatsoever, such other rate in substitution thereof as may from time to time be stipulated by BBMB to the Facility Agent; 4 -3- "BBMB" means Bank Bumiputra Malaysia Berhad, a company incorporated in Malaysia pursuant to the Companies Act, 1965 and licensed under the Banking and Financial Institutions Act, 1989 as a licensed bank and having its registered office at Menara Bumiputra, Jalan Melaka, 50100 Kuala Lumpur and includes its successors in title and assigns thereof; "BBMB Group" means all companies which are related companies or associate companies of BBMB; "Beneficiaries" means the Agents, the Working Capital Lender, the Lending Banks and the Funding Lender; "Charge" means a first fixed legal charge over the Land under the Sarawak Land Code (Chapter 81) in favour of the Security Agent for the Beneficiaries as security for the Facilities; "Commitment Termination Date" means: (a) in relation to the TL I Facility, the date which is a Ringgit Business Day following twenty four (24) months from the date of first Ringgit Advance under the TL I Facility; (b) in relation to the Dollar Advance Facility, the date which is a Dollar Business Day following eighteen (18) months from the date of first Dollar Advance; (c) in relation to the Dollar RC Facility, the date which is a Dollar Business Day on which the Dollar RC Facility is cancelled or terminated pursuant to the terms herein; "Corporate Guarantee" means the corporate guarantee for the performance of the obligations of the Borrower to the Lenders under or in connection with this Agreement and each of the Security Documents, given by the Corporate Guarantor in favour of the Facility Agent and the other Beneficiaries; "Contractor" means HITI ENGINEERING (M) SDN. BHD. or such other contractors appointed by the Borrower; "Corporate Guarantor" means Zycon Corporation, a corporation incorporated and existing under the laws of the State of Delaware in the United States of America and having its registered office at 445, El Camino Real, Santa Clara, California CA 95050-4366; 5 -4- "Debenture" means the debenture to be executed by the Borrower in favour of the Security Agent for the benefit of the Beneficiaries wherein the Borrower as beneficial owner thereby: (1) charges by way of first fixed legal charge over all estates and interests in the Land and any other freehold or leasehold property (hereinafter collectively called "the Immovable Property") now or at any time during the continuance of this security belonging or charged to the Borrower in respect of which the Borrower shall at the request of the Security Agent execute charges under the Sarawak Land Code in favour of the Security Agent and such other legal documents as may be required by the Security Agent from time to time and all licenses now or hereafter held by the Borrower to enter upon or use the Immovable Property the benefit of all other agreements relating to the Immovable Property to which the Borrower is or may become a party or otherwise entitled and all buildings, fixtures, plant and machinery owned by the Borrower and from time to time on or in any freehold or leasehold property an interest in which is charged hereunder and the proceeds of sale thereof, all Debts (as defined in the Debenture), all chattel paper, documents and instruments evidencing any obligation to the Borrower, all accounts (as defined in the Debenture), all its present and future uncalled capital, all the undertaking and goodwill of the Borrower, all stocks, shares, debentures, loan capital, rights to subscribe for, convert other securities into or otherwise acquire any stocks, shares, debentures and loan capital of any other body corporate now or at any time hereafter belonging to the Borrower, together with all dividends, interest and other income and all other rights of whatsoever kind deriving from or incidental to any of the foregoing, all of the Equipment (as defined in the Debenture) and all proceeds of sale thereof; (2) assigns in favour of the Security Agent for the benefit of the Beneficiaries, the benefit to the Borrower of all rights and claims to which the Borrower is now or may hereafter become entitled in relation to the Immovable Property including in particular (but without prejudice to the generality of the foregoing) all rights and claims of the Borrower against all persons who now are or who at any time have been or may become lessees of the whole or any part or parts of the Immovable Property and all guarantors and sureties for the obligations of such persons and against all persons who are under any obligation to the Borrower in respect of any works of design, construction, repair or replacement to or on or about the Immovable Property or any of the fixtures, fittings and equipment on, in or about the Immovable Property so far as the same are or become capable of assignment without the consent of a third party or such consent shall be obtained; and 6 -5- (3) charges by way of a first floating charge all the Inventory (as defined in the Debenture) and all its property assets and rights whatsoever and wheresoever both present and future not otherwise charged assigned or mortgaged by way of fixed charge under paragraph (1) or (2) above or otherwise pursuant to the Debenture, save for future assets and properties of the Borrower which are excluded in accordance with the provisions therein; "Depository Agent" means the agent of BBMB in that foreign country where the Letter of Credit shall be issued; "Dollar Advance" means an advance in US Dollars made or to be made by the Funding Lender to the Borrower under the Dollar Advances Facility or, as the case may be, the outstanding principal amount of any such advance; "Dollar Advances Commitment" means the commitment of the Funding Lender to make Dollar Advances to the Borrower of an aggregate principal amount not exceeding United States Dollars Four Million (USD4,000,000.00) upon the terms and subject to the conditions of this Agreement; "Dollar Advances Facility" means the USD term loan facility of up to the aggregate principal amount of United States Dollars Four Million (USD4,000,000.00) granted by the Funding Lender to the Borrower subject to the terms and conditions herein; "Dollar Advance Interest Period" means the period of one (1), three (3) or six (6) months, as selected by the Borrower or if no selection is made, such period as selected by the Funding Lender provided that: (a) the first Dollar Advance Interest Period in respect of any Dollar Advance other than the first Dollar Advance shall end upon the expiry of the Dollar Advance Interest Period then current for the first Dollar Advance so that all current Dollar Advance Interest Periods shall be co-terminous; (b) any Dollar Advance Interest Period relating to a Dollar Advance which would otherwise extend beyond the last installment date for the Dollar Advances Facility shall end on the last installment date for the Dollar Advances Facility; (c) each subsequent Dollar Advance Interest Period shall commence on the expiry of the previous one; (d) any Dollar Advance Interest period which would otherwise end on a non-Dollar Business Day shall end on the next succeeding Dollar Business 7 -6- Day or if that Dollar Business Day falls in the next calendar month of the year, on the preceding Dollar Business Day; (e) if a Dollar Advance Interest Period is extended or shortened by (d) above, the following Dollar Advance Interest Period shall (without prejudice to the application of (d) above) end on the day on which it would have ended if the preceding Dollar Advance Interest Period had not been so extended or shortened; and (f) If any Dollar Advance Interest Period commences on the last Dollar Business Day in a calendar month or if there is no corresponding date in the calendar month in which Dollar Advance Interest Period is due to end, then such Dollar Advance Interest Period shall end on the last Dollar Business Day in the relevant later month; "Dollar Advances Outstandings" means, in relation, to the Funding Lender at any particular time, the aggregate principal amount of all (if any) Dollar Advances outstanding under or in connection with the Dollar Advances Facility at that time; "Dollar Business Day" means a day (other than Saturday or Sunday or any public holiday) on which (i) US Dollar deposits may be dealt in on the Singapore Inter-bank Market and (ii) commercial banks are open for business in Kuala Lumpur and Singapore; "Dollar RC Commitment" means the commitment of the Funding Lender to make Dollar RC Drawdowns to the Borrower of the aggregate principal amount not exceeding United States Dollars Two Million (USD2,000,000.00) upon the terms and subject to the conditions of this Agreement; "Dollar RC Drawdowns" means all drawdowns made or to be made by the Borrower under the Dollar RC Facility and "Dollar RC Drawdown" means each drawdown made or to be made by the Borrower under the Dollar RC Facility; "Dollar RC Drawdown Notice" means a notice of drawdown substantially in the form set out in Schedule 6 hereto; "Dollar RC Facility" means the USD revolving credit facility of up to the aggregate principal amount of United States Dollars Two Million (USD2,000,000.00) granted by the Funding Lender to the Borrower subject to the terms and conditions herein; "Dollar RC Loan" means at any particular time, the aggregate principal amount of all Dollar RC Drawdowns or amounts rolled over outstanding under or in connection with the Dollar RC Facility at that time; 8 -7- "Dollar RC Margin" means one point seven five per centum (1.75%) per annum or such other rate as is varied by the Funding Lender as specifically permitted by this Agreement; "Dollar RC Repayment Date" means the last Dollar Business Day of a Dollar RC Rollover Period; "Dollar RC Rollover Period" means the period of one (1), three (3) or six (6) months, subject to the availability of funds, as selected by the Borrower, for each Dollar RC Drawdown and any roll-over thereof but in all cases to mature on a day which is not later than the expiry date of the Dollar RC Facility and on a Dollar Business Day; "Dollar RC Interest Period" means the period of one (1), three (3) and six (6) months as selected by the Borrower or if no selection is made, such period as selected by the Funding Lender; "Effective Cost of Funds" means in relation to a Lender the cost to that Lender of obtaining one (1), three (3) or six (6) months Ringgit deposit from the Kuala Lumpur Inter-bank Market plus the cost of maintaining statutory reserves and complying with liquidity and other requirements imposed from time to time and at any time by Bank Negara Malaysia or any other appropriate authority; "Event of Default" means any of the events or circumstances described in Clause 17; "Facility Office" means in relation to any Beneficiary, its office identified in Schedule 1 (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) or such other office as it may from time to time select and notify to the Agents and the Borrower in accordance with Clause 29; "Facilities" means the facilities comprising of the Dollar Advances Facility, the Dollar RC Facility, the TL I Facility and the Working Capital Facilities and the expression "Facility" means any one of these Facilities; "Funding Labor Outstanding Amount" means in relation to the Funding Lender at any particular time, the aggregate at such time of (i) its Dollar Advances Outstanding (ii) its Dollar RC Loan and (iii) all interest, fees, costs, expenses and other monies whatsoever which are expressed to be payable to the Funding Lender under this Agreement; 9 -8- "Instructing Group" means: (i) before any advance, drawdown or utilisation of any of the Facilities granted hereunder, the Lenders whose Lender Commitment constitute in aggregate more than fifty per centum (50.0%) of the Lenders Commitments; (ii) thereafter, the Lenders to whom in aggregate more than fifty per centum (50.0%) of the Lenders Outstanding Amounts are owed; "Interest Payment Date" means: (a) in relation to a Ringgit Advance, the last Ringgit Business Day of a TL I Interest Period provided that upon commencement of the installment payments under the TL I Facility, each Interest Payment Date shall coincide with the installment payment date then current for the TL I Facility; (b) in relation to a Dollar Advance, the last Dollar Business day of the Dollar Advance Interest Period provided that upon commencement of the installment payments under the Dollar Advances Facility, each Interest Payment Date shall coincide with the installment payment date then current for the Dollar Advances Facility; (c) in relation to a Dollar RC Drawdown the last Dollar Business Day of the Dollar RC Interest Period or Dollar RC Rollover Period, as the case may be; (d) in relation to a drawdown under the RC Facility, the last Ringgit Business Day of the Ringgit RC Interest Period or the Ringgit RC Rollover Period, as the case may be; "Kewangan" means BBMB Kewangen Berhad, a company incorporated in Malaysia pursuant to the Companies Act, 1965 and having its office at 1st Floor, Menara Promet, Jalan Sultan Ismail, 50250 Kuala Lumpur and includes its successors in title and assigns thereof; "Land" means all that piece of land provisionally known as Lot No. 12 at Sama Jaya Free Industrial Zone Kuching and measuring approximately 7.31 hectare; "Land Letter of Offer and Acceptance" means the letter dated 21st July 1995 from the Ministry of Industrial Development, Sarawek approving the Borrower's application for the Land, the letter dated 12th September 1995 from the Land and Survey Department, Sarawak setting out the terms and conditions of the issue of 10 -9- the provisional lease in respect of the Land and such other letter(s) issued by the relevant authorities in connection thereto; "Lenders" means (1) BBMB, in its capacity as the Working Capital Lender, (2) BBMB, in its capacity as a Lending Bank, (3) BBMB, in its capacity as the Funding Lender and (4) Kewangan, in its capacity as a Lending Bank, including their respective successors and "Lender" means any of them; "Lender Commitment" means (1) in relation to the Working Capital Lender, its Working Capital Commitment, (2) in relation to a Lending Bank, its Ringgit Advances Commitment (TL I), and (3) in relation to the Funding Lender, its Dollar Advances Commitment, and its Dollar RC Commitment and "Lenders Commitments" means the Lender Commitment of all the Lenders; "Lender Outstanding Amount" means (1) in relation to the Working Lender, its Working Capital Outstanding Amount, (2) in relation to a Lending Bank, its Lending Bank Outstanding Amount and (3) in relation to the Funding Lender, the Funding Lender Outstanding Amount and "Lenders Outstanding Amounts" means the Lender Outstanding Amounts of all Lenders; "Lending Bank Outstanding Amount" means, in relation to a Lending Bank at any particular time, the aggregate at such time of (i) the amount for the time being owing and outstanding from or by the Borrower to that Lending Bank under or in respect of its Proportion of the Ringgit Advances Facility and (ii) all interest, fees, costs, expenses and other monies whatsoever which are expressed to be payable to that Lending Bank under this Agreement and "Lending Bank Outstanding Amounts" means, at any particular time, the aggregate of the Lending Bank outstanding amounts of the lending Banks at such time; "Margin" means: (a) in relation to the Dollar Advances Facility, the Advance Margin; (b) in relation to the TL I Facility, the TL I Margin; (c) in relation to the Dollar RC Facility, the Dollar RC Margin. "Parties" means the Borrower, the Arranger, the Facility Agent, the Security Agent and each of the Lenders and "Party" means one of such Parties; "Potential Event of Default" means any event or circumstance which, if it continued after the giving of any notice, the expiry of any grace period, and/or (as the case may be) the making of any reasonable determination by the Instructing Group would be an Event of Default; 11 -10- "Proportion" means, in relation to a Lending Bank, a fraction the numerator of which is the amount set out opposite its name in Column 2 of Schedule 1 and the denominator of which is RM29,200,000.00; "Ringgit Malaysia" and "RM" means the lawful currency of Malaysia; "Ringgit Advance" means an advance in Ringgit made or to be made by the Lending Banks to the Borrower under the TL I Facility or, as the case may be, the outstanding principal amount of that Ringgit Advance; "Ringgit Advances Commitment" means, in relation to a Lending Bank, the aggregate of its Ringgit Advances Commitment (TL I); "Ringgit Advances Commitment (TL I)" means, in relation to a Lending Bank and subject as provided in this Agreement, the amount set out opposite its name in Column 2 of Schedule 2 and "Ringgit Advances Commitments (TL I)" means the aggregate of the Ringgit Advances Commitments (TL I) of the Lending Banks; "Ringgit Advances Facility" means the TL I Facility; "Ringgit Advance Outstandings" means the Ringgit Advances Outstandings (TL I); "Ringgit Advances Outstandings (TL I)" means in relation to a Lending Bank at any particular time, the aggregate principal amount of all (if any) Ringgit Advances owing and outstanding from or by the Borrower to that Lending Bank under or in connection with the TL I Facility at that time; "Ringgit Business Day" means a day (other than Saturday, Sunday or any public holiday) on which (i) Ringgit deposits may be dealt in on the Kuala Lumpur inter-bank market and (ii) commercial banks are open for business in Kuala Lumpur and Sarawak; "Ringgit RC Interest Period" means the period of one (1), three (3) and six (6) months as selected by the Borrower or if no selection is made, such period as selected by the Working Capital Lender; "Ringgit RC Repayment Date" means the last Ringgit Business Day of a Ringgit RC Rollover Period; "Ringgit RC Rollover Period" means the period of one (1), three (3) or six (6) months, subject to the availability of funds, as selected by the Borrower, for each drawdown under the RC Facility and any roll-over thereof but in all cases to 12 -11- mature on a day which is not later than the expiry date of the Ringgit RC Facility and on a Ringgit Business Day; "Relevant Applicable Rate" means: (a) the aggregate of the TL I Margin and the Base Lending Rate or the Effective Cost of Funds, whichever is applicable, in respect of the TL I Facility; (b) the aggregate of the Advance Margin and SIBOR in respect of the Dollar Advances Facility; (c) the aggregate of the Dollar RC Margin and SIBOR in respect of the Dollar RC Facility; (d) the interest rate as set out or determined or varied as specifically permitted by the terms of this Agreement in respect of a facility within the Working Capital Facilities. "Security Documents" means collectively this Agreement, the Debenture, the Assignment, the Charge, the Corporate Guarantee, the Security Agency Agreement and nay and every other document from time to time executed in substitution or in addition to secure, guarantee, indemnify or otherwise assure the performance of the obligations of the Borrower hereunder; "Shareholders Loan" means the loans granted or to be granted by the shareholders of the Borrower to the Borrower in such amounts and on such dates as set out in Schedule 8 hereof; "SIBOR" means the cost to the Funding Lender of obtaining one (1), three (3) or six (6) months US Dollars deposit from the Singapore Interbank Money Market as quoted on the Reuters Screen Page as at 11:00 a.m. (Singapore time) or based on the prevailing rate as quoted in the said market whichever is applicable; "TL I Facility" means the term loan facility of up to the aggregate principal amount of Ringgit Malaysia Twenty Nine Million And Two Hundred Thousand (RM29,200,000.00) granted by the Lending Banks to the Borrower subject to the terms and conditions hereunder; "TL I Instalment Payment Date" means the date being a Ringgit Business Day on which the Borrower pays the Ringgit Advances made under the TL I Facility by Instalment pursuant to Clause 9.1.1; 13 -12- "TL I Interest Period" means, in respect of a Ringgit Advance made under the TL I Facility, a period of three (3) months commencing from the date of first Ringgit Advance under the TL I Facility provided that: (a) the first TL I Interest Period in respect of any Ringgit Advance other than the first Ringgit Advance shall end upon the expiry of the TL I Interest Period then current for the first Ringgit Advance so that all current TL I Interest Periods shall be co-terminous; (b) any TL I Interest Period relating to a Ringgit Advance which would otherwise extend beyond the last TL I Instalment Payment Date shall end on the last TL I Instalment Payment Date; (c) each Subsequent TL I Interest Period shall commence on the expiry of the previous one; (d) any TL I Interest Period which would otherwise end on a non-Ringgit business day shall end on the next succeeding Ringgit Business Day or if that Ringgit Business Day falls in the next calendar month of the year, on the preceding Ringgit Business Day; (e) if a TL I Interest Period is extended or shortened by (d) above, the following TL I Interest Period shall (without prejudice to the application of (d) above) end on the day on which it would have ended if the preceding TL I Interest Period had not been so extended or shortened; and (f) if any TL I Interest Period commences on the last Ringgit Business Day in a calendar month or if there is no corresponding date in the calendar month in which TL I Interest Period is due to end, then such TL I Interest Period shall end on the last Ringgit Business Day in the relevant later month; "TL I Margin" in relation to BBMB shall mean one point seven five per centum (1.75%) per annum above its Base Lending Rate or such other rate as is varied by BBMB as specifically permitted by this Agreement and in relation to Kewangan shall mean one point seven five per centum (1.75%) per annum above the Effective Cost of Funds or such other rate as is varied by Kewangan, as specifically permitted by this Agreement; "Transfer Certificate" means a certificate in the form set out in Schedule 7 signed by a Lender and a Transferee whereby: (a) such Lender seeks to procure the transfer to such Transferee of all or a part of such Lender's rights and obligations under the Facilities upon and subject to the terms and conditions set out in Clause 22; and 14 -13- (b) such Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Facility Agent as is contemplated in Clause 22.4; "Transfer Date" in relation to any Transfer Certificate means the date for the making of the transfer as specified in the schedule to such Transfer Certificate; "Transferee" means a bank or financial institution licensed under BAFIA or the Offshore Banking Act, 1990 to which a Lender seeks to transfer all or part of such Lender's rights and obligations hereunder; "US Dollars" or "USD" means United States Dollars, the lawful currency of United States of America; "Working Capital Commitment" means the commitment of the Working Capital Lender to grant the Working Capital Facilities to the Borrower of up to an aggregate principal amount of Ringgit Five Million And Nine Hundred Thousand (RM5,900,000.00) upon the terms and subject to the conditions of this Agreement; "Working Capital Facilities" means, in relation to the Working Capital Lender, the Working Capital Facilities described in Schedule 3 granted by the Working Capital Lender to the Borrower under Clause 2.1.1 and made or to be made available by the Working Capital Lender, subject to the terms and conditions of this Agreement and Working Capital Facility means any one of these Working Capital Facilities; "Working Capital Outstanding Amount" means, in relation to the Working Capital Lender at any particular time, the aggregate at such time of (i) the amount for the time being owing and outstanding (including contingent liabilities) from or by the Borrower to the Working Capital Lender under or in respect of the Working Capital Facilities, and (ii) all interest, fees, costs, expenses and other monies whatsoever which are expressed to be payable, whether at maturity or otherwise, to the Working Capital Lender under this Agreement; "Working Capital Termination Date" means the date which is a Ringgit Business Day on which the Working Capital Facilities is canceled or terminated pursuant to Clause 2.3.2 of this Agreement; 1.2 Any reference in this Agreement to: 1.2.1 a "month" means (and references to "months" shall be construed accordingly) a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or, if that day is not a Ringgit 15 -14- Business Day or a Dollar Business Day, as the case may be, on the next Ringgit Business Day or Dollar Business Day, as the case may be, in the said next calendar month or, if none, on the preceding Ringgit Business Day or Dollar Business Day, as the case may be, provided that if either the period starts on the last Ringgit Business Day or Dollar Business Day, as the case may be, in a calendar month or if there is no corresponding day in the next calendar month, the period shall end on the last Ringgit Business Day or Dollar Business Day, as the case may be, of the next relevant calendar month; 1.2.2 a "person" shall be construed as a reference to any person, firm, company, corporation, government, state or agency of a state or any association, partnership (whether or not having separate legal personality) or one or more of the foregoing; 1.2.3 a "statute" shall be construed as a reference to such statute as amended or re-enacted from time to time; 1.2.4 a "Consent" shall be construed so as to include any approval authorization consent exemption license permission or registration by or from any governmental or other authority or any other person; 1.2.5 "fees, costs and expenses" shall be exclusive of any service tax or similar tax chargeable on them, which shall accordingly be payable in addition. 1.3 Section headings are for convenience only and shall not in any way affect the interpretation thereof. 1.4 Save where the context otherwise requires words importing the singular number include the plural and vice versa. 2. THE FACILITIES -------------- 2.1 The Facilities -------------- 2.1.1 Working Capital Facilities -------------------------- The Working Capital Lender agrees to grant to the Borrower Working Capital Facilities, pursuant to which the Working Capital Lender will, upon the terms and conditions set out in this Agreement and upon the security granted or created in its favour under, pursuant to and/or in connection with the Security Documents, at the request of the Borrower, allow the Borrower to utilise the Working Capital Facilities, provided, however, that following such utilisation, the principal amount comprised in the Working Capital Outstanding Amount shall not exceed the Working Capital Commitment; 16 -15- 2.1.2 Ringgit Advances Facility ------------------------- (i) Each of the Lending Bank agrees to grant to the Borrower its respective Proportion of the TL I Facility, pursuant to which each favour under, pursuant to and/or in connection with the Security Documents and upon the terms and subject to the conditions of this Agreement, make Ringgit Advances under the TL I Facility to the Borrower provided however that the aggregate of such Ringgit Advances relating to each Lending Bank shall not exceed the Available Ringgit Advances Commitment relating to such Lending Bank. (ii) The tenor of the TL I Facility shall be for a period of ten (10) years (inclusive of a grace period of eighteen (18) months) commencing from the date of the first Ringgit Advance under the TL I Facility. The TL I Facility shall be subject to yearly review. 2.1.3 Dollar Advances Facility ------------------------ (i) The Funding Lender agrees to grant to the Borrower the Dollar Advances Facility, pursuant to which the Funding Lender will, upon the security granted or recreated in its favour under, pursuant to and/or in connection with the Security Documents and upon the terms and subject to the conditions of this Agreement, make Dollar Advances to the Borrower. (ii) The tenor of the Dollar Advances Facility shall be for a period of five (5) years (inclusive of a grace period of twelve (12) months) commencing from the date of the first Dollar Advance. 2.1.4 Dollar RC Facility ------------------ The Funding Lender agrees to grant to the Borrower the Dollar RC Facility, pursuant to which the Funding Lender will, upon the security granted or created in its favour under, pursuant to and/or in connection with the Security Documents and upon the terms and subject to the conditions of this Agreement, make Dollar RC Drawdown to the Borrower. 2.2 Purpose ------- 2.2.1 The Borrower shall Utilise the Working Capital Facilities for the purposes of financing its working capital requirements. 2.2.2 The Borrower shall Utilise the proceeds of each Ringgit Advance made under the TL I Facility for the purpose of part financing the construction of the Borrower's factory. 17 -16- 2.2.3 The Borrower shall utilise the proceeds of each Dollar Advance made under the Dollar Advances Facility for the purpose of part financing the acquisition of new plant, machinery and equipment to be installed at the Borrower's factory. 2.2.4 The Borrower shall utilise the proceeds of each Dollar RC Drawdown made under the Dollar RC Facility to supplement its working capital. 2.2.5 Notwithstanding the provisions herein contained, the Arranger, the Facility Agent, the Security Agent nor any Lender need check that the respective facilities are utilised for the purposes aforesaid. 2.3 Cancellation ------------ 2.3.1 The Borrower may not cancel all or any part of any of the Lenders' Commitments except as expressly provided in this Agreement. 2.3.2 The Facility Agent may, at its absolute discretion, cancel the Facilities or any part thereof by written notice to the Borrower and any amount so cancelled shall become immediately due and payable together with interest and any other monies due thereon within thirty (30) Ringgit Business Days or Dollar Business Days, as the case may be, provided, however, the Facility Agent shall only be entitled to such right: (a) upon an occurrence of the Event of Default; or (b) where such cancellation is made necessary as a result of statutory or regulatory requirements imposed on the Borrower and the Borrower elects in writing not to comply or fails to comply with such statutory or regulatory requirements, within thirty (30) days from the date the Facility Agent notifies the Borrower in writing of the same; or (c) where such cancellation is made necessary as a result of statutory or regulatory requirements imposed on the Lenders. 3. CONDITIONS PRECEDENT -------------------- 3.1 Utilisation of Working Capital Facilities ----------------------------------------- 3.1.1 The Borrower may not make its request to the Working Capital Lender for the utilisation of the Working Capital Facilities until the Facility Agent has confirmed to the Borrower and the Working Capital Lender that the Facility Agent has received documents appearing to the Facility Agent to comply with the requirements of Schedule 2 and to be satisfactory. 18 -17- 3.2 Request for Ringgit Advances ---------------------------- 3.2.1 The Borrower may not make its request for a Ringgit Advance until the Facility Agent has confirmed to the Borrower and the Lending Banks that the Facility Agent has received documents appearing to the Facility Agent to comply with the requirements of Schedule 2 and to be satisfactory. 3.3 Request for Dollar Advances --------------------------- 3.3.1 The Borrower may not make its request for a Dollar Advance until the Facility Agent has confirmed to the Borrower and the Funding Lender that the Facility Agent has received documents appearing to the Facility Agent to comply with the requirements of Schedule 2 and to be satisfactory. 3.4 Request for Dollar RC Drawdown ------------------------------ 3.4.1 The Borrower may not make its request for a Dollar RC Drawdown until the Facility Agent has confirmed to the Borrower and the Funding Lender that the Facility Agent has received documents appearing to the Facility Agent to comply with the requirements of Schedule 2 and to be satisfactory. 4. WORKING CAPITAL FACILITIES -------------------------- 4.1 Terms and Conditions -------------------- The Working Capital Facilities shall be made available by the Working Capital Lender upon and subject to the terms and conditions contained herein or otherwise made known and agreed to by the Borrower in writing. 4.2 Review ------ The Working Capital Lender reserves the right to review the Working Capital Facilities periodically. Such review may be carried out by the Working Capital Lender as an "in-house exercise" and the Borrower need not be informed of such review. 4.3 Revolving Credit Facility ("RC Facility") ----------------------------------------- 4.3.1 Purpose of the RC Facility The RC Facility shall be used by the Borrower to supplement its working capital requirements or such other purpose as may be acceptable to the Working Capital Lender. 19 -18- 4.3.2 Drawdown (a) In the event the Borrower intends to drawdown the RC Facility or part thereof from the Working Capital Lender subject to the terms herein after determination of the Relevant Applicable Rate pursuant to Clause 4.3.2(b) hereof, and agreed by the Borrower, the Borrower shall give notice of such drawdown to the Facility Agent in accordance with Clause 4.3.2(b) hereof and such notice must reach the Facility Agent by the third Ringgit Business Day, at the latest, following the determination and agreement of the Relevant Rate for the RC Facility. The Borrower shall also deliver to the Facility Agent, before noon on the date of the relevant advance, a duly executed and stamped promissory note for the face amount and tenor which is equivalent to the face amount and tenor of the proposed advance. (b) The drawdown notice substantially in the form set out in Schedule 9 must be delivered in accordance with the provisions of Clause 29 and must specify: (i) the amount of the drawdown which shall be in multiples of Ringgit Malaysia One Hundred Thousand (RM100,000.00) but subject to a minimum of Ringgit Malaysia One Hundred Thousand (RM100,000.00). The total drawdown under the RC Facility must not exceed the approved sub-limit of Ringgit Malaysia One Million (RM1,000,000.00); (ii) the date on which the drawdown is required, which must in any event be a Ringgit Business Day not less than three (3) Ringgit Business Days following the date of the drawdown notice; and (iii) the Ringgit Rollover Period selected by the Borrower for such drawdown referred to herein. (c) Subject to Clauses 4.3.2(a) and (b) being satisfied and to the availability of funds, the Working Capital Lender shall on the date of drawdown credit the Borrower's account as specified in the drawdown notice. (d) The Borrower shall repay the principal amount of the RC Facility so drawdown on demand by the Facility Agent for and on behalf of the Working Capital Lender for repayment thereof or on its Ringgit RC Repayment Date unless the Borrower shall have served a request in writing on the Facility Agent at least three (3) Ringgit Business Days before the Ringgit RC Repayment Date to roll-over the principal amount for the Ringgit Rollover Period and the Working Capital Lender has agreed to the same in writing. If the Working Capital Lender has agreed to allow a rollover the principal amount of the RC Facility so drawdown which is repayable on the Ringgit RC Repayment Date shall on the Ringgit RC Repayment Date be rolled over for the Ringgit RC Rollover Period stipulated in such notice. 20 -19- (e) Any drawdown notice once received by the Facility Agent shall be irrevocable. In the event the Borrower fails to drawdown after the drawdown notice is received by the Facility Agent, the Borrower shall on demand indemnify the Facility Agent and the Working Capital Lender against all funding losses and related expenses suffered by them in liquidating or otherwise employing deposits from third parties acquired or arranged to fund the drawdown following receipt of the drawdown notice. (f) The Borrower may prepay the whole or any part of any drawdown under the RC Facility Provided That: (a) it has given to the Facility Agent not less than fourteen (14) Ringgit Business Days' notice in respect of prepayment under the Ringgit RC Facility; (b) all prepayments shall not be less than RM100,000.00 or in integral multiples of RM100,000.00; and (c) each prepayment must be made on an Interest Payment Date; in default of which, the Borrower shall pay to the Facility Agent for the account of the Working Capital Lender a premium calculated at zero point five per centum (0.5%) flat on the amounts to be prepaid. (g) Interest -------- (i) The Working Capital Lender shall at the request of the Borrower and on selection of the Ringgit RC Interest Period by the Borrower, or if no selection is made by the Borrower, such period as selected by the Working Capital Lender, prior to making of an advance or a rollover of an advance under the RC Facility, as the case may be, determine (i) whether the Ringgit RC Interest Period or the Ringgit RC Rollover Period, as the case may be, is agreed upon and if not, the proposed Ringgit RC Interest Period or the Ringgit RC Rollover Period, as the case may be, and (ii) the Relevant Applicable Rate for the intended Ringgit RC Interest Period or the Ringgit RC Rollover Period, as the case may be, and shall notify the Borrower of such determination PROVIDED ALWAYS that the Relevant Applicable Rate shall not be less than the Working Capital Lender's Effective Cost of Funds plus one point seven five per centum (1.75%) per annum. (ii) Interest at the Relevant Applicable Rate shall accrue from day to day and shall be calculated on the basis of the number of days elapsed and a 365 day year. The Relevant Applicable Rate so determined in accordance with 21 -20- the Clause 4.3.2(g)(1) above shall be the Relevant Applicable Rate for the RC Facility or portion thereof so drawdown or rolled over. (iii) Interest on the amount of the RC Facility so drawdown or rolled over, as the case may be, shall be payable on the Ringgit RC Repayment Date in arrears Provided Always that if the day on which interest is due is not a Ringgit business Day then payment shall be made on the next succeeding Ringgit Business Day. In the event the next succeeding Ringgit Business Days falls on the first day of the month following, then payment shall be made on the day preceding the due date for payment. (h) The approved sub-limits in respect of the RC Facility and the LG Facility (as hereinafter defined) may be varied by the Borrower giving not less than three (3) Ringgit Business Days' notice to the Working Capital Lender. The variation to the approved sub-limits in respect of the RC Facility and the LG Facility is subject to the available unutilised amount under the aggregate limited of RMS,900,000.00. 4.4 Letters of Credit Facility ("LC Facility") ------------------------------------------ 4.4.1 Purpose The LC Facility shall be utilised by the Borrower to facilitate its imports or local purchase of goods, spare parts, new machinery and/or new equipment or such other purpose as may be acceptable to the Working Capital Lender. 4.4.2 Tenor of Letters of Credit The Working Capital Lender will open sight and usance letters of credit and each such letter of credit shall have a maximum validity period of one hundred and eighty (180) days from its issuance date. 4.4.3 Payment Full payment for each letter of credit must be effected by the Borrower upon presentation by the Borrower of the same and other relevant documents for payment. 4.4.4 Interest Foreign Letters of Credit (sight) (i) at the prevailing overdraft rate levied or such other rate as may be levied by the Working Capital Lender's Depository Agent from the date of 22 -21- negotiation to the date of receipt of notification of negotiation calculated on the basis of a 365-day year for the actual number of days elapsed. (ii) at one point seven five percent (1.75%) per annum above the Working Capital Lender's Base Lending Rate from the date of receipt of notification of negotiation to the date of payment or conversion to the TR Facility (as hereinafter defined) or BA Facility (as hereinafter defined) calculated on the basis of a 365-day year for the actual number of days elapsed. Local Letters of Credit (sight) At one point seven five percent (1.75%) per annum above the Working Capital Lender's Base Lending Rate from the date of receipt of notification of negotiation to the date of payment or conversion to the TR Facility or the BA Facility calculated on the basis of a 365-day year for the actual number of days elapsed. Foreign or Local Letters of Credit (usance) At one point seven five percent (1.75%) per annum above the Working Capital Lender's Base Lending Rate from the date of maturity to the date of payment or conversion to the TR Facility or the BA Facility calculated on the basis of a 365-day year for the actual number of days elapsed. 4.5 Trust Receipts Facility ("the TR Facility") ------------------------------------------- 4.5.1 Purpose of the TR Facility The TR Facility shall be utilised by the Borrower to convert bills drawn under the LC Facility issued by the Working Capital Lender to facilitate its imports or local purchase of goods related to the Borrower's trade. 4.5.2 Utilisation of the TR Facility (a) The Borrower acknowledges that all goods covered by the relevant trust receipts, all documents of title relating to the goods and the proceeds of sale thereof, and all insurance monies arising from them, are held as trustees for the Working Capital Lender. (b) The Borrower shall hold all relevant documents of title relating to the goods for the purpose of obtaining delivery and to warehouse the goods. The goods will be warehoused in the name of the Working Capital lender or as otherwise agreed by the Working Capital Lender and at the sole expense of the Borrower. (c) The Borrower undertakes to keep the goods duly covered by insurance against fire and such other risks as are required by the working Capital Lender with such 23 -22- company or companies as acceptable to the Working Capital Lender and in case of loss to pay the insurance money immediately on receipt to the Working Capital Lender without any deduction. The Borrower agrees to pay to the Working Capital lender immediately and specifically on receipt the whole proceeds of sale and each part of the proceeds (whatever form they may take) without any deduction. The Working Capital Lender may require any money received on any insurance be applied in or towards making good the loss or damage in respect of which money is received or receivable or in or towards discharge of any principal sum, interest, default interest or any other monies payable hereunder or under any of the other Security Documents and the Working Capital Lender may give a good discharge for any such monies and nay balance remaining after discharging all monies payable hereunder or under the other Security Documents, shall be refunded to the Borrower. (d) The Borrower shall return to the Working Capital Lender immediately on demand at any time all relevant documents of title relating to the goods and/or any other documents received by the Borrower in exchange or substitution for them and to comply promptly and fully with any instructions which the Working Capital Lender may give as to the dealing with the goods of any of them. (e) The Borrower undertakes to keep the documents of title relating to the goods, the goods, the proceeds of any sale and all insurance money separate and distinct from any other documents, goods, proceeds of sale or insurance money relating to or arising from any transaction. (f) A copy of the relevant insurance policy showing the Working Capital Lender as mortgagee is to be delivered and to be retained by the Working Capital Lender. However, where the goods are covered by a master policy, the Borrower need not submit another insurance policy for specific goods, nor is there a need to have the master policy specially endorsed to the Working Capital Lender as mortgagee. In such an instance, the Borrower must confirm in writing to the Working Capital Lender that the master policy covers the goods financed by the Working Capital Lender and a copy of such master policy is to be delivered to the Working Capital Lender and kept by the Working Capital Lender for its reserves. (g) Any amount not paid by the Borrower to the Working Capital Lender under the TR Facility shall be subject to interest at the rate of one point seven five per centum (1.75%) per annum above the Base Lending Rate or such other rate as is varied by the Working Capital Lender pursuant to this Agreement and shall be payable upon maturity of the relevant bills shown by the Working Capital Lender and accepted by the Borrower on all goods covered by the relevant trust receipt. (h) The tenor or each TR shall be up to one hundred and eighty (180) days inclusive of supplier's credit. 24 -23- 4.6 Bankers Acceptances Facility ("the BA Facility") ------------------------------------------------ 4.6.1 Purpose of the BA Facility The BA Facility shall be utilised by the Borrower for financing its export as well as inland sales, imports, as well as local purchases or for such other purpose as may be acceptable to the Working Capital Lender. 4.6.2 Utilisation of the BA Facility (a) Each bankers acceptance will be discounted at inter-bank offer rates prevailing on the date of discount. (b) The tenor of each bankers acceptance shall be up to one hundred and eighty (180) days inclusive of supplier's credit. (c) If the Borrower fails to put the Working Capital Lender in sufficient funds to meets its obligations on the maturity of any bankers acceptance, the Working Capital Lender shall have the right but not the obligation to debit the Borrower's current account with the Working Capital Lender without prior notice the Borrower and if in consequent of so doing the current account is overdrawn, an additional interest of one per centum (1%) per annum above the Working Capital Lender's Base Lending Rate shall be charged and the Working Capital Lender shall not be liable if any cheque drawn under the said current account is dishonored by reason of insufficiency of funds. (d) All bankers acceptances accepted by the Working Capital Lender are to be discounted with the Working Capital Lender only. (e) Interest and commission are to be paid at the time of acceptance. (f) The procedure for accepting and discounting bankers acceptances will be subject to all the conditions and guidelines laid down by Bank Negara Malaysia and/or other statutory bodies from time to time. (g) The Working Capital Lender reserves the right to accept or reject any bankers acceptance presented. (h) No new bankers acceptance will be accepted or discounted if there are any overdue amounts under the BA Facility and/or any of the other facilities. 25 -24- 4.7 Export Credit Refinancing Facility ("the ECR Facility") ------------------------------------------------------- 4.7.1 Purpose The ECR (Preshipment) Facility shall be utilised by the Borrower as additional working capital to finance the Eligible Goods (as defined in the ECR Guidelines issued by Bank Negara Malaysia). The ECR (Postshipment) Facility shall be utilised by the Borrower for the purchase of usance export bills in respect of Eligible Goods. 4.7.2 Tenor of the ECR (Preshipment) Facility (a) In respect of Eligible Goods not already shipped by the Borrower ("ECR-Pre") the Working Capital Lender will advance sums to the Borrower for a maximum of one hundred and twenty (120) days under pre-shipment bills of exchange. Such bills of exchange shall expire on a day which is not a Saturday, a Sunday or a public holiday in Kuala Lumpur or Kuching. Each request for an advance shall be supported by an ECR domestic letter of credit (as defined by the ECR Guidelines) or an ECR domestic purchase order (as defined by the ECR Guidelines). (b) The tenor of each advance under the ECR-Pre Facility shall be calculated from the date the Working Capital Lender receives the relevant supporting documents et out in Clause 4.7.2(a) above to the shipment date of the Eligible Goods from Malaysia. 4.7.3 Tenor of Post-Shipment Advances (a) In respect of Eligible Goods already shipped by the Borrower ("ECR-Post") the Working Capital Lender will advance sums to the Borrower for a maximum of one hundred and eighty (180) days by discounting the amounts stated in post-shipment bills of exchange. Such bills of exchange shall mature on a day which is not a Saturday, a Sunday or a public holiday in Kuala Lumpur or Kuching. (b) Each request of ran advance under the ECR-Post Facility shall be accompanied by the export documents (as defined by the ECR Guidelines) in respect of the shipment of the Eligible Goods. (c) All post-shipment bills of exchange shall be discounted by the Working Capital Lender with recourse to the Borrower. In the event a Borrower's customer shall fail to pay a post-shipment bill for whatever reason on presentation of such bill, the Borrower shall pay the bill amount to the Working Capital Lender on demand failing which the Working Capital Lender shall be entitled to debit the Borrower's Account for the said amount. The Borrower shall also indemnify the Working Capital Lender against all costs, expenses and charges incurred by the 26 -25- Working Capital Lender arising from the default in payment by the Borrower's customer. 4.8 Letters of Guarantee Facility ("the LG Facility") ------------------------------------------------- 4.8.1 Purpose of the LG Facility The LG Facility shall be utilised for the issuance of guarantees in favor of the Government, semi-Government and private bodies in respect of tender, performance, advance payment, security deposit, supply of equipment and other business related to the Borrower's trade. 4.8.2 Indemnity (a) The Borrower is to issue a letter of indemnity for each guarantee issued under the LG Facility and in the event that the Working Capital Lender is called upon to make any payment under any of the guarantees so issued, then the Borrower shall forthwith thereafter and in any event not later than seven (7) Ringgit Business Days from the date of payment by the Working Capital Lender, repay the Working Capital Lender all such monies paid out by the Working Capital Lender, together with all interest (chargeable at one point zero percent (1.0%) above the Working Capital Lender's Base Lending Rate or such rate as the Working Capital Lender may at its absolute discretion impose subject to the maximum interest rate as allowable by Bank Negara Malaysia and any other charges and expenses incurred thereon. (b) Without prejudice to the Working Capital Lender's right to recall on demand, the Working Capital Lender may at its absolute discretion convert the monies paid out under any guarantee into a term loan facility or an overdraft facility on such terms and conditions (including repayments) as the Working Capital Lender may at its absolute discretion impose. 4.8.3 Commission (a) The commission payable under the LG Facility shall be charged for the full liability period (inclusive of the claim period) of the guarantee issued. (b) Should the same letter of guarantee be renewed upon expiry, commission shall be calculated from the date or renewal to the new expiry date. 5. UTILISATION OF WORKING CAPITAL FACILITIES ----------------------------------------- 5.1 Subject to the provisions of this Agreement, any of the Working Capital Facilities made available by the Working Capital Lender to the Borrower may be utilised 27 -26- by the Borrower, at the request of the Borrower, made in writing to the Working Capital Lender if: 5.1.1 following such utilisation by the Borrower, the aggregate principal amount comprised in the Working Capital Outstanding Amount shall not exceed its Working Capital Commitment; 5.1.2 all representations and warranties in Clause 18 have been complied with and would be correct in all respects if repeated on the proposed date of utilisation of the Working Capital Facilities by reference to the circumstances then existing; 5.1.3 no Event of Default or Potential Event of Default has occurred on or before the proposed date of utilisation of the Working Capital Facilities or will occur as a result of the utilisation of the Working Capital Facilities; 5.1.4 such terms and conditions as may be imposed by the Working Capital Lender in relation to the utilisation of the Working Capital Facilities have been satisfactorily complied with and/or will not be breached pursuant to such utilisation; 5.1.5 not later than 11:00 a.m. on the proposed date of utilisation of that Working Capital Facilities, the Working Capital Lender has received and found satisfactory such additional information and/or other documents as it may reasonably request. 6. PAYMENT OF WORKING CAPITAL FACILITIES ------------------------------------- 6.1 Payment by Borrower ------------------- 6.1.1 In consideration of the Working Capital Lender agreeing to grant or continue to grant the Working Capital Facilities to the Borrower and without prejudice to any other rights of the Working Capital Lender and obligations of the Borrower under this Agreement, the Borrower hereby covenants and undertakes with and to the Working Capital Lender that, subject to any specific agreement or arrangement for payments by the Borrower in relation to each or all of the working Capital Facilities now or hereafter subsisting between the Working Capital Lender and the Borrower, the Borrower will on demand, pay to the Working Capital Lender: (a) all sums of money in respect of the Working Capital Facilities which are then due and payable to the Working Capital Lender by the Borrower and whether as principal or surety or which the Borrower is then liable to pay 28 -27- to the Working Capital Lender anywhere or any account or otherwise or in any manner whatsoever as provided in this Agreement; and (b) all other liabilities in respect of the Working Capital Facilities which have accrued or become due and payable then, including the balance for the time being owing for or in respect of cheques, bills, notes, drafts or other negotiable or non-negotiable instruments accepted, paid or discounted for or on behalf of the Borrower or for any other payments, credits or advances made to or for the use or accommodation of or on behalf of the Borrower pursuant to or in respect of or under any guarantee or letter of credit given, established or opened by the Working Capital Lender for the Borrower or in respect of any other facilities whatsoever whether or not given upon or under any trust receipts or other security whatsoever or otherwise howsoever together with, in all cases aforesaid, interest and fees at such rate as may from time to time be fixed or determined by the Working Capital Lender (which shall not be more than the relevant rate provided in Clause 7), such interest and fees to be charged and calculated on a daily basis with monthly or such other periodic rests and together also with commission, discount and other usual bankers' charges (which shall not be more than the relevant rate provided in Clause 7), such sums to be raised and paid at the time and in the manner set out herein immediately upon service on the Borrower of a demand for payment in writing sent by the Working Capital Lender in the manner provided in this Agreement. 6.1.2 If and when a demand is made for payment of all or any monies agreed to be paid pursuant to this Agreement and/or the account current or otherwise of the Borrower with the Working Capital Lender shall be closed and a balance shall be owing to the Working Capital Lender, the balance so owing shall be an overdue sum under this Agreement and the Borrower will, so long as the same or any part thereof shall remain owing pay to the Working Capital Lender interest thereon in accordance with Clause 10.4. 7. PROVISIONS RELATION TO INTEREST, SECURITIES AND OTHERS ------------------------------------------------------ 7.1 Interest -------- 7.1.1 In respect of the Working Capital Facilities, the Borrower hereby expressly agrees and declares, subject to Clauses 7.2 and 7.3 and any specific agreement or arrangement referred to in Clause 6.1.1, that: (a) the Working Capital Lender shall be at liberty without thereby affecting its rights under this Agreement at any time: 29 -28- (i) to vary the rate of interest and/or commission payable for or in respect of any or all of its Working Capital Facilities or any part thereof and on serving a notice in writing on the Borrower to this effect, such amended rate of interest and/or commission shall be payable as from the date specified in the said notice Provided that such right shall only be exercisable by the Working Capital Lender upon the occurrence of an Event of Default or where such variation is made necessary as a result of any statutory and/or regulatory requirements imposed on the Borrower and/or the Working Capital Lender; (ii) to vary exchange or release any security held or to be held by the Working Capital Lender for or on account of the Working Capital Facilities or any monies and liabilities owing under this Agreement or any part thereof; and (iii) to vary any credit to the Borrower and to renew bills or promissory notes in any manner and to compound with, give time for payment (except that any such time given shall not extend beyond the Working Capital Termination Date), accept composition from and make any other arrangements with any person or party liable to that Working Capital Lender in respect of bills, rates or other securities held or to be held by that Working Capital Lender for its Working Capital Facilities or any monies or liabilities owing under this Agreement or any part thereof. 7.1.2 When the payment of any monies under any of the Working Capital Facilities shall be secured to the Working Capital Lender by any bill of exchange, promissory note, draft, receipt or other instrument reserving a higher rate of interest to be paid in respect thereof than that provided in Clause 7.2, such higher rate of interest shall be payable in respect of such monies and nothing contained in or to be implied by this Agreement shall affect the right of the Working Capital Lender to enforce and recover payment of such higher rate of interest. 7.2 Interest, Commission and Other Charges -------------------------------------- The Working Capital Lender agrees with the Borrower (but without affecting its rights under Clauses 6.1.2 and 7.1.2) that the rate of interest, fees, commission and other charges payable by the Borrower on each sub-facility of the Working Capital Facilities utilised by the Borrower shall not exceed the rate specified in Schedule 3 in respect of each sub-facility granted to the Borrower under its Working Capital Facilities. 30 -29- 7.3 Miscellaneous ------------- 7.3.1 The Working Capital Lender agrees that no Working Capital Facilities may be canceled prior to the Working Capital Termination Date otherwise than pursuant to Clauses 14 and 17. 8. DRAWDOWN -------- 8.1 Drawdown Conditions for Ringgit Advances ---------------------------------------- 8.1.1 Subject to the provisions of this Agreement, Ringgit Advances will be made by the Lending Banks to the Borrower at its request if the following additional conditions are fulfilled: (a) not later than 11:00 a.m. on the third Ringgit Business Day before the proposed date of the relevant Ringgit Advance, the Facility Agent has received: (i) a notice substantially in the form set out in Schedule 4 specifying (aa) the proposed ate of that Ringgit Advance, which must be a Ringgit Business Day falling on or before the Commitment Termination Date and (bb) the amount of that Ringgit Advance, which must be in multiples of RM100,000.00 subject to a minimum of RM100,000.00 provided that the aggregate of the Ringgit Advances made or to be made under the TL I Facility shall not at any time exceed the Available Ringgit Advances Commitment (TL I); (ii) a certificate of work done issued by the Contractor's architect in respect of Ringgit Advances to be made under the TL I Facility; (b) all representations and warranties in Clause 18 (except to any extent waived in accordance with Clause 23.2) have been complied with and would be correct in all respects if repeated on this proposed date of that Ringgit Advance by reference to the circumstances then existing; (c) no Event of Default or Potential Event of Default has occurred on or before the proposed date of that Ringgit Advance, or will occur as a result of the making of that Ringgit Advance, other than that waived in accordance with Clause 23.2; and (d) not later than 11:00 a.m. on the proposed date of that Ringgit Advance, the Facility Agent and/or the Lending Banks have received and found satisfactory such additional information, legal opinions and/or other 31 -30- documents relevant in the context of or relating to this Agreement as it or they may reasonably request. 8.1.2 The Facility Agent shall promptly notify the Lending Banks of the proposed date of, the amount of, each Ringgit Advance. 8.1.3 Each Lending Bank shall participate in each Ringgit Advance made pursuant to Clause 8.1.1 in respect of the TL I Facility in its respective Proportion. 8.2 Drawdown Condition for Dollar Advances -------------------------------------- 8.2.1 Subject to the provisions of this Agreement and to the availability of funds, Dollar Advances will be made by the Funding Lender to the Borrower at its request if the following conditions are fulfilled: (a) not later than 11:00 a.m. on the third Dollar Business Day before the proposed date of the relevant Dollar Advance, the Facility Agent has received from the Borrower: (i) a notice substantially in the form set out in Schedule 5 specifying (aa) the proposed date of that Dollar Advance, which must be a Dollar Business Day falling on or before the Commitment Termination Date and (bb) the amount of that Dollar Advance, which must be in multiples of USD100,000.00 subject to a minimum of USD100,000.00 Provided That the aggregate of the Dollar Advances made to be made under the Dollar Advances Facility shall not at any time exceed the Available Dollar Advances Commitment (cc) the Dollar Advance Interest Period selected by the Borrower for such Dollar Advance Provided that if the Borrower fails to select the Dollar Advance Interest Period, the Funding Lender shall be at liberty to select the Dollar Advance Interest Period; and (ii) original document verified by an independent engineer/valuer acceptable to the Facility Agent or other documents reasonably acceptable to the Facility Agent confirming the purchase, value and installation of machines and an independent opinion from a consultant acceptable to the Facility Agent confirming the date of installation of the machines (if the machines have been installed) in writing, in respect of Dollar Advances to be made under the Dollar Advances Facility. (b) all representations and warranties in Clause 18 (except to any extent waived in accordance with Clause 23.2) have been complied with and 32 -31- would be correct in all respects if repeated on the proposed date of that Dollar Advance by reference to the circumstances then existing; (c) no Event of Default or Potential Event of Default has occurred on or before the proposed date of that Dollar Advance, other than that waived in accordance with Clause 23.2; and 8.2.2 The Facility Agent shall promptly notify the Funding Lender of the proposed date of, and the amount of, each Dollar Advance. 8.2.3 (a) Subject to Clause 8.2.3(b) hereof, all payments under the Dollar Advances Facility for the purchase of new fixed assets shall be made direct to the parties concerned against relevant original documents evidencing the delivery and installation thereof. (b) Where the purchase price of the new fixed assets have been paid by the Borrower directly to the vendors of such fixed assets, the Funding Lender, upon receipt of the original document by the Facility Agent and/or the Funding Lender to evidence the delivery and installation of such fixed assets and/or other documentary evidence satisfactory to the Facility Agent and/or the Funding Lender that the purchase price has been paid to the said vendors, will reimburse the Borrower for such payments. (c) The Facility Agent shall have custody or possession of the original documents referred to in this Clause so long as this Agreement remains in subsistence PROVIDED, however. the Borrower may request the Facility Agent in writing and at its own cost and expenses for the release of any one of such original documents and the Facility Agent, acting on the instructions of the Instructing Group, will only release such original documents after the interest of the Beneficiaries have been endorsed thereon. 8.3 Drawdown Conditions for Dollar RC Drawdown ------------------------------------------ 8.3.1 Subject to the provisions of this Agreement and to the availability of funds Dollar RC Drawdown will be made by the Funding Lending to the Borrower at is request if the following conditions are fulfilled: (a) not later than 11:00 a.m. on the third Dollar Business Day before the proposed date of the relevant Dollar RC Drawdown, the Facility agent has received from the Borrower: (i) a notice substantially in the form set out in Schedule 6 specifying (aa) the proposed date of that Dollar RC Drawdown, which must be a Dollar Business Day and (bb) the amount of the Dollar RC Drawdown which must be in multiples of USD100,000.00 subject 33 -32- to a minimum of USD100,000.00. Provided that the aggregate of the Dollar RC Drawdowns made or to be made under the Dollar RC Facility shall not at any time exceed the Available Dollar RC Commitment and (cc) the Dollar RC Interest Period selected by the Borrower for such Dollar RC Drawdown Provided that if, the Borrower fails to select the Dollar RC Interest Period, the Funding Lender shall be at liberty to select the Dollar RC Interest Period for that particular Dollar RC Drawdown; and (ii) not later than 12:00 noon on the proposed date of the relevant Dollar RC Drawdown, a duly executed and stamped Promissory Note for the amounts of each Dollar RC Drawdown; (b) all representations and warranties in Clause 18(except to any extent waived in accordance with Clause 23.2) have been complied with and would be correct in all respects if repeated on the proposed date of the Dollar RC Drawdown by reference to the circumstances then existing; (c) no Event of Default or Potential Event of Default has occurred on or before the proposed date of that Dollar RC Drawdown, other than that waived in accordance with Clause 23.2; (d) not later than 11:00 a.m. on the proposed date of that Dollar RC Drawdown, the Facility Agent and/or the Funding Lender have received and found satisfactory such additional information, legal opinions and/or other document relevant in the context of or relating to this Agreement as it may reasonably request. 8.3.2 The Facility Agent shall promptly notify that Funding Lender of the proposed date of, and the amount of, each Dollar RC Drawdown. 9. REPAYMENT AND PREPAYMENT ------------------------ 9.1 Repayment of Ringgit Advances ----------------------------- 9.1.1 The Borrower shall repay the Ringgit Advances made under the TL I Facility by the thirty four (34) quarterly installments commencing on the 21st month from the date of the first Ringgit Advance in respect of the TL I Facility. The amount of each installment will vary based on the aggregate of all Ringgit Advances made under the TL I Facility Provided that after the Commitment Termination Date, the amount of the remaining installments in respect of the TL I Facility shall be fixed by the Facility Agent. 34 -33- 9.2 Repayment of Dollar Advances ---------------------------- 9.2.1 The Borrower shall repay the Dollar Advances made under the Dollar Advances Facility by sixteen (16) quarterly installments commencing on the 15th month from the date of the first Dollar Advance. The amount of each installment will vary based on the Dollar RC Loan provided that after the Commitment Termination Date, the amount of the remaining installments will be fixed by the Facility Agent. 9.2.2 The Facility Agent shall promptly notify the Borrower of the amount of each installment payable by it under the Dollar Advances Facility. 9.3 Repayment of Dollar RC Loan --------------------------- 9.3.1 The Borrower shall repay the principal amount of each Dollar RC Drawdown on the Dollar RC Repayment Date unless the Borrower shall have served on the Facility Agent not less than three (3) Dollar Business Days, prior to the Dollar RC Repayment Date, a request to rollover the principal amount of the Dollar RC Drawdown for a period of one (1), three (3) or six (6) months and the Funding Lender has agreed to the same in writing. If the Funding Lender agrees to the request for a rollover, then the principal amount of the Dollar RC Drawdown which is repayable on the Dollar RC Repayment Date shall on the Dollar RC Repayment Date be rolled over for the Dollar RC Rollover Period stipulated in such notice. 9.4 Prepayment of Ringgit Advances Facility --------------------------------------- 9.4.1 The Borrower may prepay the whole or any part of any Ringgit Advance Provided That: (a) it has given to the Facility Agent not less than thirty (30) Ringgit Business Days' notice; and (b) all prepayments shall not be for less than RM100,000.00 or in integral multiples of RM100,000.00; in default of which, the Borrower shall pay to the Facility Agent for account of the Lending Banks a premium calculated at the rate of zero point five per centum (0.5%) flat on amounts to be prepaid. 9.4.2 Amounts prepaid shall be applied in the inverse order of maturity and any amount prepaid cannot be re-borrowed by the Borrower. 35 -34- 9.5 Prepayment of Dollar Advances Facility -------------------------------------- 9.5.1 The Borrower may prepay the whole or any part of any Dollar Advance Provided That: (a) it has given to the Facility Agent not less than thirty (30) Dollar Business Days' notice in respect of prepayment under the Dollar Advances Facility; and (b) all prepayments shall not be for less than USD100,000.00 or in integral multiples of USD100,000.00; in default of which, the Borrower shall pay to the Facility Agent for the account of the Funding Lender a premium calculated at zero point five per centum (0.5%) flat on amounts to be prepaid. 9.5.2 Amounts prepaid shall be applied in the inverse order of maturity and any amount prepaid cannot be re-borrowed by the Borrower. 9.6 Prepayment of Dollar RC Facility -------------------------------- 9.6.1 The Borrower may prepay the whole or any part of any Dollar RC Drawdown Provided That: (a) it has given to the Facility Agent not less than fourteen (14) Dollar Business Days' notice in respect of prepayment under the Dollar RC Facility; (b) all prepayments shall not be less than USD100,000.00 or in integral multiples of USD100,000.00; and (c) each prepayment must be made on an Interest Payment Date: in default of which, the Borrower shall pay to the Facility Agent for the account of the Funding Lender a premium calculated at zero point five per centum (0.5%) flat on the amounts to be prepaid. 9.6.2 The Borrower shall, upon demand, reimburse the Facility Agent for all cost, expenses or other charges incurred by the Facility Agent in the event of such prepayment. 9.7 Miscellaneous ------------- 9.7.1 Any notice of prepayment given by the Borrower under Clause 9.4.1 (a) or 9.5.1 (a) or 9.6.1 (a) will oblige the Borrower to prepay in accordance with that notice. 36 -35- The Borrower may not repay or prepay all or any part of the Ringgit Advances Outstandings or the Dollar Advances Outstandings or the Dollar RC Loan except as expressly provided in this Agreement and may not re-borrow any amount repaid or prepaid. 10. INTEREST 10.1 Interest Rates and Interest Period ---------------------------------- 10.1.1 Interest at the Relevant Applicable Rate shall accrue from day to day and shall be calculated on each Ringgit Advance on the basis of a year of 365 days for the actual number of days elapsed and shall exclude the day of which interest is paid. Interest shall be paid on the relevant Interest Payment Date. 10.1.2 Interest at the Relevant Applicable Rate shall accrue from day to day and shall be calculated on each Dollar Advance made under the Dollar Advance Facility on the basis of a year of 360 days for the actual number of days elapsed and shall exclude the day on which the interest is paid. Interest shall be paid on the relevant Interest Payment Date. 10.1.3 Interest at the Relevant Applicable Rate shall accrue from day to day and shall be calculated on each Dollar RC Drawdown made under the Dollar RC Facility on the basis of a year of 360 days for the actual number of days elapsed and shall exclude the day on which interest is paid. Interest shall be paid on the relevant Interest Payment Date. 10.2 Notification of Interest Rates ------------------------------ 10.2.1 Each of the Lending Bank shall promptly notify the Facility Agent of its rate of interest. 10.2.2 The Funding Lender shall promptly notify the Facility Agent of its rate of interest. 10.2.3 The Facility Agent shall promptly notify the Borrower of each rate of interest notified to the Facility Agent by the relevant Lender pursuant to Clause 10.2.1 and 10.2.2. 10.3 Payment of Interest ------------------- 10.3.1 Subject as otherwise provided in this Agreement, on each Interest Payment Date relating to a Ringgit Advance, the Borrower shall pay to the Facility Agent for the account of the Lending Banks the unpaid interest accrued during the relevant TL I Interest Period, on that Ringgit Advance at the Relevant Applicable Rate. 37 -36- 10.3.2 Subject as otherwise provided in this Agreement, on each Interest Payment Date relating to a Dollar Advance made under the Dollar Advance Facility, the Borrower shall pay to the Facility Agent for the account of the Funding Lender the unpaid interest accrued during that Dollar Advance Interest Period on that Dollar Advance at the Relevant Applicable Rate. 10.3.3 Subject as otherwise provided in this Agreement, on each Dollar RC Interest Payment Date relating to a Dollar RC Drawdown made under the Dollar RC Facility, the Borrower shall pay to the Facility Agent for the account of the Funding Lender the unpaid interest accrued during that Dollar RC Interest Period on that Dollar RC Drawdown at the Relevant Applicable Rate. 10.4 Default Interest ---------------- 10.4.1 If the Borrower does not pay any sum payable under this Agreement (including, without limitation, any sum payable under this Clause) when due, it shall pay interest, in the same currency as that in which that overdue sum is payable, on the amount from time to time outstanding in respect of that overdue sum for the period beginning on the 11th day after its due date and ending on the date of its receipt by the Facility Agent or the relevant Lender (both before and after judgment and notwithstanding the termination of any banker and customer relationship) in accordance with this Clause. For the purpose of this Clause, if any payment is received by the Facility Agent on the due date, but after the term required and too late to be made available by the Facility Agent on that due date to the Lender(s) entitled to it, that payment shall be deemed to be received on the next Ringgit Business Day or the Dollar Business Day, as the case may be. 10.4.2 Interest under this Clause shall be calculated by reference to successive Interest Periods, each of which (other than the first, which shall begin on the 11th day after its due date) shall begin on the last day of the previous one. Each such Interest Period shall be of one month or such other period as the Facility Agent may from time to time select and the rate of interest payable on each person's share of that overdue sum for all or any part of a particular Interest Period shall be the rate per annum (as quoted by that person to the Facility Agent) equal to the sum of the Default Rate, the Margin and the cost (as certified by that person and expressed as a rate per annum) to that person (including the cost occasioned by or attributable to complying with reserves, liquidity, deposit or other requirements imposed on that person by such relevant authority or authorities) of funding its share of that overdue sum, in the currency in which it is payable, for that Interest Period by whatever means it determines to be appropriate. In this sub-Clause 10.4.2 "Default Rate" means one per centum (1.0%) per annum or such other relevant rate not exceeding the maximum interest rate imposed by Bank Negara Malaysia from time to time. 38 -37- 10.4.3 Each Lender to whom any default interest is payable under this Agreement shall promptly notify the Borrower and the Facility Agent of each rate of interest determined in accordance with Clause 10.4.2. 10.5 Variation of Interest Rate/Commission ------------------------------------- Each of the Lenders reserve the right to vary from time to time and at its absolute discretion, the interest and/or commission payable by the Borrower to that Lender under this Agreement Provided that such right shall only be exercisable by that Lender upon the occurrence of an Event of Default or where such variation is made necessary as a result of any statutory and/or regulatory requirements imposed on the Borrower and/or the Lenders. 11. FEES ---- 11.1 Participation Fee ----------------- 11.1.1 Upon the execution of this Agreement, the Borrower shall pay to the Facility Agent for the account of the Lenders a participation fee of USD55,000.00. 11.1.2 On receipt of the participation fee, the Facility Agent shall pay to each Lender, its share of the participation fee in the amount already agreed between the Facility Agent and that Lender. 11.2 Commitment Fees --------------- 11.2.1 The Borrower shall pay to the Lending Banks a commitment fee at the rate of zero point two five per centum (0.25%) per annum on the account of the Available Ringgit Advances Commitment based on the drawdown schedule for the TL I Facility and ending on the Commitment Termination Date. Such drawdown schedules shall be agreed upon by the Facility Agent and the Borrower on or before the execution of this Agreement and shall be annexed hereto as Schedule 10. The Ringgit Advances commitment fees shall be payable from the date of this Agreement to the earlier of he Commitment Termination Date or the date on which the Available Ringgit Advances Commitment first equals zero. 11.2.2 The Borrower shall pay to the Funding Lender a commitment fee at the rate of zero point two five per centum (0.25%) per annum on the account of the Available Dollar Advances Commitment based on the drawdown schedule for the Dollar Advances Facility and ending on the Commitment Termination Date. Such drawdown schedule shall be agreed upon by the Facility Agent and the Borrower on or before the execution of this Agreement and shall be annexed hereto as Schedule 10. The Dollar Advances commitment fee shall be payable 39 -38- from the date of this Agreement to the earlier of the Commitment Termination Date or the date on which the Available Dollar Advances Commitment first equals zero. 11.2.3 The Borrower shall pay to the Funding Lender a commitment fee at the rate of zero point two five per centum (0.25%) per annum on the Available Dollar RC Commitment from day to day during the period beginning on the date of this Agreement and ending on the Commitment Termination Date. The Dollar RC commitment fee shall be payable from the date of this Agreement and on the earlier of the Commitment Termination Date and the date on which the Available RC Commitment first equals zero. 12. INDEMNITIES ----------- 12.1 Miscellaneous Indemnities ------------------------- The Borrower shall on demand indemnity the Facility Agent, the Security Agent, the Arranger and the Lenders against any funding or other cost, loss (including loss of Margin), expense or liability sustained or incurred by it as a result of: (a) any Ringgit Advance not being made by reason of non-fulfillment of any of the conditions in Clause 3.2.1 or the Borrower purporting to revoke the notice requesting a Ringgit Advance. (b) a Dollar Advance not being made by reason of non-fulfillment of any of the conditions in Clause 3.3.1 or the Borrower purporting to revoke a notice requesting a Dollar Advance. (c) a Dollar RC Drawdown not being made by reason of non-fulfillment of any of the conditions in Clause 3.4.1 or the Borrower purporting to revoke a notice requesting for a Dollar RC Drawdown. (d) the occurrence or continuance of any Event of Default or Potential Event of Default. (e) the receipt of recovery by any Lender (or the Facility Agent on its behalf) of all or any part of its Outstandings otherwise than on the last day of an Interest Period or the receipt or recovery by any Lender (or the Facility Agent on its behalf) of all or any part of an overdue sum otherwise than on the last day of an Interest Period relating to that overdue sum. 12.2 Broken Funding Costs -------------------- In the case of sub-Clause 12.1(a), (b), (c) and (e) above, the amount payable shall in any event include the amount (if any) by which: 40 -39- (a) the amount of interest which the relevant person is able to obtain by placing an amount equal to its share of the relevant Ringgit Advance, or overdue sum payable in Ringgit on deposit in the Kuala Lumpur inter-bank market or, as the case may be, the relevant Dollar Advance or the relevant Dollar RC Drawdown or respective overdue sum payable in Dollars on deposit in the inter-bank market, for the remainder of the relevant Interest Period, as soon as reasonably practicable after it becomes aware that the relevant Ringgit Advance or Dollar Advance or Dollar RC Drawdown is not being made or (as the case may be) of the relevant receipt or recovery; is less than: (b) the amount of interest which, in accordance with the expressed terms of this Agreement, would otherwise be payable to that person on the Ringgit Advance or, as the case may be, the Dollar Advance or, as the case may be, the Dollar RC Drawdown for its first Interest Period or on the relevant amount so received or recovered for the remainder of the relevant Interest Period. 12.3 Currency Indemnity ------------------ 12.3.1 Any amount received or recovered by any part to this Agreement (other than the Borrower) in respect of any sum expressed to be due to it from the Borrower under or in connection with this Agreement or any other Security Documents in a currency (such currency being referred to as the "Relevant Currency") other than the currency in which such sum is expressed to be due under this Agreement or any other Security Document (such currency being referred to as the "Currency of Account") whether as a result of, or of the enforcement of, a judgment or order of court or tribunal of any jurisdiction, in the dissolution of the Borrower or otherwise, shall only constitute a discharge to the Borrower to the extent of the amount in the Currency of Account which the recipient is able, in accordance with its usual practice, to purchase with the amount of the Relevant Currency so received or recovered on the date of that receipt or recovery (of, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). 12.3.2 If that amount in the Currency of Account is less than the amount of the Currency of Account due to the recipient under or in connection with this Agreement or any other Security Document, the Borrower shall indemnify it against any loss sustained by it as a result. In any event, the Borrower shall indemnify the recipient against the cost of making any such purchase. For the purpose of this sub-clause 12.3, it will be sufficient for the recipient to demonstrate that it would have suffered a loss had an actual exchange or purchase taken place. 41 -40- 12.4 Indemnities Separate -------------------- Each of the indemnities in this Agreement constitute a separate and independent obligation from the other obligations in this Agreement, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by the Arranger, the Facility Agent, the Security Agent and/or any Lender and shall continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under this Agreement or any other judgment or other. 13. TAXES ----- 13.1 Payments to be Free and Clear ----------------------------- All sums payable by the Borrower under this Agreement shall be paid (i) free of any restriction or conditions, (ii) free and clear of and (except to the extent required by law) without any deduction or withholding for or on account of any tax and (iii) without deduction or withholding (except to the extent required by law) on account of any other amount, whether by way of set-off or otherwise. 13.2 Grossing-up of Payments ----------------------- 13.2.1 If the Borrower or any other person (whether or not a party to, or on behalf of a party to, this Agreement) must at any time deduct or withhold any tax or other amount from any sum paid on payable by, or received or receivable from, the Borrower under this Agreement, the Borrower shall pay such additional amount as is necessary to ensure that the Facility Agent, the Security Agent or the relevant Lender, as the case may be, to which that sum is due receives on the due date and retains (free from any liability other than tax on its own overall net income) a net sum equal to what it would have received and so retained had not such deduction or withholding been required or made. 13.2.2 If the Borrower or any other person (whether or not a party to, or on behalf of a party to, this Agreement) must at any time pay any tax or other amount on, or calculated by reference to, any sum received or receivable by the Facility Agent, the Security Agent or any lender, as the case may be, under this Agreement (except for a payment by the Facility Agent, the security Agent or a Lender of tax on its own overall net income), the Borrower shall pay or procure the payment of that tax or other amount before any interest or penalty becomes payable or, if that tax or other amount is payable and paid by the Facility Agent, the Security Agent or any Lender shall reimburse it on demand for the amount paid by it. 12.2.3 Within thirty (30) Ringgit Business Days after paying any sum from which it is required by law to make any deduction or withholding, and within thirty (30) 42 -41- Ringgit Business Days after the due date of payment of any tax or other amount which it is required by Clause 13.2.2 to pay, the Borrower shall deliver to the Facility Agent evidence satisfactory to the Facility Agent, the Security Agent or the relevant Lender, as the case may be, of that deduction, withholding or payment and (where remittance is required) of the remittance thereof to the relevant taxing or other authority. 14. CHANGES IN CIRCUMSTANCES ------------------------ 14.1 Illegality ---------- 14.1.1 If at any time any Lender determines that it is or will become unlawful or contrary to any directive of any agency of any state for it to allow all or part of its Lender's Commitment to remain outstanding, to make, fund or allow to remain outstanding all or part of its Outstanding Amount and/or to carry out all or any of its other obligations under this Agreement, upon that Lender notifying the Facility Agent and the Borrower. (a) its Lender's Commitment or the relevant part thereof, shall be cancelled; and (b) the Borrower shall: (i) prepay that Lender's Outstanding Amount, or the relevant part thereof, on such date as that Lender shall certify to be necessary to comply with the relevant law or directive with all unpaid accrued interest thereon, all unpaid fees accrued to that Lender and any other sum then due to that Lender under Clause 12.1 or any other provision of this Agreement; and/or (ii) (if that Lender is a Working Capital Lender and a part of the Lender's Outstanding Amount, or a relevant part thereof, comprise its Working Capital Outstanding Amount which include any contingent liabilities of that Lender) pay to the Facility Agent for the account of that Lender an amount equal to the aggregate of the amounts of the contingent liabilities of that Lender comprised in its Working Capital Outstanding Amount (which shall be held by the Facility Agent for the account of the Working Capital Lender and applied towards the discharge of the obligations of the Borrower to the Working Capital Lender under or in connection with this Agreement and shall only be released to the Borrower as and when and to the extent that the maximum contingent liability of the Borrower to the Working Capital Lender under this Agreement is reduced) and shall pay any sum then due from the 43 -42- Borrower to the Working Capital Lender in relations to its Working Capital Facilities. 14.2 Increased Costs --------------- 14.2.1 If the Facility Agent or (as the case may be) any Lender determines that, as a result of (a) the introduction of or any change in, or in the interpretation or application of, any law (which shall for this purpose include any removal or modification or any exemption currently in force in favor of the Borrower) or (b) compliance by the Facility Agent or that Lender with any directive any agency of any state (including, without limitation, a directive which affects the manner in which that Lender allocates capital resources to its obligations under this Agreement or any Working Capital Facilities granted by it to the Borrower): (i) the cost to that Lender of maintaining all or any part of its Lender's Commitment and/or of making, maintaining or funding all or any part of its Lender's Outstanding Amount or any overdue sum is increased; and/or (ii) any sum received or receivable by the Facility Agent or (as the case may be) that Lender under this Agreement or the effective return to it under this Agreement or any Working Capital Facilities granted by it to the Borrower or the overall return on its capital is reduced (except on account of tax on its overall net income); and/or (iii) the Facility Agent or (as the case may be) that Lender makes any payment (except on account of tax on its overall net income) or forgoes any interest or other return on or calculated by reference to the amount of any sum received or receivable by it under this Agreement; the Borrower shall indemnify the Facility Agent or (as the case may be) that Lender against that increased cost, reduction, payment or forgone interest or other return (except to the extent that if results from a deduction or withholding of tax) and, accordingly, shall from time to time on demand (whenever made) pay to the Facility Agent for its own account or (as the case may be) for the account of that Lender the amount certified by it to be necessary so to indemnify it. Under this Clause 14.2.1, a Lender shall be entitled to claim interest or other return directly attributable to this Agreement, its Lender's Commitment, its Lender's Outstanding Amount or its share of any overdue sum, but also for that proportion of any cost, reduction, payment or forgone interest or other return which that Lender determines to be allocable to this Agreement, its Lender's Commitment, its Outstanding Amount or its share of any overdue sum in relation to any law or directive applicable to that Lender or affecting the conduct of that Lender's business or a type of business or the manner in which or the extent to which that Lender allocates capital resources. 44 -43- 15. PAYMENTS -------- 15.1 Ringgit Advances ---------------- 15.1.1 On each date on which a Ringgit Advance under the TL I Facility is to be made, each Lending Bank shall make its Proportion of that Ringgit Advance available to the Borrower in Ringgit, in immediately available and freely transferable funds to the account of the Borrower with such bank in Kuala Lumpur or Kuching as the Borrower shall have specified in the notice requiring that Ringgit Advance. Each of the Lending Bank shall promptly notify the Facility Agent upon making such Ringgit Advance. 15.1.2 On each date on which any sum is due from the Borrower to each Lending Bank under this Agreement in Ringgit, it shall make that sum available to that Lending Bank, by payment in Ringgit, in immediately available and freely transferable funds to the account of the Lending Bank with such bank in Kuala Lumpur or Kuching as the Lending Bank shall have designated to it for this purpose. Each Lending Bank shall promptly notify the Facility Agent upon receipt of any such sum from the Borrower. 15.2 Dollar Advances --------------- 15.2.1 On each date on which a Dollar Advance is to be made, the Funding Lender shall make that Dollar Advance available to the Borrower, and on each date on which any sum is due to the Funding Lender from the Borrower in US Dollars it shall make that sum available to the Funding Lender, by payment in US Dollars and in funds which are for same day settlement to the Account of the Borrower with BBMB, Kuala Lumpur Branch. 15.3 Dollar RC Drawdown ------------------ 15.3.1 On each date on which a Dollar RC Drawdown is to be made, the Funding Lender shall make that Dollar RC Drawdown available to the Borrower, and on each date on which any sum is due to the Funding Lender from the Borrower in US Dollars it shall make that sum available to the Funding Lender, by payment in US Dollars and in fund which are for same day settlement to the account of the Borrower with BBMB, Kuala Lumpur Branch. 15.4 Distribution to Lenders, Agents ------------------------------- 15.4.1 The Facility Agent shall make available to each Lender (other than the Funding Lender) before close of business in Kuala Lumpur on that date its pro rata share (if any) of any sum in Ringgit so received or recovered by the Facility Agent from the Borrower in the same currency and funds as received by the Facility Agent to such account of that Lender with such bank in Kuala Lumpur as it shall have designated to the Facility Agent for that purpose. If any sum is received by 45 -44- the Facility Agent from the Borrower later than 11:00 a.m. on its due date, the Facility Agent shall make each Lender's share (if any) available to it as soon as practicable thereafter. 15.4.2 The Facility Agent shall make available to the Funding Lender before close of business in Singapore on that date any sum in US Dollars so received by the Facility Agent from the Borrower in the same currency and funds as received by the Facility Agent to such account of the Funding Lender with such bank in Kuala Lumpur as it shall have designated to the Facility Agent for that purpose. If any sum is received by the Agent from the Borrower later than 11:00 a.m. (local time in Singapore), the Facility Agent shall make available to it the said sum in US Dollars as soon as practicable thereafter. 15.5 Order or Distribution --------------------- If the amount received by the Facility Agent from the Borrower for the account of the Lenders on any date is less than the total sum remaining and/or becoming due to the Lenders under this Agreement on that date, the Facility Agent shall apply that amount tin or towards payment of the following sums in the following order: (a) first, any sum then due to the Facility Agent in its capacity as such; and (b) secondly, in or towards payment pro rata of any sums then due to the Lender (or any of them). Any such applications shall override any purported appropriation by any person. 15.6 Refunding of Payments --------------------- The Facility Agent shall not be obliged to (but may) make available to any person any sum which it is expecting to receive for the account of that person until it has been able to establish that it has received that sum. Howsoever, it may do so if it wishes. If and to the extent that it does so but it transpires that it has not then received the sum which it paid out: (a) the person to whom the Facility Agent made that sum available shall on request refund it to the Facility Agent; and (b) that person or (at the option of the Facility Agent) the person by whom that such should have been made available shall on request pay to the Facility Agent the amount (as certified by the Facility Agent) which will indemnify the Facility agent against any funding or other cost, loss expense or liability sustained or incurred by it as a result of paying out that sum before receiving it but without prejudice to the rights of any party hereto against such defaulting party. 46 -45- 15.7 Non-Business Days ----------------- 15.7.1 If any Interest Payment Date or any other repayment date, (each such date hereinafter referred to as a "Relevant Date") would otherwise fall on a day which is not a Ringgit Business Day or, as the case may, a Dollar Business Day, it shall instead fall on the next Ringgit business Day or, as the case may be, Dollar Business Day in the same calendar month (if there is one) or the preceding Ringgit Business Day, or as the case may be, Dollar Business Day (if there is not). 15.7.2 Any payment to be made by the Borrower on a day which is not a Relevant Date and which would otherwise be due on a day which is not a Ringgit Business Day or, as the case may be, a Dollar Business Day shall instead be due on the next Ringgit Business Day or, as the case may be, Dollar Business Day. 16. SECURITY -------- 16.1 For the consideration aforesaid and for better securing the repayment by the Borrower of the moneys due and payable or hereafter due and payable under the Facilities respective interest thereon and all other moneys hereby agreed to be paid under this Agreement and the other Security Documents the Borrower hereby agrees that the Facilities shall be secured against the Security Documents. 16.2 The Borrower hereby warrants, represents and declares that there is not mortgage charge pledge or lien or any encumbrance over the assets secured under the Security Documents or any part thereof and: (a) The Borrower shall not have power to create any subsequent assignment mortgage charge pledge lien or encumbrance in respect of the assets secured under the Security Documents or any part thereof without the prior written consent of the Security Agent and the Lenders, such consent shall not be unreasonably withheld by the Security Agent and the Lenders; (b) This Agreement shall be without prejudice to any security already given by the Borrower to the Security Agent and the Lenders whether the same be for securing repayment of the principal sums and interest hereby secured or any part hereof or any other moneys and whether such security is taken as additional or collateral security or otherwise howsoever. 16.3 The Borrower shall at the request of the Lenders and at the cost and expense of the Borrower charge or deposit with the Security Agent all documents of title of any or all immovable and movable properties vested in the Borrower for any tenure save for future assets and properties of the Borrower which are excluded in accordance with the provisions in the Debenture. Such charge or deposit shall be 47 -46- by way of security for the repayment of the principal sum of the Facilities respective interest thereon and all other monies covenanted to be paid herein and in the Security Documents. 16.4 The security created by the Security Documents is and shall be a continuing security for all moneys whatsoever now or hereafter from time to time owing to the Facility Agent, Security Agent and the Lenders by the Borrower whether alone or jointly and severally with another or others and whether as principal or surety notwithstanding that the Borrower may at any time or times cease to be indebted to any of them for any period or periods and notwithstanding any settlement of account or accounts or otherwise. 17. EVENTS OF DEFAULT ----------------- 17.1 Upon the occurrences of any of the following events: 17.1.1 the Borrower fails to pay any sum payable by it under any of the Security Documents within ten (10) days after the same has become due; or 17.1.2 the Borrower commits any breach of any other provision of the Security Documents, and such breach (if capable of remedy) is not remedied within thirty (30) days of notification of such breach by the Facility Agent; or 17.1.3 any representation or warranty made or deemed to be made or repeated by the Borrower in or pursuant to the Security Documents is or proves to have been untrue or incorrect in any material and adverse respect when made or when deemed to be repeated with reference to the facts and circumstances existing at such time; or 17.1.4 an encumbrancer takes possession over the undertaking assets rights or revenues of the Borrower or a distress or other process is lifted or enforced upon any such assets rights or revenues and any such action is not lifted or discharged within fourteen (14) days or in the opinion of the Facility Agent (acting on the instructions of an Instructing Group) is not bona fide challenged by the Borrower in the appropriate court within seven (7) days of such possession or distress or enforcement; or 17.1.5 a petition is presented or an order is made or a resolution is passed for the winding up or dissolution of the Borrower or Corporate Guarantor; or 48 -47- 17.1.6 any of the Security Documents is or becomes or is alleged to be unlawful or unenforceable in any material and adverse respect; or 17.1.7 any requisite Consent for the borrowing of the Facilities is withdrawn or revoked or expires or is modified or made subject to any condition which may have a materials adverse effect on the Borrower; or 17.1.8 any other event or series of events or any circumstances whether related or not (including but without limitation any adverse change in the assets or financial condition of the Borrower and/or Corporate Guarantor) occurs or arises which, in the opinion of the Facility Agent (acting on the instructions of the Instructing Group, may/would (be likely to) have a material adverse effect on the Borrower or its ability or willingness to perform or comply with any of its obligations under the Security Documents; or 17.1.9 the transfer of the Land in favor of the Borrower is not executed within seven (7) days from the date of written request by the Security Agent or is not registered for any reason whatsoever resulting in the non-registration of the Charge; or 17.1.10 the Borrower fails and/or neglects to execute the transfer of the Land as transferers; or 17.1.11 the Borrower breaches any term or condition of the Land Letter of Offer and Acceptance; or 17.1.12 the Borrower fails to obtain the necessary Consent for the transfer of the land to the Borrower and/or the Charge; or 17.1.13 the Land Letter of Offer and Acceptance is revoked for any reason whatsoever; or 17.1.14 the Corporate Guarantor ceases to be the major shareholder of the Borrower; or 17.1.15 the Corporate Guarantor and/or the Borrower ceases or threatens to cease to carry on its business; or 17.1.16 any other indebtedness of the Borrower in respect of borrowed money is or is declared to be or is capable of being rendered due and payable before its normal maturity by reason of actual or potential default and in the reasonable opinion of the Facility Agent (acting on the instructions of the Instructing Group) may/would (be likely to) have a adverse effect on the Borrower or 49 -48- its ability or willingness to perform or comply with any of its obligations under any of the Security Documents; or then and in any such event and at any time thereafter if such event is continuing the Facility Agent may by notice to the Borrower declare that the Facilities shall be cancelled and the Lender's Outstanding Amounts have become immediately due and repayable, whereupon the Borrower shall forthwith repay the same together with all interest accrued and all other sums payable under the Security Documents. A demand for repayment of the Lenders Outstanding Amounts may be made by notice in writing from the Facility Agent to the Borrower demanding payment of the same within seven (7) Ringgit Business Days or, as the case may be, seven (7) Dollar Business Days or, as the case may be, seven (7) Dollar Business Days, from the date of such notice. 18. REPRESENTATIONS AND WARRANTIES ------------------------------ 18.1 Representation and Warranties ----------------------------- The Borrower represents and warrants to the Beneficiaries as at the date hereof and shall be deemed to represent at each date of drawdown, as follows: 18.1.1 the execution of the Security Documents is a valid and legally binding obligation on the Borrower enforceable in accordance with the terms therein; 18.1.2 the execution of the Corporate Guarantee by the Corporate Guarantor is valid and legally binding obligation on the Corporate Guarantor enforceable in accordance with the terms therein; 18.1.3 the execution delivery and performance of the Security Documents and the use of the Facilities do not and will not: (a) contravene any law regulation directive judgment or order to which the Borrower and/or the Corporate Guarantor is subject; or; (b) result in any actual or potential breach of or default under any obligation agreement instrument or Consent to which the Borrower and/or the Corporate Guarantor is a party or by which it is bound; 18.1.4 no litigation arbitration or administrative or winding up proceeding and without limitation no dispute with any statutory or governmental authority is pending or to the Borrower's knowledge 50 -49- threatened against it or any of its assets which might/would be likely to have a material adverse effect on the Borrower (having regard to all its other obligations); 18.1.5 no Event of Default or Potential Event of Default has occurred and is continuing; 18.1.6 the Borrower is not in default in the payment of any due and payable taxes or in the filing registration or recording of any document or under any legal or statutory obligation or requirement which default might/would be likely to have a material adverse effect on the Borrower; 18.1.7 the Borrower will not nor would it, with the giving of notice or lapse of time or any certificate or the making of any determination or any combination thereof be in breach of or in default under any agreement relating to any indebtedness to which it is a party or by which it is bound which might/would have a material adverse effect on the Borrower (having regard to all its other obligations); 18.1.8 all Consents necessary or appropriate for the execution, delivery and performance of the Security Documents and the grant of and use of the Facilities have been obtained and complied with and the same are in full force and effect; 18.1.9 all factual information supplied by the Borrower to the Facility Agent in contemplation or for the purpose of this Agreement, was true and accurate in all material respects as at its date and not misleading; and such information did not omit anything, nor since the date of such information has anything occurred, which renders that information untrue or misleading in any material respect or which, if disclosed, might/would (be likely to) adversely affect the reasonable decision of a person considering whether to enter into this Agreement; and all projections and statements of belief and opinion given by the Borrower to the Facility Agent were made honestly and in good faith after due and careful inquiry and remain valid; 18.1.10 Section 62 of BAFIA would not be contravened upon the granting of the Facilities by the Lenders; 18.1.11 The Land Letter of Offer and Acceptance has been duly accepted by the Borrower; 51 -50- 18.1.12 The Land Letter of Offer and Acceptance is still valid and binding on the Borrower. 19. COVENANTS --------- 19.1 Particular Covenants -------------------- The Borrower hereby expressly covenants with the Beneficiaries that at all times during the continuance of this Agreement and so long as any principal sums under the Facilities so utilised and interest and any monies payable under this Agreement or other Security Documents shall remain unpaid: 19.1.1 it will ensure that its obligations under this Agreement and the other Security Documents shall at all times rank ahead of all its other present and future liabilities to any other third party or parties (with the exception of any obligations which are mandatorily preferred by law and not by contract); 19.1.2 it will obtain, maintain in full force and effect and comply with all Consents and any conditions thereof necessary (or appropriate) for the execution delivery and performance of this Agreement and the other Security Documents and the use of the Facilities; 19.1.3 it will promptly inform the Facility Agent, forthwith upon becoming aware of the same, of any occurrence or circumstance of which it becomes aware which might/would be likely to adversely affect its ability to perform its obligations under the Security Documents and of any Event of Default or Potential Event of Default; 19.1.4 it will punctually pay all interests payable on its relevant Interest Payment Dates and any other sums owing under any of the Security Documents; 19.1.5 it will furnish to the Facility Agent all information as the Facility Agent shall reasonably request concerning the use of the Facilities and on any factors partially affecting the financial condition of the Borrower; 19.1.6 it will promptly inform and keep the Facility Agent informed of any legal proceedings litigation claims of a 52 -51- material nature involving the Borrower which would have a material adverse effect on its assets or financial condition or its ability to observe or perform its obligations under the Security Documents; 19.1.7 it will observe and perform all terms and conditions of the Land Letter or Offer and Acceptance and will make all necessary payments pursuant to the said letter; 19.1.8 it will execute all documents, undertake all acts necessary to effect a transfer of the land in favor of the Borrower and the Charge; 19.1.9 it will procure the delivery of the relevant issue document of title to the Land when issued, the said transfer and all other necessary documents to effect the transfer of the Land in favor of the Borrower to the Security Agent or its solicitors; 19.1.10 it will inform the Security Agent as regards the progress in the issuance of the separate document of title to the Land and inform the Security Agent in respect of all matters relating to the Land; 19.1.11 it will ensure that there is no material change in the nature of its business; 19.1.12 it will not make any repayments in respect of the Shareholders Loan; 19.1.13 it will convert the Shareholders Loan to paid-up capital on acquisition of the new plant and machinery; 19.1.14 it will maintain its debt : equity ratio to at least 3 : 1. For the purpose of this paragraph, equity shall include loans from its shareholders; 19.1.15 it will procure its shareholders to meet any cost overrun and at the request of the Facility Agent procure documentary evidence in this respect; 19.1.16 it will pay or procured to be paid punctually, in accordance with all proper demands for payment, all sums due or to become due under the construction contract in respect of the factory on the Land and all other costs relating thereto, 53 -52- duly comply with all its obligations and take all reasonable steps to assume that other parties comply with their respective obligations under the said contract; 19.1.17 it will at all times comply with all applicable laws or directives and any conditions of any consent relating to the construction of the factory on the Land and maintain in full force and effect such consents and if required, apply for all consent; 19.1.18 it will supply a copy of the said construction contract to the Security Agent; 19.1.19 it will allow the Security Agent and its agents and employees (subject to prior appointment) access from time to time to the Land and for the purpose of carrying out an inspection and review thereof, cause its agents or employees to give their full co-operation on any such inspection and all and any reasonable expenses incurred by the Security Agent in connection with such inspection shall be borne by the Borrower (save and except for expenses incurred in respect of post sanction visits which will be borne by the respective Lenders); 19.1.20 it will maintain in full force and effect all Consents; 19.1.21 it will promptly inform the Security Agent on receipt of any notice from the relevant land authority; and 19.1.22 it will at all times comply with all terms and conditions of the manufacturing license issued in connection with the Borrower's manufacturing activities. 19.2 Restrictive Covenants --------------------- The Borrower hereby covenants with the Beneficiaries that during the continuance of this Agreement it will not without the consent of the Facility Agent (acting on the instructions of the Instructing Group) in writing first had and obtained, such consent shall not be unreasonably withheld: 19.2.1 create or permit to subsist any encumbrance over all or any of its present or future revenues or assets, charged under any of the Security Documents, such consent not to be unreasonably withheld by the Facility Agent; 54 -53- 19.2.2 make any loans or grant any credit or give any guarantee or indemnity to or for the benefit or any person or otherwise voluntarily assume any liability, whether actual or contingent, in respect of any obligation or any other person, otherwise than in the ordinary courses of its business and/or in accordance with schemes approved by the Borrower for its employees; 19.2.3 (disregarding disposals in the ordinary course of business) sell, lease, transfer or otherwise dispose of, by one or more transactions or series of transactions (whether related or not), the whole or any part of its revenues or its assets unless such sale is in respect of non material items disposed of on an arms length basis; 19.2.4 declare any dividends or any other distribution of profits (whether in cash, specie or otherwise) within the first three (3) years from the date of this Agreement. Thereafter the Borrower without prior permission shall be entitled to declare dividends PROVIDED that such payment of dividends shall not exceed 15% of the Borrower's retained earnings in any one financial year; 19.2.5 vary, cancel rescind or otherwise terminate or agree to any variation cancellation, rescission or accept any repudiation of the said construction contract; 19.2.6 sell, lease, transfer or otherwise dispose of the Land; 19.2.7 change its corporate structure either by merger, amalgamation, reorganization or reconstruction; 19.2.8 amend its Memorandum and Articles of Association; 19.2.9 enter into any transaction with any person other than in the ordinary course of business on ordinary commercial terms and at arm's length; 19.2.10 made any prepayment or repayment in respect of any debt (except any debts incurred by way of normal trade transactions) or loan advanced to the Borrower by the shareholders third parties or related companies as defined under Section 6 of the Companies Act, 1965 (except the Comerica Bank loan of approximately United States 55 -54- Dollars Ten Million (USD10,000,000.00) provided that in _____ month, the Borrower shall repay all monies to the Lenders first before any repayment of the loan or any part thereof; 19.2.11 save as provided by any provisions herein decrease or in any way whatsoever alter the authorized or issued Capital of the Borrower whether by varying the amount structure or value thereof or the rights attaching thereto or convert any of the its share capital into stock or by consolidating, dividing, or sub-dividing all or any of its shares; 19.2.12 make advances or guarantee to others or make investments in other companies or enterprises (other than normal trade credit or temporary loans to customers, contractors or suppliers in the ordinary course of business); 19.2.13 reduce its share capital; 19.2.14 enter or threaten to enter into any partnership, profit sharing or royalty agreement or other similar arrangement whereby the Borrower's income or profits are, or might be shared with any other person, firm, company, or enter into any management contract or similar arrangement whereby the Borrower's business or operations are managed by any other person, firm or company save and except in the ordinary course of the Borrower's business; 19.2.15 make or permit loans or make advances to any shareholder or director of the Borrower or to any related or associate company of the Borrower or to any shareholder or director thereof or guarantee any person, enterprise, or company (other than normal trade credits or trade guarantees or temporary loans to staff, customers or suppliers in the ordinary course of business); 19.2.16 alter the category of land use of the Land; 19.2.17 allow or permit any change in the Corporate Guarantor's shareholding in the Borrower to less than 75%. 19.3 Government Acquisition ---------------------- 19.3.1 In the event that the Land or any part thereof shall at any time become the subject matter of or be included in any notice notification or declaration 56 -55- concerning or relating to acquisition by government or governmental authority or any inquiry or proceedings in respect thereof if any government or governmental authority shall condemn, nationalize, seize or otherwise expropriate all or any part of the property or other assets of the Borrower charged hereunder or under any of the other Security Documents or shall have assumed custody or control of such property or other assets the Borrower shall forthwith inform the Facility Agent of the same and shall forward to the Facility Agent a copy or copies of any such notice, notification or declaration as soon as the same shall be delivered to or served on the Borrower and shall not be more than three (3) days of receiving such notification or declaration. 19.3.2 The Facility agent shall be entitled to engage advisers and agents (including solicitors and valuers) as it may think fit for the purpose of appearing or attending at or advising upon any inquiry or proceedings affecting concerning or relating to any such acquisition, expropriation or any of the matters referred to in Clause 19.3.1 hereof at the reasonable expense of the Borrower. 19.3.3 All monies received as or by way of compensation in respect of any of the matters referred to in Clause 19.3.1 hereof shall be applied in or towards discharge or repayment of any money or liability secured by the Security Documents and the Borrower shall, and hereby declares that it will hold all such monies so received in trust for the Facility Agent and the Borrower agrees and confirms that the Facility Agent may receive and give a good discharge for all such monies. 20. INSURANCE --------- 20.1 The Borrower shall so long as any monies under any of the Security Documents remain unpaid: 20.1.1 at all times prior to the completion of the construction of the factory on the Land effect and maintain with insurers or underwriters acceptable by the Lenders in writing from time to time insurances against such risks and liabilities customary for businesses similar to its business as the Lenders may from time to time require and in amounts and on terms satisfactory to the Lenders, including but not limited to Contractor's all risks insurance and material supplies insurance; 57 -56- 20.1.2 at all times after the completion of the said factory effect and maintain with insurers or underwriters acceptable by the Lenders in writing from time to time insurances against such risks and business as the Lenders may from time to time require and in amounts and on terms satisfactory to the Lenders, including but not limited to insurances over the buildings on the Land against loss and damage by fire, explosion, aircraft and other serial devices and articles dropped therefrom, storm, tempest, flooding, burst pipes and tanks, subsidence, malicious damage and such other risks as the Lenders may from time to time require to the full reinstatement value of the buildings on the Land (which shall not be less than any amount in that behalf which the Lenders may from time to time notify to it) together with additional amounts estimated as sufficient to cover architects' surveyors' and other professional fees and the costs of demolition and debris removal and will give such information to the Lenders regarding such insurances as the Lenders may from time to time require; 20.1.3 punctually pay or procure to be paid all premium and deliver or procure to be delivered receipts therefor to the Security Agent; and 20.1.4 not make, do, consent, or agree to any act or omission which would or might enable cancellation of any of the insurances or render any of the insurances invalid, void, voidable or unenforceable. 20.2 Each of such insurances shall: 20.2.1 be taken out in the joint names of the Borrower and the Security Agent for and on behalf of the Lenders or be noted, by indorsement on such insurances (in such form as may be acceptable to the Lenders), with the interest of the Beneficiaries; 20.2.2 contain a non-cancellation clause, a mortgage interest clause and a loss payee or beneficiary clause in favor of the Security Agent for and on behalf of the Lenders; 58 -57- 20.2.3 acknowledge that the Borrower is the sole party liable to pay the premium in respect thereof; 20.2.4 provide for the insurers or underwriters to pay to the Security Agent at least thirty (30) days' prior notice of cancellation by reason of non-payment of calls, premiums or otherwise and allow the security Agent or the Lenders an opportunity of paying such calls or premiums which may be in default; 20.2.5 provide that they may not be altered or amended without the prior consent in writing of the Security Agent; 20.2.6 acknowledge that all proceeds shall, irrespective of any other provisions therein contained, be paid to the Security Agent without deduction, set-off or counterclaim in respect of any outstanding premiums or calls on it. The Security Agent (acting on the instructions of the Instructing Group) may require any money received on any insurance be applied in or towards making good the loss or damage in respect of which money is received or receivable or in or towards discharge of any principal sum, interest, default interest or any other monies payable hereunder or under any of the other Security Documents and the Security Agent may give a good discharge for any such monies and any balance remaining after discharging all monies payable hereunder or under the other Security Documents, shall be refunded to the Borrower; and 20.2.7 be in all other respects in form and substance acceptable to the Security Agent. Each of such insurances shall also contain a loss payee and notice of cancellation clause, a notice of assignment signed in accordance with the relevant policy rules and such other terms and conditions as the Lenders may require, all such provisions to be in form and substance acceptable to the Lenders. 59 -58- 21. AGENCY PROVISIONS ----------------- 21.1 Each of the Arrangers and the Lenders hereby appoint each of the Facility Agent and the Security Agent to act as its agent in connection with the Security Documents and authorizes each Agent to exercise such rights, powers and discretions as are specifically delegated to such Agent by the terms hereof and of any other Security Document together with such other rights, powers and discretions as are reasonably incidental thereto. 21.2 The Beneficiaries agree that each Agent may: 21.2.1 assume that: (a) any representation made by any person in connection with any Security Document is true; (b) no event which is an Event of Default or Potential Event of Default has occurred; and (c) no person is in breach of or default of its obligations under any Security Document unless it has actual knowledge or actual notice to the contrary; 21.2.2 assume that the Facility Office of each Lender is that identified in the Schedule (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from such Lender a notice designating some other office of such Lender to replace its Facility Office and act upon any such notice until the same is superseded by a further such notice; 21.2.3 engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained; 21.2.4 rely as to any matters of fact which might reasonably be expected to be within the knowledge of any person upon a certificate signed by or on behalf of any person; 60 -59- 21.2.5 rely upon any communication or document believed by it to be genuine; 21.2.6 refrain from exercising any right, power or discretion vested in it as agent under Security Document unless and until instructed by the Instructing Group as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised; and 21.2.6 refrain from acting in accordance with any instructions of an Instructing Group to begin any legal action or proceeding arising out of or in connection with any Security Document until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, expenses (including legal fees) and liabilities which it will or may expend or incur in complying with such instructions. 21.3 The Facility Agent shall: 21.3.1 promptly inform each Lender of the contents of any notice or document received by it from the Borrower or the Security Agent hereunder; 21.3.2 promptly notify each Lender of the occurrence of any Event of Default or any default by the Borrower in the due performance of or compliance with its obligations under this Agreement of which the Facility Agent has actual knowledge or actual notice; 21.3.3 save as otherwise provided herein, act in accordance with any instructions given to it by the Instructing Group, which instructions shall be binding on the Arranger and the Lenders; and 21.3.4 if so instructed by the Instructing Group, refrain from exercising any right, power or discretion vested in it as agent hereunder. 61 -60- 21.4 Not withstanding anything to the contrary expressed or implied herein, none of the Agents or Arranger shall: 21.4.1 be bound to enquire as to: (a) whether or not any representation made by any person in connection herewith or with the Security Documents is true; (b) the occurrence or otherwise of any event which is or may become an Event of Default; (c) the performance by any person of its obligations under any Security Documents; or (d) any breach of or default by any person of or under its obligations under any Security Document; 21.4.2 be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account; 21.4.3 be bound to disclose to any other person any information relating to the Borrower if such disclosure would or might in its opinion constitute a breach of any law or regulation or be otherwise actionable at the suit of any person; or 21.4.4 be under any obligations other than those for which express provision is made herein. 21.5 Each Lender shall from time to time on demand by an Agent, indemnify such Agent, in the proportion its share of its Lender's Outstanding Amounts (or, if no drawdown has been made, its Lender's Commitment) bears to the amount of the Lenders Outstanding Amounts (or, if no drawdown has been made, the aggregate amount of the Commitments) at the time of such demand (or, if the Lender's Outstanding Amounts has then been repaid in full, immediately prior to the final repayment thereof), against any and all costs, claims, expenses (including legal fees) 62 -61- and liabilities which such Agent may incur, otherwise than by reason of its own gross negligence or willful misconduct, in acting in its capacity as agent hereunder or under any Security Document. 21.6 None of the Agents or the Arranger accepts any responsibility for the accuracy and/or completeness of any information supplied by the Borrower in connection herewith or for the legality, validity, effectiveness, adequacy or enforceability of any Security Document and none of the Agents or the Arranger shall be under any liability as a result of taking or omitting to take any action in relation to this Agreement or any other Security Documents save in the case of gross negligence or willful misconduct. 21.7 Each of the Lenders agrees that it will not assert or seek to assert against any director, officer or employee of any Agent or the arranger any claim it might have against any of them in respect of the matters referred to in Clause 21.6. 21.8 The Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty (30) days' prior written notice to that effect to each of the other parties hereto Provided that no such resignation shall be effective until a successor for such Agent is appointed in accordance with the succeeding provisions of this Clause 21. 21.9 Any Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty (30) days' prior written notice to that effect to each of the other parties hereto Provided that no such resignation shall be effective until a successor for such Agent is appointed in accordance with the succeeding provisions of this Clause 21. 21.10 If an Agent gives notice of its resignation pursuant to Clause 21.9, then any reputable and experienced bank or other financial institution may be appointed as a successor to such Agent by the Instructing Group (or failing such appointment during the period of such notice, by the Agent itself) with the consent of the Borrower which consent shall not be unreasonably withheld or delayed. 21.11 If a successor to such Agent is appointed under the provisions of Clause 21.10 then (i) the retiring Agent shall be discharged from any further obligation hereunder but shall remain entitled to the benefit of the provisions of this Clause 21 and (ii) its successor and each of the other Parties hereto shall have the same rights and 63 -62- obligations amongst themselves as they would have had if such successor had been a party hereto. 21.12 It is understood and agreed by each Lender that it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigations into the financial condition creditworthiness, condition affairs, status and nature of the Borrower and, accordingly, each Lender warrants to the Agents and the Arranger or any of them; 21.12.1 to check or enquire on its behalf into the adequacy, accuracy or completeness of any information provided by any person in connection with any Security Document or the transactions herein contemplated (whether circulated to such Lender by any Agent or Arranger); or 21.12.2 to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Borrower. 21.13 The Facility Agent may at any time without the consent of the Lenders or the Instructing Group, but only if and in so far as such matters are purely technical or mechanical and which will not have a material commercial effect on the transaction or relate to the correction of a manifest error, grant any consent under this Agreement or waive on such terms and subject to such conditions as it shall think fit and proper any requirement of this Agreement or any breach by the Borrower of any of the covenants or other provisions of this Agreement and in all such circumstances the Facility Agent will not be deemed to be acting unreasonably or with undue delay if it seeks the instructions of the Instructing Group before taking any such action. Any such consent, waiver or agreement shall be binding on the Lenders. 22. ASSIGNMENT AND TRANSFERS ------------------------ 22.1 Benefit of Agreement -------------------- This Agreement shall be binding upon and ensure to the benefit of each Party hereto and its successors and assigns. 64 -63- 22.2 Assignments and Transfers by the Borrower ----------------------------------------- The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits and obligations hereunder. 22.3 Assignments and Transfers by Lenders ------------------------------------ 22.3.1 Any Lender may at any time assign all or any of its rights and benefits hereunder and under the Security Documents or transfer in accordance with Clause 22.4 all or any of its rights, benefits and obligations hereunder and under the Security Documents to a company which is its subsidiary or holding company or to any other financial institution without any consent. 22.3.2 If any Lender assigns all or any of its rights and benefits hereunder in accordance with Clause 22.3.1, then, unless and until the assignee has agreed with the Beneficiaries that it shall be under the same obligations towards each of them as it would have been under if it had been an original party hereto as a Lender, the Beneficiaries shall not be obliged to recognize such assignee as having the rights against each of them which it would have had if it had been such a party hereto. 22.4 If any Lender wishes to transfer all or any of its rights, benefits and/or obligations hereunder as contemplated in Clause 22.3.1, then such transfer may be effected by the delivery to the Facility Agent of a duly completed and duly executed Transfer Certificate in which event, on this later of the Transfer Date specified in such Transfer Certificate and the fifth (5th) Ringgit Business Day after (or such earlier Ringgit Business Day endorsed by the Facility Agent on such "Transfer Certificate failing on or after) the date of delivery of such Transfer Certificate to the Facility Agent: 22.4.1 to the extent that in such Transfer Certificate the Lender party thereto seeks to transfer its rights and obligations hereunder, the Borrower and such Lender shall each be released from further obligations to the other hereunder and their respective rights against each other shall be cancelled (such rights and obligations being referred to in this Clause 22.4 as "discharged rights and obligations); 22.4.2 the Borrower and the Transferee party thereto shall each assume obligations towards each other and/or acquire rights against each other which differ from such discharged rights and obligations only insofar as the Borrower and such Transferee have assumed and/or acquired the same in place of the Borrower and such Lender; and 22.4.3 The facility Agent, the Arranger, such Transferee and the other Lenders shall acquire the same rights and assume the same 65 -64- obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto as a Lender with the rights and/or obligations acquired or assumed by it as a result of such transfer 22.5 Any Beneficiary may at any time change its Facility Office by giving written notice of such change to the Agents and the Borrower. 23. MISCELLANEOUS ------------- 23.1 Modification and Indulgence --------------------------- The Beneficiaries may in their absolute discretion at any time and without in any way affecting any of their powers, rights or remedies conferred herein or in any of the other Security Documents or affecting the security thereunder: 23.1.1 determine, vary or increase any of the approved sub-limits, exceed or allow the Borrower to exceed such sub-limit and may open and/or continue any account or accounts for the Borrower and the Borrower hereby expressly consents to any such reduction, determination, variation and/or increase as may be effected or determined by the Beneficiaries; 23.1.2 vary or depart from the terms and conditions in the Security Documents governing the Facilities or any of them (however substantial) but such variation or departure shall not increase the Borrower's obligations under the Security Documents without the Borrower's written consent; 23.1.3 grant to the Borrower, or any surety or guarantor any time or indulgence; 23.1.4 renew any bills, notes or other negotiable securities; 23.1.5 deal with, exchange, release or modify or abstain from perfecting or enforcing any securities or guarantees or rights they may now or at any time hereafter or from time to time have (including any under the Security Documents) from or against the Borrower or any other person; or 23.2 Waiver ------ No waiver by the Beneficiaries or any of them of the Borrower's compliance with any of the provisions in any of the Security Documents or of any of the conditions precedent to utilisation or to drawdown shall affect the Borrower's 66 -65- obligation to subsequently comply with all provisions of such Security Doicuments ot to comply with all he conditions precedent for any subsequent utilisation or drawdown. No failure or delay on the part of the Beneficiaries or any of them in exercising nor any omission to exercise any right, power, privilege or remedy accruing to them under the Security Documents upon any default on the part of the Borrower shall impair any such right, power, privilege or remedy or be construed as a waiver thereof or an acquiescence in such default, affect or impair any of their right, power, privilege or remedy in respect of any other or subsequent default. 24. Costs and Expenses ------------------ 24.1 The Borrower shall, from time to time on demand of the Facility Agent, reimburse the agents and the Arranger for all reasonable costs and expenses (including legal fees) incurred by them in connection with the negotiation, preparation and execution of this Agreement and the completion of the transaction herein contemplated. 24.2 The Borrower shall, from time to time on demand of the Facility Agent, reimburse the for all costs and expenses (including legal fees) reasonably incurred by any of them in or in connection with the preservation and/or enforcement of any of the rights of the Beneficiaries under this Agreement and each of the Security Documents. 24.3 The Borrower shall pay all stamp, registration and other documentary duties to which this Agreement or any Security Document or any judgment given in connection herewith or therewith is or at any time may be subject in Malaysia an shall, from time to time within ten (10) days of demand by the Facility Agent, indemnify each Beneficiary against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax. 25. Liens and other Securities not Affected --------------------------------------- Nothing herein contained shall prejudice or affect any lien to which the Beneficiaries are entitled or any other securities which the Beneficiaries may at any time or from time to time hold for or on account of the monies advanced hereunder nor shall anything herein contained operate so as to merge or otherwise prejudice or affect any bill, note or guarantee, mortgage or other security which the Beneficiaries may for the time being have for any money intended to be hereby or otherwise secured or any right or remedy of the Beneficiaries thereunder. 67 -66- 26. Calculations and Evidence of Debt --------------------------------- 26.1 The Facility Agent shall maintain on its books a control account or accounts in which shall be recorded (i) the amount of the drawdown made or arising hereunder and each Lender's share therein, (ii) the amount of all principal, interest and other sums due or to become due from the borrower to any of the Lenders hereunder and each Lender's share therein and (iii) the amount of any sum received or recovered by the Facility Agent hereunder and each Lender's share therein. 26.2 In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained pursuant to Clause 26.1 shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded. 27. Disclosure ---------- The Borrower hereby expressly authorizes the Agents, the Arranger and the Lenders to furnish all relevant information pertaining to the Facilities to the Central Credit Bureau of BNM whenever requested to do so in writing from time to time pursuant to any applicable regulation or directive (whether having the force of law or otherwise), to the BBMB Group or to any potential Transferees and they shall not be liable for furnishing such information. 28. Governing Law ------------- The Security Documents shall be governed by and construed in all respects in accordance with the laws of Malaysia and the Parties hereby submit to the jurisdiction of the Courts of Malaysia in all matters connected with the obligations and liabilities of the parties under the Security Documents. 29. Notices ------- 29.1 Each communication to be made hereunder shall be made in writing but, unless otherwise stated, may be made by telex, facsimile or letter. 29.2 Any communication or document to be made or delivered by one person to another pursuant to this Agreement shall (unless that other person has by fifteen (15) days' written notice to the Facility agent specified another address) be made 68 -67- or delivered to that other person at the address identified herein or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee. 29.3 Any communication or document made or delivered under Clause 29.1 hereof shall be deemed to have been made or delivered: 29.3.1 in the case of delivery in person, at the time of delivery; 29.3.2 in the case of prepaid registered post, five (5) days after the date of posting or where posted to an address outside Malaysia, seven (7) days after the date of posting; 29.3.3 in the case of telex on receipt by the sender of the answer-back code of the recipient at the end of the transmission; and 29.3.4 in the case of telegram or facsimile, within twenty-four (24) hours after the time of transmission by the sender to be authenticated by the receipt by the sender of a transmission controlled report appearing on its face to emanate from the sender's machine showing the relevant number of pages, the correct facsimile number of the recipient and the result of the transmission being described as "O.K." or any equivalent description indicating that the communication has been properly transmitted. The original of the notice demand or request so sent by facsimile shall be forwarded to the receiving party by prepaid registered post. Provided That any communication or document to be made or delivered to the Facility Agent shall be effective only when received by the Facility Agent. 30. Agreement to Prevail -------------------- In the event of any conflict between the provisions of this Agreement and any of the other Security Documents, the provisions of this Agreement shall prevail. 31. Severability ------------ Any condition, term, stipulation, covenant or undertaking of this Agreement which is illegal, prohibited or unenforceable shall be ineffective to the extent of such illegality, voidness, prohibition or unenforceability without invalidating or impairing the remaining provisions hereof. 69 -68- 32. Concurrent Actions ------------------ In the event of the Borrower defaulting in payment of any sums due or payable hereunder whether or not a demand is required or has been made or in the event of the Borrower failing to observe or perform any of the provisions of this Agreement it shall be lawful for the Security Agent forthwith to institute such lawful for the Security Agent forthwith to institute such proceedings and take such steps as it may think fit to enforce or exercise of all or any of the rights and remedies available whether under all or some of the Security Documents or by statute or otherwise and the Security Agent shall be entitled to exercise such rights and remedies concurrently. 33. Time of the Essence ------------------- Time wherever mentioned herein, shall be of the essence of this Agreement. 34. Choice of Legal Remedy ---------------------- The Beneficiaries shall be entitled to recover from the Borrower all sums payable by the Borrower under the Facilities without first availing itself of its legal remedies under this Agreement or the other Security Documents or against any other security which the Beneficiaries may now or at any time hereafter or from time to time have from or again person. 35. Principal & Subsidiary Instruments ---------------------------------- It is hereby declared and agreed: 35.1 this Agreement; 35.2 the Debenture; 35.3 the Assignment; 35.4 the Charge; 35.5 the Corporate Guarantee; and 35.6 the Security Agency Agreement; 70 -69- are instruments employed in one transaction within the meaning of Section 4(3) of the Stamp Act, 1949 (Consolidated and Revised 1989) to secure one aggregate principal sum comprising: (i) TL I Facility of up to RM29,200,000.00; (ii) Dollar Advances Facility of up to USD4,000,000.00; (iii) Dollar RC Facility of up to USD2,00,000.00; (iv) Working Capital Facilities of up to RM5,900,000.00; and respective interest thereon and for the purpose of the said Section this Agreement is deemed to be the Principal Instrument and the other documents the Subsidiary Instruments. 71 -70- IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seal the day and year first above written. The Common Seal of ZYCON CORPORATION SDN. BHD. was hereunto affixed in the presence of : - ---------------------------------- ------------------------------------- Director *Director/Secretary SIGNED by for and on behalf of BANK BUMPUTRA MALAYSIA BERHAD as Arranger in the presence of: SIGNED by for and on behalf of BANK BUMPUTRA MALAYSIA BERHAD as Working Capital Lender in the presence of: 72 -71- SIGNED by for and on behalf of BANK BUMPUTRA MALAYSIA BERHAD as Lender Bank in the presence of: SIGNED by for and on behalf of BBMB Kewangan Berhad as Lending Bank in the presence of: SIGNED by for and on behalf of BANK BUMIPUTRA MALAYSIA BERHAD as Funding Lender in the presence of: 73 -72- SIGNED by for and on behalf of BANK BUMIPUTRA MALAYSIA BERHAD as Facility Agent in the presence of: SIGNED by for and on behalf of BANK BUMIPUTRA MALAYSIA BERHAD as Security Agent in the presence of: 74 SCHEDULE 1 ---------- LENDER AND LENDERS COMMITMENTS
Column 1 Column 2 Column 3 Column 4 Working Cap Ringgit Malaysia Dollar Advances Dollar RC under Commitment Commitment Commitment Commitment - ----- ---------- ---------- ---------- ---------- 8MB BUMIPUTRA RM5,900,000.00 RM14,600,000.00 USD4,000,000.00 USD2,000,000.00 MALAYSIA BERHAD Negara Bumiputra Alan Melaka 0100 Kuala Lumpur Telex: PUTRA MA 28065 Facsimile: 2914967
75 -2- SCHEDULE 1 (Cont.2) ------------------- LENDER AND LENDERS COMMITMENTS
Column 1 Column 2 Column 3 Column 4 Working Cap Ringgit Malaysia Dollar Advances Dollar RC under Commitment Commitment Commitment Commitment - ----- ---------- ---------- ---------- ---------- 8MB KEWANGAN RM14,600,000.00 BERHAD First Floor Benara Promet Alan Sultan Ismail 8250 Kuala Lumpur Telex: - Facsimile: 2451155 --------------------------------------------------------------------------------------- RM5,900,000.00 RM29,200,000.00 USD4,000,000.00 USD2,000,000.00
76 SCHEDULE 2 ---------- CONDITIONS PRECEDENT -------------------- 1. Corporate Authorisation ----------------------- In relation to the Borrower: --------------------------- 1.1 A copy of the following documents, certified as true by a director or the company secretary of the Borrower: (a) the certificate of incorporation of the Borrower; (b) the Memorandum and Articles of Associations of the Borrower; and (c) the latest Forms 24 and 49 relating to the Borrower filed with the Registrar of Companies 1.1 A copy, certified as true by a director or the company secretary of the Borrower, of a board of directors' resolution approving the execution, delivery and performance of this Agreement and the other Security Documents to which it is a party and to authorise appropriate person(s) to execute, affix the Common Seal of the Borrower or such documents, give any communications and take any other action required under or in connection with this Agreement or such other Security Documents. 1.3 Passport number(s)/identification card number(s) and specimen signatures of the person(s) authorised to take action on behalf of the Borrower as referred to in paragraph 1.2 above. In relation to the Corporate Guarantor: 1.4 A certified true copy of its Articles of Incorporation and Bylaws. 1.5 A certified true copy of its board of directors' resolution authorising the execution of the Corporate Guarantee and the person or persons authorized to execute, affix the Common Seal of the Corporate Guarantor on the Corporate Guarantee. 2. Authorization and Consents -------------------------- 2.1 A certified true copy of each authorisation, consent, licence, approval or registration required by the Borrower for the borrowing the Facilities (including but without limitation, (1) all approvals of Bank Negara Malaysia as may be 77 -2- required by or pursuant to the laws and directives in force or as may be appropriate in relation to the execution, performance and enforcement of this Agreement and the other Security Documents to which it is a party and (2) evidence of a report to Bank Negara Malaysia of such information relating to this Agreement, the other Security Documents to which it is a party and such other information as may be required by or pursuant to the laws and directions is force. 2.2 A certified true of each authorization, consent, licence, approval or registration required by the Corporate Guarantor for the issuing of the Corporate Guarantee (including but without limitation, all approvals of Bank Negara Malaysia as may be required by or pursuant to the laws and directives in force or as may be appropriate in relation to the execution, performance and enforcement of the Corporate Guarantee). 3. Security Documents ------------------ 3.1 Certified true copies of each of the Security Documents duly executed by each party thereto, and where appropriate, duly stamped and presented for registration with all appropriate authorities. 4. Paid-up Capital of Borrower/Debt to Equity Ratio ------------------------------------------------ 4.1 Evidence acceptable to Facility Agent that Guarantor has made loans to Borrower as set forth on Schedule 8. 4.2 Evidence acceptable to the Facility Agent that the debt equity ratio as defined in paragraph 19.1.14 of the Borrower is maintained at not more than 3:1. 5. Letter of Undertaking from the Contractor ----------------------------------------- 5.1 Irrevocable letter of undertaking from the Contractor in form and substance satisfactory to the Facility Agent when the Contractor undertakes to forward to the Facility Agent Certificate of Fitness for Occupation issued by the relevant authority in respect of the factory and/or such other building or structure constructed by the Contractor on the Land. 6. Letter of Undertaking from the Corporate Guarantor -------------------------------------------------- 6.1 Irrevocable and unconditional letter of undertaking from Corporate Guarantor to meet any costs over-run incurred and the construction period of the factory for the Borrower. 78 -3- 7. Opinion ------- 7.1 Opinion of Messrs. Skrine & Co., the Solicitors to the Lenders, in form and substance satisfactory to the Facility Agent. 7.2 Opinion (in a form and substance satisfactory to the Facility Agent) of a firm of solicitors to the Corporate Guarantor which is acceptable to the Lenders, as to such matters relating to the Corporate Guarantor and the Corporate Guarantee. 8. Letter of Undertaking from the Borrower --------------------------------------- 8.1 Irrevocable Letter of Undertaking from the Borrower: (1) to comply with all terms and conditions set out in the Land Letter of Offer and Acceptance promptly; (2) confirming that the Shareholders Loan shall be free of interest; (3) not to vary any repayments in respect of the Shareholders Loan; and (4) to convert the Shareholders Loan to paid-up capital on the acquisition of the new plant and machinery. 79 SCHEDULE 3 ---------- WORKING CAPITAL FACILITIES -------------------------- 1. Revolving Credit Facility Interest Rate - 1.75% per annum above the Effective Cost of Funds of the Working Capital Lender. 2. Letters of Credit Facility Interest Rate - as stipulated in Clause 4.4.4 of this Agreement Commission - 0.15% on the amount of each letter of credit issued for each month or part thereof payable in advance but subject to a minimum charge of RM50.00 for each letter of credit issued. 3. Trust Receipts Facility Interest Rate - 1.75% per annum above the Base Lending Rate of the Working Capital Lender. Commission - 1.0% per annum on each bankers acceptance created on the face value of the bankers acceptance from the date of creation up to the date of maturity. 5. Export Credit Refinancing Facility (Pre-shipment and Post-shipment) Interest Rate - 1.0% per annum above the prevailing Bank Negara Malaysia (BNM) discount rate or such other rate as may be determined by BNM from time to time. 6. Letter of Guarantee Commission - 0.1% per month or part thereof on the amount guaranteed or issued but subject to a minimum charge of RM50.00, such commission to be payable immediately upon issuance of each guarantee and for every extension thereafter. 80 SCHEDULE 4 ---------- FORM OF REQUEST FOR RINGGIT ADVANCE ----------------------------------- To: BANK BUMIPUTRA MALAYSIA BERHAD [address] For the attention of: [name and title of relevant person] Dear Sirs, Zycon Corporation Sdn. Bhd. RM50,400,000.00 Facility Agreement dated 1996 ---------------------------------- We refer to the above Agreement between (1) ourselves, as Borrower, (2) yourselves as Arranger, (3) the Working Capital Lender named therein, as Working Capital Lender, (4) the Lending Banks named therein, as Lending Banks, (5) the Funding Lender named therein, as Funding Lender, (6) yourselves, as Facility Agent, and (7) yourselves, as Security Agent. Terms defined in the Agreement have the same meaning in this notice. We give you notice that we request a Ringgit Advance to be made to us by the Lending Banks under the Agreement as follows: (1) Amount : [RM ] (2) Date of Ringgit Advance : ,19 (or, if that is not a Ringgit Business Day, the next succeeding Ringgit Business Day). We confirm that no Event of Default or Potential Event of Default in relation to ourselves or has occurred or will occur as a result of the making of that Ringgit Advance, we represent and warrant that the representations and warranties contained in Clause 18 of the Agreement have been complied with and would be correct in all respects if repeated today by reference to the circumstances now existing and we confirm that all the undertakings on our part contained in Clause 19 and 20 of the Agreement have been fully performed and observed by us. 81 -2- You are requested to make the proceeds of that Ringgit Advance available to us by credit to [details of bank accounts]. Dated 19 Yours faithfully, For and on behalf of ZYCON CORPORATION SDN. BHD By: Name: Title: 82 SCHEDULE 5 ---------- FORM OF REQUEST FOR DOLLAR ADVANCE ---------------------------------- To: BANK BUMIPUTRA MALAYSIA BERHAD [address] For the attention of: [name and title of relevant person] Dear Sirs, Zycon Corporation Sdn. Bhd. RM50,400,000.00 Facility Agreement dated 1996 ---------------------------------- We refer to the above Agreement between (1) ourselves, as Borrower, (2) yourselves as Arranger, (3) the Working Capital Lender named therein, as Working Capital Lender, (4) the Lending Banks named therein, as Lending Banks, (5) the Funding Lender named therein, as Funding Lender, (6) yourselves, as Facility Agent, and (7) yourselves, as Security Agent. Terms defined in the Agreement have the same meaning in this notice. We give you notice that we request a Dollar Advance to be made to us by the Funding Lender under the Agreement as follows: (1) Amount : [USD ] (2) Date of Dollar Advance : ,19 (or, if that is not a Dollar Business Day, the next succeeding Dollar Business Day). (3) Period : [1, 3 or 6 months] We confirm that no Event of Default or Potential Event of Default in relation to ourselves or any Security Party has occurred or will occur as a result of the making of that Dollar Advance, we represent and warrant that the representations and warranties contained in Clause 18 of the Agreement have been complied with and would be correct in all respects if repeated today by reference to the circumstances now existing and we confirm that all the undertakings on our part contained in Clause 19 and 20 of the Agreement have been fully performed and observed by us. 83 -2- You are requested to make the proceeds of that Dollar Advance available to us by credit to [details of bank accounts]. Dated 19 Yours faithfully, For and on behalf of ZYCON CORPORATION SDN. BHD. By: Name: Title: 84 SCHEDULE 6 ---------- FORMS OF REQUEST FOR DOLLAR RC DRAWDOWN --------------------------------------- TO: BANK BUMIPUTRA MALAYSIA BERHAD [ address ] For the attention of: [name and title of relevant person] Dear Sirs: Zycon Corporation Sdn. Bhd. RM50,400,000.00 Facility Agreement dated 1996 ------------------------------------- We refer to the above Agreement between (1) ourselves, as Borrower, (2) yourselves as Arranger, (3) the Working Capital Lender named therein, as Working Capital Lender, (4) the Lending Banks named therein, as Lending Banks, (5) the Funding Lender named therein, as Funding Lender, (6) yourselves, as Facility Agent, and (7) yourselves, as Security Agent. Terms defined in the Agreement have the same meaning in this notice. We give you notice that we request a Dollar RC Drawdown to be made to us by the Funding Lender under the Agreement as follows: (1) Amount : [ USD ] (2) Date of Dollar RC Drawdown : 19 (or, if that is not a Dollar Business Day, the next succeeding Dollar Business Day). (3) Period : [1, 3 or 6 months] We confirm that no Event or Default or Potential Event of Default in relation to ourselves or any Security Party has occurred or will occur as a result of the making of that Dollar RC Drawdown, we represent and warrant that the representations and warranties contained in Clause 18 of the Agreement have been complied with and would be correct in all respects if repeated today by reference to the circumstances now existing and we confirm that all the undertakings on our part contained in Clause 19 and 20 of the Agreement have been fully performed and observed by us. 85 -2- We enclose the Promissory Note for the proposed Dollar RC Drawdown. You are requested to make the proceeds of that Dollar RC Drawdown available to us by credit to [details of bank account]. Dated 1997. Yours faithfully, for and on behalf of ZYCON CORPORATION SDN. BHD. By: Name: Title: 86 SCHEDULE 7 ---------- FORM OF TRANSFER CERTIFICATE ---------------------------- TO: [Facility Agent] [Address] TRANSFER CERTIFICATE -------------------- relating to an agreement (as from time to time amended, varied, novated or supplemented, "the Facilities Agreement") dated 19 and made between (1) ZYCON CORPORATION SDN. BHD. as borrower (2) BANK BUMIPUTRA MALAYSIA BERHAD as Arranger, Facility Agent and Security Agent and (3) the Lenders listed in Schedule 1 thereto. 1. Terms defined in the Facilities Agreement shall, subject to any contrary indication, have the same meaning herein. The terms Lender, Transferee, Lender's Participation and Amount Transferred are defined in the Schedule hereto. 2. The Lender confirms that the Lender's Participation is an accurate summary of its participation in the Facilitation specified in the Facilities Agreement and request the Transferee to accept and procure the transfer to the Transferee of a percentage of the Lender's Participation (equal to the percentage that the Amount Transferred is of the aggregate of the component amounts (as set out in the schedule hereto) of the Lender's Participation) by counter-signing and delivering this Transfer Certificate to the Facility Agent at its address for the service of notices specified in the facilities Agreement. 3. The Transferee hereby requests the Facility Agent to accept this Transfer Certificate as being delivered to the Facility Agent pursuant to and for the purposes of Clause 22.4 of the Facilities Agreement so as to take effect in accordance with the terms thereof on the Transfer Date or on such later date as may be determined in accordance with the terms thereof. 4. The Transferee warrants that: (I) it has received a copy of the Facilities Agreement and each Security Document together with such other information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Lender to check or inquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such information and further agrees that it has not relied and will not rely on the Lender to assess or keep under review on its 87 -2- behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Borrower; and (ii) it is a transferee permitted by Clause 22.3.1 of the Facilities Agreement. The Transferee expressly acknowledges that its execution and delivery of the Transfer Certificate constitutes its contractual acceptance of the offer to become a party to the Security Agency Agreement. 5. The Transferee hereby undertakes with the Lender and each of the other parties to the Facilities Agreement and the Security Agency Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Facilities Agreement and the Security Agency Agreement will be assumed by it after delivery of this Transfer Certificate to the Facility Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect. 6. The Lender makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Facilities Agreement or any document relating thereto and assumes no responsibility for the financial condition of the Borrower or for the performance and observance by the Borrower of any of its obligations under the Facilities Agreement or any documents relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise are hereby excluded. 7. The Lender hereby gives notice that nothing herein or in the Facilities Agreement (or any document relating thereto) shall oblige the Lender to (i) accept a re-transfer from the Transferee of the whole or any part of its rights, benefits and/or obligations under the Facilities Agreement transferred pursuant hereto or (ii) support any losses directly or indirectly sustained or incurred by the Transferee for any reason whatsoever including, without limitation, the non-performance by the Borrower or any other party to the Facilities Agreement (or any document relating thereto) of its obligations under any such document. The transferee hereby acknowledges the absence of any such obligation as is referred to in (i) or (ii) above. 8. This Transfer Certificate and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with Malaysian law. Schedule to the Transfer Certificate 1. Lender: 2. Transferee: 3. Transfer Date: 88 -3- 4. Lender's Participation: Lender's Available Commitment ----------------------------- Lender's Outstanding Amount --------------------------- 5. Amount Transferred: [Transferor Lender] [Transferee Lender] By: By: Date: Date: Address: 89 SCHEDULE 8 ---------- SHAREHOLDERS LOAN -----------------
Date Amount 31 August 1995 USD 2,000,000.00 30 September 1995 USD 1,000,000.00 31 October 1995 USD 2,000,000.00 31 December 1995 USD 2,000,000.00 1 January 1996 USD 2,000,000.00 29 February 1996 USD 2,000,000.00 ---------------- USD11,000,000.00 ================
90 SCHEDULE 9 ---------- FORM OF REQUEST FOR RINGGIT RC DRAWDOWN --------------------------------------- TO: BANK BUMIPUTRA MALAYSIA BERHAD [ address ] For the attention: [name and title of relevant person] Dear Sirs, Zycon Corporation Sdn. Bhd. RM50, 400,000.00 Facility Agreement dated 1996 ----------------------------------- We refer to the above Agreement between (1) ourselves, as Borrower, (2) yourselves as Arranger, (3) the Working Capital Lender named therein, as Working Capital Lender, (4) the Lending Banks named therein, as Lending Banks, (5) the Funding Lender named therein, as Funding Lender, (6) yourselves, as Facility Agent, and (7) yourselves, as Security Agent. Terms defined in the Agreement have the same meaning in this notice. We give you notice that we request a Ringgit RC Drawdown to be made to us by the Working Capital Lender under the Agreement as follows: (1) Amount : [USD ] (2) Date of Ringgit RC Drawdown : 19 (or, if that is not a Ringgit Business Day, the next succeeding Ringgit Business Day). (3) Period : [1, 3 or 6 months] We confirm that no Event of Default or Potential Event of Default in relation to ourselves or any Security Party has occurred or will occur as a result of the making of that Ringgit RC Drawdown, we represent and warrant that the representations and warranties contained in Clause 18 of the Agreement have been complied with and would be correct in all respects if repeated today by reference to the circumstances now existing and we confirm that all the undertakings on our part contained in Clause 19 and 20 of the Agreement have been fully performed and observed by us. 91 -2- We enclose the Promissory Note for the proposed Ringgit RC Drawdown. You are requested to make the proceeds of that Ringgit RC Drawdown available to us by credit to [details of bank account]. Dated 19 . Yours faithfully, for and on behalf of ZYCON CORPORATION SDN. BHD. 92 SCHEDULE 10 ----------- ZYCON CORPORATION ----------------- FORECASTED 1996 DRAWDOWN SCHEDULE ---------------------------------
DRAWDOWN # ESTIMATED DATE ESTIMATED AMOUNT - ---------- -------------- ---------------- RM-TL1 (TERM LOAN FACILITY) 1) APRIL 19, 1996 RM 13,400,000.00 2) MAY 20, 1996 RM 5,000,000.00 3) JUNE 21, 1996 RM 5,000,000.00 4) JULY 23, 1996 RM 5,000,000.00 5) AUG 23, 1996 RM 800,000.00 ------------- TOTAL: RM 29,200,000.00 ============= USD (TERM LOAN FACILITY) 1) JUNE 15, 1996 USD $1,000,000.00 2) JULY 15, 1996 USD $2,000,000.00 3) AUG 15, 1996 USD $1,000,000.00 ------------- TOTAL: USD $4,000,000.00 =============
EX-10.5 7 CORPORATE GUARANTEE 1 EXHIBIT 10.5 DATED THIS 9TH DAY OF FEBRUARY 1996 *********************************** ZYCON CORPORATION as Guarantor in favour of BANK BUMIPUTRA MALAYSIA BERHAD BBMB KEWANGAN BERHAD as Lenders - and - BANK BUMIPUTRA MALAYSIA BERHAD as Facility Agent BANK BUMIPUTRA MALAYSIA BERHAD as Security Agent CORPORATE GUARANTEE ***************** Prepared by: SKRINE & CO. ADVOCATES & SOLICITORS STRAITS TRADING BUILDING 4 LEBOH PASAR BESAR 50050 KUALA LUMPUR. FILE NO. TC/PTW/151878.0/95 February 7, 1996-liu 2 THIS GUARANTEE is issued on the 9th day of February 1996 by Zycon Corporation, a corporation incorporated and existing under the laws of the State of Delaware in the United States of America and having its registered office at 445 El Camino Real, Santa Clara, California CA 95050-4366 (the "Guarantor", which expression shall include the successors, if any, of the Guarantor) in favour of: - (1) BANK BUMIPUTRA MALAYSIA BERHAD and BBMB KEWANGAN BERHAD (the "Lenders", which expression shall include their respective successors and assigns); and (2) BANK BUMIPUTRA MALAYSIA BERHAD, as facility agent for itself and the other Lender (in such capacity, the "Facility Agent", which expression shall include any of its successors in such capacity); and (3) BANK BUMIPUTRA MALAYSIA BERHAD, as security agent for itself and the other Lender (in such capacity, the "Security Agent", which expression shall include any of its successors in such capacity). WHEREAS (a) By a Facilities Agreement (the "Facilities Agreement") dated the 9th of February 1996 made between (1) ZYCON CORPORATION SDW. BHD. (the "Borrower"), as Borrower, (2) BANK BUMIPUTRA MALAYSIA BERHAD, as Arranger, (3) BANK BUMIPUTRA MALAYSIA BERHAD, as Working Capital Lender, (4) BANK BUMIPUTRA MALAYSIA BERHAD and BBMB KEWANGAN BERHAD, as Lending Banks, (5) BANK BUMIPUTRA MALAYSIA BERHAD, as Funding Lender, (6) BANK BUMIPUTRA MALAYSIA BERHAD, as Facilities Agent and (7) BANK BUMIPUTRA MALAYSIA BERHAD, as Security Agent, inter alia (a) the Working Capital Lender agreed to grant to the Borrower the Working Capital Facilities (as defined in the Facilities Agreement) upon the terms and subject to the conditions of the Facilities Agreement, (b) the Lending Banks agreed to grant to the Borrower the Ringgit Advances Facility (as defined in the Facilities Agreement) upon the terms and subject to the conditions of the Facilities Agreement and (c) the Funding Lender agreed to grant to the Borrower the Dollar Advances Facility and the Dollar RC Facility upon the terms and subject to the conditions of the Facilities Agreement. (B) As security for the repayment by the Borrower of the monies due and payable or hereafter due and payable under the respective Facilities (as defined in the Facilities Agreement), interest thereon and all other monies agreed to be paid under the Facilities Agreement and the other Securities Documents (as defined in the Facilities Agreement), the Guarantor has agreed to issue this Guarantee in favour of the Lenders, the Facility Agent and the Security Agent. 3 (C) The Borrower may not make its request to the Working Capital Lender for the utilization of the Working Capital Facilities, and may not make its request for a Ringgit Advance (as defined in the Facilities Agreement), and may not make its request for a Dollar Advance (as defined in the Facilities Agreement) and may not make its request for a Dollar RC Drawdown (as defined in the Facilities Agreement), unless and until, inter alia, the Facility Agent has received this Guarantee duly executed by the Guarantor and stamped. NOW THEREFORE IT IS AGREED AS FOLLOW: - 1. DEFINITIONS AND INTERPRETATION 1.1 Terms defined in the Facilities Agreement and the Security Agency Agreement Except as otherwise provided in this Guarantee, all terms and references which are defined or construed in the Facilities Agreement and the Security Agency Agreement but are not defined or construed in this Guarantee shall have the same meaning and construction in this Guarantee. All references to the Facilities Agreement are to the Facilities Agreement and from time to time amended modified or supplemented and all references to the Security Agency Agreement are to the Security Agency Agreement as from time to time amended, modified or supplemented. 1.2 Terms In this Guarantee, except where the context otherwise requires: - "Borrower" means ZYCON CORPORATION SDW. BHD., a company incorporated in Malaysia and having its registered offices at 11th Floor, Wisma Damansara, Jalan Semantan, Damansara Heights, 50490 Kuala Lumpu and includes its successor in title; "Dollar Advances Facility" means, in relation to the Funding Lender, the USD term loan facility of up to the aggregate principal amount of United States Dollars Four Million (USD4,000,000.00) granted by the Funding Lender to the Borrower upon the terms and subject to the conditions of the Facilities Agreement; "Facilities" means the facilities comprising of the Dollar Advances Facility, the Dollar RC Facility, the TL AI Facility and the Working Capital Facilities and the expression "Facility" means any of these Facilities; 4 "Guaranteed Indebtedness" means: - (1) all sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due from or owing by the Borrower to BBMB, in its capacity as a Working Capital Lender whether actually or contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to BBMB under or pursuant to, the Facilities Agreement in connection with the Working Capital Lender, whether actually or Contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to BBM under or pursuant to, the Facilities Agreement in connection with the Working Capital Facilities; (2) all sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due from or owing by the Borrower to the Lending Banks, whether actually or contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to the Lending Banks under or pursuant to, the Facilities Agreement, in connection with the Ringgit Advances Facilities; (3) all sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due from or owing by the Borrower to the Funding Lender, whether actually or contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to the Funding Lender under or pursuant to, the Facilities Agreement, in connection with the Dollar Advances Facility; (4) all sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due from or owing by the Borrower to the Funding Lender whether actually or contingently, under or in connection with, or which the Borrower has covenanted to part or discharge to the Funding Lender under or pursuant to, the Facilities Agreement, in connection with the Dollar RC Facility; (5) all other sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due form or owing by the Borrower to the Lenders, whether actually or contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to the Lenders under 5 or pursuant to, the Facilities Agreement and the other Security Documents to which the Borrower is a party; and (6) all other sums (whether principal, interest, fee, commission or otherwise) whatsoever which are or at any time may be or becomes due fro or owing by the Borrower to the Agents, whether actually or contingently, under or in connection with, or which the Borrower has covenanted to pay or discharge to the Agents under or pursuant to the Facilities Agreement and the other Security Documents to which the Borrower is a party. 1.3 Interpretation In this Guarantee unless the context otherwise requires: - 1.3.1 references to persons include firms, companies, corporations states and administrative and governmental entities, associations and partnerships (whether or not having separate legal personality); 1.3.2 references to the masculine gender includes the feminine and neuter genders and vice versa and references to the singular number include the plural and vice versa; 1.3.3 references to Schedules, Clauses, sub-clauses, paragraphs and sub-paragraphs are to the Schedules and to the Clauses, sub-clauses, paragraphs and sub-paragraphs of this Guarantee; and 1.3.4 the headings of clauses and the underlined introductory words to sub-clauses are inserted for ease of reference only and shall be ignored in construing this Guarantee. 2. COVENANT TO PAY 2.1 Covenant to Pay In consideration of the Working Capital Lender agreeing to grant to the Borrower the Working Capital Facilities on the terms and subject to the conditions contained in the Facilities Agreement (a copy of which the Guarantor hereby acknowledges having received) or the Lending Banks agreeing to grant to the Borrower the Ringgit Advances Facility on the terms and subject to the Conditions contained in the Facilities Agreement or the Funding Lender agreeing to grant to the Borrower the Dollar Advances Facility on the terms and subject to the conditions contained in the Facilities Agreement or the Funding Lender agreeing to grant to the Borrower the Dollar RC Facility on the terms and subject to the conditions 6 contained in the Facilities Agreement or the Beneficiaries otherwise acting under or in connection with the Facilities Agreement, the Guarantor hereby unconditionally and irrevocably guarantees, as a continuing guarantee, the due punctual payment by the Borrower of the Guaranteed Indebtedness, and conditionally and irrevocably undertakes and agrees that, if for any reason the Borrower does not make payment of any amount of the Guaranteed Indebtedness, by the time, in the currency, on the date and otherwise if the manner specified in (1) the Facilities Agreement in respect of that part of the Guaranteed Indebtedness owing to BBMB as a Working Capital Lender (whether on the normal due date, on acceleration or otherwise), (2) the Facilities Agreement in the respect of that part of the Guaranteed Indebtedness owing to Lending Banks (whether on the normal due date, on acceleration or otherwise), or (3) the Facilities Agreement in respect of that part of the Guaranteed Indebtedness owing to the Funding Lender (whether on the normal due date, on acceleration or otherwise), the Guarantor will pay to the Facility Agent on demand for its account or for the account or for the account of the relevant Beneficiary such sum in the currency and in the manner provided in the Facilities Agreement. 2.2 Default of Borrower In the event of the Borrower failing to observe and perform any of the covenants, undertakings, stipulations or terms contained in the Facilities Agreement and/or the other Security Documents to which the Borrower is a party, the Beneficiaries shall notwithstanding anything to the contrary contained in the Facilities Agreement and/or the other Security Documents be entitled to demand payment in full from the Guarantor the whole of the Guaranteed Indebtedness or such part thereof as may be outstanding. 2.3 Independent Action 2.3.1 The Guarantor waives all rights of subrogation and contribution and any rights which it may have to claim prior exhaustion of remedies by the Beneficiaries and agrees that demands under this Guarantee may be made from time to time irrespective of whether any steps or proceedings are being taken or have been taken against the Borrower and/or any other person or are being taken or have been taken to enforce any other security, guarantee or indemnity. The Beneficiaries may proceed to exercise any right or remedy which the Beneficiary may have under this Guarantee without regard to any actions or omissions of any other party or entity and the Beneficiaries may exercise any such right or remedy independently of each other and in separate actions or proceedings and the Guarantor hereby so agrees and waives any rights it has or 7 may have to object to any such proceedings being separately brought. 2.3.2 The amount at any time owing by the Guarantor to the Beneficiaries under this Guarantee shall be a separate and independent debt from the amount owing to any other party. The Beneficiaries shall have the right to protect and enforce their respective rights arising out of this Guarantee and it shall not be necessary for any other party to be joined as an additional party in any proceeding for this purpose. 3. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties 3.1.1 Status The Guarantor is a corporation duly incorporated and validly existing under the laws of the United States of America and has the power and authority to own its assets and to conduct the business which it conducts and/or purposes to conduct. 3.1.2 Powers The Guarantor has full power, authority and legal right to enter into and perform and comply with its obligations under this Guarantee. 3.1.3 Obligations Binding The obligations of the Guarantor under this Guarantee constitute the legal, valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with its terms. 3.1.4 Authorizations and Consents All actions, conditions and things required to be taken, fulfilled and done (including the obtaining of any necessary Consent) in order (a) to enable it to lawfully enter into and perform and comply with its obligations under this Guarantee, (b) to ensure that those obligations are valid, legally binding and enforceable, (c) to ensure that those obligations rank and will at all times rank in accordance with Clause 4.1.5 and (d) to make this Guarantee admissible in evidence in the courts of Malaysia and the United States of America have been taken, fulfilled and done. 8 3.1.5 Ranking of Obligations Its payment obligators under this Guarantee rank and will at all times rank at lease equally and ratably in all respects with all its other unsecured indebtedness except for such indebtedness as would, by virtue only of the law in force in the United States of America, be preferred in the event of its winding-up. 3.1.6 Non-violation of Laws and/or Agreements Neither the execution and delivery of this Guarantee nor the performance or observance by the Guarantor of any of its obligators or the exercise by the Guarantor of any of its rights herder will: - (i) contravene, conflict with or result in any breach of any of the terms, conditions, covenants, undertakings or other provisions of, or constitute a default, event of default or an event which with the giving of notices and/or the lapse of time and/or the fulfillment of any conditions would constitute a default or an event of default under any provision of any law or regulation, order, franchise, concession, license, permit or authority or any agreement, undertaking, indenture, mortgage, deed or other instrument, or any arrangement, obligation or duty applicable to, or which is binding upon or affects the Guarantor or any of its assets or revenues, (ii) violate or exceed any limitation on the borrowing or any other powers of the Guarantor (whether imposed by any law or regulation, order agreement, instrument or otherwise) or any other limitation affecting the Guarantor, to be exceeded, or (iii) result in, or oblige the Guarantor to create any charge on the whole or any part of the assets or revenues of the Guarantor, present or future. 3.1.7 Litigation No litigation, arbitration or administrative proceedings before or of any court, tribunal or regulatory authority is presently pending or, to the knowledge of the Guarantor threatened against the Guarantor or any of its assets or revenues which, if determined adversely to 9 the Guarantor might materially and adversely affect its assets, liabilities or condition (financial or otherwise) or its ability to perform its obligations hereunder. 3.1.8 No Default The Guarantor is not in breach of contravention of or in default under any law or regulation, order, franchise, concession, license, permit, authority, agreement, undertaking, instrument, arrangement, obligation or duty applicable to, or which is binding upon or affect it or any of its assets or revenues, (the consequences of which breach, contravention or default, could materially and adversely affect the Guarantor's assets, liabilities, or condition (financial or otherwise) or its ability to perform its obligation hereunder); no Event of Default or Potential Event of Default has occurred or will occur as a result of its entry into this Guarantee, and neither it not any of its subsidiaries is in breach of or in default of any agreement to an extent or in a MANNER WHICH HAS OR COULD HAVE A MATERIAL effect on it; 3.1.9 Winding-Up N meeting has been convened for its winding-up or for the appointment of a receiver, trustee, judicial manager or similar officer of it, its assets or any of them, no such step is intended by it and, so far as it is aware, no petition, application or the like is outstanding for its winding-up or for the appointment of a receiver, trustee, judicial manager or similar officer of it, its assets or any of them. 3.1.10 No Arrangements with Creditors The Guarantor has not entered into any arrangement or composition with its creditors. 3.1.11 No Immunity Neither it not its assets is entitled to immunity from suit, execution, attachment or other legal process, and its entry into this Guarantee constitutes, and the exercise of its rights and performance of and compliance with its obligations under this Guarantee will constitute, private and commercial acts done and performed for private and commercial purpose. 10 3.1.12 No Misstatement No information, exhibit or report furnished by it to the Beneficiaries in connection with this Guarantee contained any misstatement of fact as at the date of such exhibit or report or as at the date when such information was given which was material in the context of this Guarantee or omitted to state a fact as at such date which in any such case would be materially adverse to the interests of the Beneficiaries under this Guarantee. 3.2 Continuation of Representation and Warranties Each of the representations and warranties set forth in Clause 4.1 above will be correct and complied with in all material respects so long as any sum remains to be lent to or remains payable by the Borrower under the Facilities Agreement as if repeated then by reference to the then existing circumstances. 4. INDEPENDENT LIABILITY As separate, independent and alternative stipulations, the Guarantor unconditionally and irrevocably agrees: - 4.1 that any sum which, although expressed to be payable by the Borrower under the Facilities Agreement, is for any reason (whether or not now existing and whether or not now known or becoming known to any party to this Guarantee) not recoverable from the Guarantor on the basis of guarantee shall nevertheless be recoverable by it as if it were the sole principal debtor and shall be paid by it to the Facility Agent on demand; and 4.2 as a primary obligation to indemnify each Beneficiary against any loss suffered by it as a result of any sum expressed to be payable by the Borrower under the Facilities Agreement not being paid by the time, on the date and otherwise in the manner specified in the Facilities Agreement or any payment obligation of the Borrower under the facilities Agreement being or becoming void, voidable or unenforceable for any reasons (whether or not now existing and whether or not now known or becoming known to the guarantor r any Beneficiary), the amount of that loss being the amount expressed to be payable by the Borrower in respect of the relevant sum. 5. INTEREST TO BE CAPITALIZED The Guarantor hereby agrees that the capitalized rate of interest fixed by each Beneficiary form time to time in respect of the Facilities shall apply and have 11 effect and be calculated on the amounts due to such Beneficiary hereunder until that Beneficiary shall have received one hundred Sen in every Ringgit outstanding, or as the case may be, one hundred cents in every Dollar outstanding under the Facilities. For the avoidance of doubt, it is hereby expressly provided that the capitalized rates of interest shall be payable before and after judgment and notwithstanding the termination of the banker and customer relationship between the Lenders and the Borrower by reason of the termination of the Facilities by recall or demand or by reason of the incapacity, winding-up, or liquidation of any party or by frustration, force majeur, operation of law, order or direction of any competent authority or otherwise howsoever. 6. PRINCIPAL DEBTOR As between the Guarantor and the Beneficiaries, the Guarantor shall be liable under this Guarantee as if it were the sole principal debtor and not merely a surety. Accordingly, it shall not be discharged, nor its liability be affected nor shall this Guarantee be discharged or diminished by reason of: - 6.1 any increase, decrease, extension, renewal or restructure of the Facilities or any variation, cancellation, supplement, substitution, or modifications of whatsoever nature being made to any provision of the Facilities Agreement and/or the other Security Documents, with or without the knowledge or consent of the Guarantor; or 6.2 any irregularity, unenforceability, illegality, invalidity or defect in the Security Documents or in relation to any obligation of the Borrower thereunder to the intent to that the Guarantor's obligations under this Guarantee shall remain in full force and effect as if there were no such irregularity, unenforceability, illegality, invalidity or defect; or 6.3 any variations, exchange, renewal, release or discharge of any security or the refusal or neglect by any Beneficiary to complete or enforce any security or instrument and whether satisfied by payment or not; or 6.4 any refusal by any Lender at any time or times with or without notice to the Guarantor or the Borrower to advance the monies or give further credit or accommodation to the Borrower notwithstanding that the limit or amount of the Facilities shall not have been reached; or 6.5 any other person or persons who is or was intended to guarantee, indemnify, provide security or in any other manner assume or undertake to be responsible for the obligation or liability in respect of the Facilities or any part thereof or other indebtedness of the Borrower shall fail to do so or shall be discharged or released from doing so; or 12 6.6 any present or future bill note guarantee indemnity mortgage charge pledge lien debenture or other security or right or remedy held by or available to any Beneficiary being or becoming wholly or in part voidable or unenforceable on any ground whatsoever or by any Beneficiary from time to time dealing with exchanging varying releasing or failing to perfect or enforce any of the same; or 6.7 any time indulgence concession waiver or consent at any time given to the Borrower or any other persons, whether by any Beneficiary or any other persons; or 6.8 the renewing determining varying or increasing any bill promissory note or other negotiable instrument accommodation facilities or transaction in any manner whatsoever or concurring in accepting or varying any compromise arrangement or settlement or omitting to claim or enforce payment form the Borrower or any other person; or 6.9 any act or omission which would not have discharged or affected the liability of the Guarantor had it been the principal debtor instead of the guarantor or by anything done or omitted which but for this provision might operate to exonerate the Guarantor; or 6.10 the winding-up, insolvency, bankruptcy, amalgamation, reconstruction or reorganization of the Borrower or any other persons (or the commencement of any of the foregoing). 7. INDEMNITY As a separate and independent obligation the Guarantor hereby agrees as primary obligor to indemnify each Beneficiary on demand from and against any claims, losses, funding or other costs, expenses or otherwise incurred by that Beneficiary as a result of the terms of the Facilities being or becoming void, voidable or unenforceable in any manner or by reason of or consequent to any breach of warranties and/or undertakings herein contained or any default on the part of the Borrower in performing and observing the obligations to be performed and observed by the Borrower or for any other reasons whatsoever, whether or not known to that Beneficiary; the among of such claims, losses, costs, expenses or otherwise being the amount which that Beneficiary would have otherwise been entitled to recover from the Borrower under the Security Documents. 8. CONTINUING SECURITY The Guarantee is a continuing security and shall secure the ultimate balance from time to time owing to each Beneficiary by the Borrower under the Security Documents notwithstanding the liquidation winding-up or other incapacity or any 13 change in the constitution of the Borrower or other incapacity or any change in the constitution of the Borrower or the liquidation winding-up or other incapacity of the Guarantor or any other person or any settlement of account or other matter whatsoever. This Guarantee shall remain in full force and effect until all monies owing under the Security Documents have been paid or satisfied in full and is in addition to and not in substitution for any other rights or remedies which the Beneficiaries may have under the Security Documents and may be enforced without first having recourse to any such rights or remedies and without taking any steps or proceedings against the Borrower or any other persons. 9. LIABILITY OF GUARANTOR 9.1 Discharge Only By Performance The obligations of the Guarantor shall not be discharged except by performance and then only to the extent of such performance. Such obligations shall not be subject to any prior notice to or demand to the Guarantor with regard to any default of the Borrower and shall not be impaired by any extension of time forbearance or concession given to the Borrower or any other person or any assertion of or failure to assert any right or remedy against the Borrower or any other persons or in respect to the Security Documents and/or any modification or amplification of the provision thereof contemplated by the terms thereof or any failure of the Borrower to comply with any requirements of any law regulations or order in Malaysia or of any political sub-division or agency thereof. 9.2 Arrangements With Borrower The Guarantor shall not be discharged or release from this Guarantee by any arrangement entered into or any composition accepted by any Beneficiary modifying its rights and remedies whether with or without the assent of the Guarantor by any alteration in the obligations terms stipulations covenants and undertakings contained in the Security Documents or by any forbearance whether as to pay time performance or otherwise. 9.3 Reconstruction The liabilities and or obligations of the Guarantor created by the is Guarantee shall continue to be valid and binding for all purposes whatsoever notwithstanding any change by amalgamation reconstruction or otherwise which may be made in the constitution of the Beneficiaries of the Borrower and it is hereby expressly declared that no change of any sort whatsoever in relation to or affecting the Guarantor shall in any way affect the 14 liabilities and or obligations created hereunder in relation to any transaction whatsoever whether past present or future. 9.4 Liquidation In the event of the liquidation of the Borrower, each Beneficiary (notwithstanding the payment by the Guarantor to the Beneficiaries or any one of them of any part of the amount hereby guaranteed) may rank as creditor and prove for such amount remaining outstanding against the Borrower or agree to accept any composition in respect of the same and such Beneficiary may receive and retain the whole of the dividends composition or other payments thereon. The Guarantor shall not in such event prove against the Borrower or in any way compete with the Beneficiaries so as to diminish any dividend or other advantage that would or might come to the Beneficiaries until the whole of each of the Beneficiary's claims against the Borrower have been satisfied. Further for the purpose of enabling any Beneficiary to maximize its recoveries in any actual or potential winding-up, any amount received or recovered by any Beneficiary (otherwise than as a result of a payment by the Borrower to the Facility Agent) in respect of any sum payable by the Borrower under the Facilities Agreement, may be placed by the recipient in an interest bearing suspense account. That amount may be kept there (with any interest earned being credited to that account) unless and until the recipient has irrevocably received or recovered its share of all sums payable to it under the Facilities Agreement. 9.5 Subordination So long as any sum remains to be lent to or remains payable by the Borrower under the Facilities Agreement: - 9.5.1 any right of the Guarantor, by reason of the performance of any of its obligations under this Guarantee, to be indemnified by the Borrower or to take the benefit of or enforce any security, guarantee or indemnity shall be exercised and enforced only in such manner and on such terms as the Facility Agent (acting on the instructions from the Instruction Group) may require; and 9.5.2 any amount received or recovered by the Guarantor (a) as a result of any exercise of any such right or (b) in the winding-up of the Borrower shall be held in trust for the Beneficiaries and immediately paid to the Facility Agent. 15 10. RECOVERY OF MONIES BY GUARANTOR Until all monies and liabilities payable under the Facilities shall have been fully paid and discharged the Guarantor shall not: - (a) in respect of any monies which may have been paid by the Guarantor to any Beneficiary, seek to enforce repayment or payment or to exercise any other rights or remedies of whatsoever kind which may accrue howsoever to the Guarantor in respect of the amount so paid; (b) prove in competition with any Beneficiary for any monies owing by the Borrower to the Guarantor on any account whatsoever and/or in respect of any monies due or owing from the Borrower to such Beneficiary but will give to that Beneficiary the full benefit of any proof which the Guarantor may be able to make in the liquidation of the Borrower or in any arrangement or composition with its creditors; (c) take any steps to enforce any rights or remedies against the Borrower or receive or claim or have the benefit of any payment or distribution, from or an account of the Borrower or exercise any right of set-off or counterclaim against the Borrower; (d) have any claim on or participate in the benefit of any claims or security which may hereafter be provided by the Borrower; and (e) negotiate assign charge or otherwise dispose of any monies obligations or liabilities now or hereafter due or owing to the Guarantor from the Borrower or any co-guarantor or any promissory note bill of exchange guarantee indemnity mortgage charge or other security. Provided always that, on making a claim against the Guarantor pursuant hereto, the Facility Agent (actin on instruction form the Instruction Group) may instruct the Guarantor to take any steps in connection with any of the matters referred to in the e foregoing sub-paragraphs and any monies or other benefit thereby obtained by the Guarantor will thereafter be held by the Guarantor in trust for the Beneficiaries and immediately paid to the Facility Agent. 12. OTHER SECURITIES HELD BY THE BENEFICIARIES This Guarantee shall be in addition to and shall not be in any way prejudiced or affected by any collateral or other security now or hereafter held by the Beneficiaries for all or any part of the monies hereby guaranteed nor shall such collateral or other security or lien to which the Beneficiaries may be otherwise entitled to or the liability of any person or persons or corporation not parties hereto for all or any part of the monies hereby secured be in any way prejudiced or affected by this present Guarantee. 16 13. PAYMENTS 13.1 Payments Without Set-Off, Counterclaim etc. All payments to be made by the Guarantor to the Beneficiaries hereunder shall be made in full and without any set-off, counterclaim or merger or combination of accounts whatsoever. 13.2 Payments Without Deductions for Taxes 13.2.1 All payments to be made by the Guarantor under this Guarantee shall be paid (1) free of any restrictions or conditions, (2) free and clear or and (except to the extent required by law) without any deduction or withholding (except to the extent required by law) on account of any other amount, whether by way of set-off or otherwise. 13.2.2 If the guarantor or any other person (whether or not a party to, or on behalf of a party to, this Guarantee) must at any time deduct or withhold any tax or other amount from any sum paid or payable by, or received or receivable from, the Guarantor under this Guarantee, the Guarantor shall pay such additional amount as is necessary to ensure that the Beneficiary to which that sum is due receives on the due date and retains (free from any liability other than tax on its own overall net income) a net sum equal to what it would have received and so retained had no such deduction or withholding been required or made. 13.2.3 if the Borrower or any other person (whether or not a party to, or on behalf of a party to, this Guarantee) must at any time pay any tax or other amount, on or calculated b reference to, any sum received or receivable by, any Beneficiary under this Guarantee (except for a payment by that Beneficiary of tax on its own overall net income), the Guarantor shall pay or procure the payment of that tax or other amount before any interest or penalty becomes payable or, if that tax or other amount is payable and paid by that Beneficiary, shall reimburse it on demand for the amount paid by it. 13.2.4 Within thirty (30) days after paying any sum from which it is required by law to make any deduction or withholding, and within thirty (30) days after the due date of payment of any tax or other amount which it is required by Clause 14.3 above to pay, the Guarantor shall deliver to the Facility Agent evidence satisfactory to the relevant Beneficiary of that deduction, withholding or 17 payment and (where remittance is required) of the remittance thereof to the relevant taxing or other authority. 13.2.5 As soon as the Guarantor is aware that any such deduction, withholding or payment is required (or of any change in any such requirement), it shall notify the Facility Agent. 13.3 Currency of Payment 13.3.1 Any payment or payments made by the Guarantor to or for the account of any Beneficiary in a currency (the currency in which the relevant payment is made being hereinafter referred to a the "Relevant Currency") other than the currency in which such payment or payments are expressed to be payable by the Guarantor to it under this Guarantee (the currency in which the relevant payment is expressed to be payable under this Guarantee being hereinafter referred to as "the Currency of Account") (whether as a result or, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up of the Guarantor to the extent of the Currency of Account which the recipient is able, in accordance with its usual practice, to purchase with the amount so received or recovered in the Relevant Currency on the date of that receipt or recovery (or, it if is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If the amount of the Currency of Account is less than the amount expressed to be due to the recipient under this Guarantee, the Guarantor shall indemnify it against any loss sustained by it as a result thereof. In any event, the Guarantor shall indemnify the recipient against the cost of making any such purchase. For the purpose of this Clause, it will be sufficient for the recipient to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 13.3.2 These indemnities constitute a separate and independent obligation from the other obligations in this Guarantee, shall give rise to a separate and independent cause of action shall apply irrespective or any indulgence granted by any Beneficiary and shall continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under this Guarantee or any other judgment or order. 13.4 Payments in Freely Transferable Funds 13.4.1 On each date on which any sum in Ringgit is due from the Guarantor under this Guarantee, the Guarantor shall make that sum 18 available to the Facility Agent so as to be received by the Facility Agent in Ringgit and in immediately available and freely transferable funds before 11 a.m. (local time in Kuala Lumpur) to such account of the Facility Agent with such bank in Kuala Lumpur as the Facility Agent shall have designated to it for that purpose. 13.4.2 On each date on which any sum in US Dollars is due from the Guarantor under this Guarantee, the Guarantor shall make that sum available to the Facility Agent so as to be received by the Facility Agent in US Dollars by 11 a.m. (local time in Singapore) and in funds which are for same day settlement in the [Singapore Clearing House Interback Payments System] (or, if such funds cease to exist or, in the Facility Agent's opinion, cease to be customary for the settlement in Singapore of international banking transactions in US Dollars, such other US Dollars funds as the Facility Agent may from time to time determine to be customary for that purpose) to such account of the Facility Agent with such bank in Singapore as the Facility Agent may from time to time designate for that purpose. 14. APPROPRIATION OF PAYMENTS 14.1 All sums from time to time recovered or received by the Facility Agent under or in connection with this Guarantee or pursuant to the Enforcement of this Guarantee (hereinafter referred to as "the Sums Recovered") shall be applied by the Facility Agent in the following manner and order: - 14.1.1 first, in or towards payment to the Agents of any fee and any costs, charges and expenses sustained or incurred by the Agents, and any other sums then due and payable to the Agents in their respective capacities as such, under or in connection with the Facilities Agreement; 14.1.2 secondly, in or towards payment to each of the Lenders, of its respective Secured Proportion (as defined in the Security Agency Agreement), at such time, of the balance of the Sums Recovered; and 14.1.3 thirdly, in payment of any surplus to the Guarantor. 15. GUARANTEE ENFORCE Each of the Beneficiary may enforce this Guarantee against the Guarantor at any time in the manner as stipulated in Clause 1 hereof. 19 16. GUARANTEE NOT REVOCABLE This Guarantee shall not be determinable by the Guarantor except on the terms of making full provision up to the limit of the Facilities together with interest thereon and any other outstanding liabilities or obligations (whether actual or contingent) on the part of the Borrower and shall in all respects and for all purposes be binding and operative until discharged by performance thereof. 17. WAIVER OF ALL RIGHTS AS SURETT In order to give full effect to this Guarantee the Guarantor hereby waives all rights and privileges which the Guarantor might otherwise as a surety be entitled to claim. 18. REINSTATEMENT OF GUARANTEE Any settlement or discharge between any of the Beneficiaries and the Guarantor shall be conditional upon no security or payment to such Beneficiary by the Borrower or any other person being avoided or reduced by virtue of any provision or enactment relating to bankruptcy, insolvency or dissolution for the time being in force or by virtue of any obligation to give effect to any preference or priority and such Beneficiary shall be entitled to recover the value amount of any such security or payment from the Guarantor subsequently as if such settlement or discharge had not occurred. 19. STATEMENT A certificate by any Beneficiary as to any sum payable by the Guarantor to it under this Guarantee, and any other certificate, determination, notification or the like of any Beneficiary provided for in this Guarantee, shall be conclusive save for manifest error. 20. MISCELLANEOUS 20.1 Severablity In the event that any one or more provisions of this Guarantee be determined to be illegal or unenforceable by any court of law, such provision shall be ineffective to the extent of such illegality or unenforceability, without invalidating the remaining provisions hereof. The Guarantor agrees, upon request by the Facility Agent (acting on instructions fro the Instructing Group), to replace any provision of this 20 Guarantee which is so determined to be illegal or unenforceable by a valid provision which has as nearly as possible the same effect. The illegality, invalidity or unenforceability of any provision of this Guarantee under the law of any jurisdiction shall not affect its legality, validity or enforceability under the law of any other jurisdiction nor the illegality, validity or enforceability of any of the provision. 20.2 Law This Guarantee is governed by, and shall be construed in accordance with, the laws of Malaysia (i) The Guarantor irrevocably: - (aa) submits to the non-exclusive jurisdiction of the courts of Malaysia and United States; (bb) waives any objections on the ground of venue or forum non-convenience or any similar grounds; (cc) consents to service of process by mail or in other manner permitted by the relevant law. (ii) The Guarantor shall at all times maintain an agent for service of process in Malaysia. Such agent shall be: - Name: Address: and the Guarantor undertakes not to revoke the authority of the above agent and if, for any reasons, which agent or any successor agent no longer serves as agent of the Guarantor to receive service of process, the Guarantor shall promptly appoint another such agent and advise the Lender thereof. 20.3 Notices 20.3.1 Each communication to be made hereunder shall be made in writing but, unless otherwise stated, may be made by telex, facsimile or letter. 20.3.2 Any communication or document to be made or delivered by one person to another pursuant to this Guarantee shall (unless that other person has by fifteen (15) days' written notice to be the Facility 21 Agent specified another address) be made or delivered to that other person at the address identified herein, or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee. 20.3.3 Any communication or document made or delivered under Clause 20.3.1 hereof shall be deemed to have been made or delivered: - (i) in the case of delivery in person, at the time of delivery; (ii) in the case of prepaid registered post, five (5) days after the date of posting or where posted to an address outside Malaysia, seven (7) days after the date of posting; (iii) in the case of telex on receipt by the sender of the answer-back code of the recipient at the end of the transmission; and (iv) in the case of telegram or facsimile, within twenty-four (24) hours after the time of transmission by the sender to be authenticated by the receipt by the send of a transmission controlled report appearing on its fact to emanate from the sender's machine showing the relevant number of pages, the correct facsimile number of the recipient and the result of the transmission being described as "O.K." or any equivalent description indicating that the communication has been property transmitted. The original of the notice, demand or request so sent by facsimile shall be forwarded to the receiving party by prepaid registered post. Provided that any communication or document to be made or delivered to the Facility Agent shall be effective only when received by the Facility Agent. 20.4 Waiver, Rights Cumulative No failure on the part of any Beneficiary to exercise, and no delay on its part in exercising, any right or remedy under this Guarantee will operate as a waiver thereof, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies provided in this Guarantee are cumulative and 22 not exclusive of any rights or remedies (whether provided by law or otherwise). 20.5 Legal Costs The Guarantor shall pay on demand all costs and expenses (including legal fees) incurred by any of the Beneficiaries in protecting or enforcing any rights under this Guaranty. 20.6 Successors in Title This Guarantee shall ensure to the benefit of each or the Beneficiaries and their respective successors and assigns, and the obligations of the Guarantor under this Guarantee shall be binding on it and its successors notwithstanding any change in the constitution or status of it or any of its successors. 20.7 No Assignment by Guarantor The Guarantor may not assign its rights or transfer its obligations under this Guarantee. 20.8 Agent for Service The Guarantor irrevocably appoints _____________________ to receive, for it and on its behalf service of process in any Proceedings in _______________________________-. Such service shall be deemed completed on delivery to the process agent (whether or not it is forwarded to and received by the Guarantor). If for any reason the process agent ceases to be able to act as such or no longer has an address in _____________________________, the Guarantor irrevocably agrees to appoint a substitute process agent acceptable to the Facility Agent, and to deliver to the Facility Agent a copy of the new agent's acceptance of that appointment, within 30 days. Nothing shall affect the right to service process in any other manner permitted by law. 20.9 Independent Legal Advice The Guarantor hereby declares that it has sought independent legal advice before executing this Guarantee and that the contents of this Guarantee has been explained to the Guarantor and the Guarantor has perfectly understood the same before the signing it voluntary with full knowledge of the Guarantor's obligations. 23 20.10 Principal & Subsidiary Instruments It is hereby declared and agreed that: - (a) the Facilities Agreement; (b) the Debenture; (c) the Assignment; (d) the Charge; (e) this Corporate Guarantee; and (f) the Security Agency Agreement; are instruments employed in one transaction within the meaning of Section 4(3) of the Stamp Act, 1949 (Consolidated and Revised 1989) to secure an aggregate principal sum comprising: - (i) TL I Facility of up to RM29,200,000.00; (ii) Dollar Advances Facility of up to USD4,000,000.00; (iii) Dollar RC Facility or up to USD2,000,000.00; (iv) Working Capital Facilities of up to RN5,900,000.00 and respective interest thereon and for the purpose of the said Section the Facilities Agreement is deemed to be the Principal Instrument and the other documents the Subsidiary Instruments. 24 IN WITNESS WHEREOF the parties have hereunto set their respective hands the day and year first abovewritten. SIGNED by ) ) for and on behalf of ) ZYCON CORPORATION ) in the presence of: - ) SIGNED by ) ) for and on behalf of ) BANK BUMIPUTRA MALAYSIA ) BERHAD ) as Lender in the ) Presence of: ) SIGNED by ) ) for and on behalf of ) BBMB KEWANGAN BERHAD as ) as Lender in the presence of: - ) SIGNED by ) ) for and on behalf of ) BANK BUMIPUTRA MALAYSIA ) BERHAD as Facility Agent ) in the presence of: - ) SIGNED by ) ) for and on behalf of ) BANK BUMIPUTRA MALAYSIA ) BERHAD as Security Agent ) in the presence of: - ) EX-10.6 8 LEASE FOR THREE ACRE 1 EXHIBIT 10.6 LEASE BETWEEN SOBRATO INTERESTS III, a California Limited Partnership AND ZYCON CORPORATION, a Delaware Corporation 2 TABLE OF CONTENTS Section Page # 1. PARTIES:............................................................ 1 2. PREMISES:........................................................... 1 3. USE:................................................................ 1 4. TERM:............................................................... 1 5. THIS PARAGRAPH INTENTIONALLY DELETED................................ 2 6. LATE CHARGES:....................................................... 2 7. CONSTRUCTION AND POSSESSION:........................................ 2 8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER................... 4 9. USES PROHIBITED:.................................................... 5 10. ALTERNATIONS AND ADDITIONS.......................................... 5 11. LANDLORD'S AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS:.... 5 12. MAINTENANCE OF PREMISES:............................................ 6 13. INSURANCE:.......................................................... 6 14. TAXES............................................................... 7 15. UTILITIES:.......................................................... 8 16. WAIVER OF LIABILITY................................................. 8 17. ABANDONMENT:........................................................ 8 18. FREE FROM LIENS:.................................................... 8 19. COMPLIANCE WITH GOVERNMENTAL REGULATIONS:........................... 9 20. TOXIC WASTE AND ENVIRONMENTAL DAMAGES............................... 9 A. TENANT'S RESPONSIBILITY........................................... 9 -i- 3 Section Page No. B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS.... 9 C. LANDLORD'S REPRESENTATIONS AND INDEMNITY............ 10 D. ACTUAL RELEASE BY TENANT............................ 10 E. ENVIRONMENTAL MONITORING............................ 11 21. INDEMNITY:............................................ 11 22. ADVERTISEMENTS AND SIGNS:............................. 12 23. ATTORNEY'S FEES:...................................... 12 24. TENANT'S DEFAULT:..................................... 12 24(a). REMEDIES:....................................... 13 24.(b) RIGHT TO RE-ENTER:.............................. 13 24.(c) ABANDONMENT:.................................... 13 24.(d) NO TERMINATION:................................. 14 25. SURRENDER OF LEASE:................................... 14 26. HABITUAL DEFAULT...................................... 14 27. LANDLORD'S DEFAULT:................................... 14 28. NOTICES:.............................................. 14 29. ENTRY BY LANDLORD:.................................... 15 30. DESTRUCTION OF PREMISES............................... 15 31. ASSIGNMENT OR SUBLEASE:............................... 16 32. CONDEMNATION:......................................... 19 33. EFFECTS OF CONVEYANCE:................................ 19 34. SUBORDINATION:........................................ 20 35. WAIVER:............................................... 20 36. HOLDING OVER:......................................... 20 37. SUCCESSORS AND ASSIGNS:............................... 20 4 Section Page No. 38. ESTOPPEL CERTIFICATES:................................ 20 39. OPTIONS TO EXTEND:.................................... 21 40. THIS PARAGRAPH INTENTIONALLY DELETED.................. 21 41. THIS PARAGRAPH INTENTIONALLY DELETED.................. 21 42. OPTIONS:.............................................. 21 43. QUIET ENJOYMENT:...................................... 21 44. BROKERS:.............................................. 22 45. LANDLORD'S LIABILITY:................................. 22 46. AUTHORITY OF PARTIES:................................. 22 47. THIS PARAGRAPH INTENTIONAL DELETED.................... 22 48. MISCELLANEOUS PROVISIONS:............................. 22 49. THIS PARAGRAPH INTENTIONAL DELETED.................... 22 5 1. PARTIES: THIS LEASE, is entered into on this 4th day of January, 1996, between Sobrato Interests III, a California Limited Partnership, and Zycon, a Delaware Corporation, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises described on the site plan proposed by Architectural Technologies dated 12/4/95, attached hereto, situated in the City of Santa Clara, County of Santa Clara, State of California, including improvements of: Approximately a 59,000 square foot two story industrial building, with parking for approximately two hundred eight (208) automobiles, described on plans prepared by Architectural Technologies dated 12/4/95, attached hereto as Exhibit "A" to be constructed at Landlord's expense. The Premises are to be constructed on approximately 3 acres as shown on the Site Plan prepared by Architectural Technologies dated 12/4/95 (the "Premises"). 3. USE: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Research, Office, and Light Manufacturing purposes including but not limited to the assembly and manufacture of printed circuit boards, provided that such assembly and manufacture shall be permitted by the 1994 Uniform Building Code F-1 Occupancy. 4. TERM: The Term shall be for one hundred fifty (150) months, commencing on the 1st day of October, 1996 and ending on the 31st day of March, 2009, at the total rent or sum of NINE MILLION SEVEN HUNDRED THIRTY ONE THOUSAND ONE HUNDRED SEVENTY FIVE AND 00/100 ($9,731,175.00) DOLLARS, payable, without deduction or offset, in monthly installments as follows:
$'s/Month $'s/Year --------- -------- 10/1/96 - 9/30/97 $ 56,050 x 12 = $672,600 10/1/97 - 9/30/98 $ 57,451 x 12 = $689,415 10/1/98 - 9/30/99 $ 58,888 x 12 = $706,650 10/1/99 - 9/30/00 $ 60,360 x 12 = $724,317 10/1/00 - 9/30/01 $ 61,869 x 12 = $742,425 10/1/01 - 9/30/02 $ 63,415 x 12 = $760,985 10/1/02 - 9/30/03 $ 65,001 x 12 = $780,010 10/1/03 - 9/30/04 $ 66,626 x 12 = $799,510 10/1/04 - 9/30/05 $ 68,291 x 12 = $819,498 10/1/05 - 9/30/06 $ 69,999 x 12 = $839,985 10/1/06 - 9/30/07 $ 71,749 x 12 = $860,985 10/1/07 - 9/30/08 $ 73,542 x 12 = $882,509 10/1/08 - 3/31/09 $ 75,381 x 06 = $452,286
6 -2- due on or before the first day of each calendar month during the term hereof. Said rental shall be paid in lawful money of the United States of America, without offset or deduction, and shall be paid to Landlord at such place or places as may be designated in writing from time to time by Landlord. Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Concurrently with Tenant's execution of this Lease, Tenant shall pay to Landlord the sum of FIFTY SIX THOUSAND FIFTY AND 00/100 ($56,050.00) DOLLARS as prepaid rent for the first month's rent. 5. THIS PARAGRAPH INTENTIONALLY DELETED. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord or rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, administrative, processing, accounting charges, and late charges, which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to three percent (3%) of such overdue amount which shall be due and payable with the payment then delinquent. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. 7. CONSTRUCTION AND POSSESSION: The Tenant Interior Improvements and Building Shell shall be constructed by independent contractors to be employed by and under the supervision of Sobrato Construction Corporation, as general contractor. The final plans for such Interior Improvements shall be prepared as expeditiously as possible and shall be subject to the reasonable approval by the parties, which approval shall not be unreasonably withheld or delayed. Landlord shall construct the Tenant Interior Improvements and Building Shell in accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. The Building Shell and Tenant Interior Improvements are generally described in Exhibit E. The final plans shall be consistent with Exhibit E and shall be based upon and consistent with the plan for the Building Shell attached as Exhibit A, and with the Tenant Floor Plans to be submitted as provided in Exhibit E. Landlord shall be responsible for and shall pay the entire cost of the Building Shell. Costs for all Tenant Interior Improvements shall be paid for by Tenant in cash within ten (10) 7 -3- days after Landlord has provided Tenant with written evidence of Landlord's progress payments to sub-contractors. Landlord to retain 10% from progress payment to sub-contractors until completion of punch list corrective work. All costs for Tenant Interior Improvements shall be fully documented to and verified by Tenant. Tenant reserves the right to require Landlord to secure three competitive bids from sub-contractors on any item costing in excess of TWENTY FIVE THOUSAND AND 00/100 ($25,000.00) DOLLARS. Landlord and Tenant to execute a standard construction contract containing provisions customarily contained in such contracts providing reasonable protection to the interests of the parties. The final selection of the successful sub-contractors for the interior improvements shall be subject to Tenant's approval. Upon receipt of all competitive bids, Tenant shall retain the right to negotiate with any subcontractor subject to the reasonable approval of Lessor. Tenant to have the right to record a chattel mortgage, personal property lease, or other security interest on the lease hold improvements that it has paid for and that have become an integral part of the real estate; Tenant's rights hereunder will revert to the Landlord upon Tenant's surrender at the end of the term or sooner termination of this Lease. If Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement date and the rent and rent schedule set forth in Article 4 shall be revised to conform to the date of the Landlord's delivery of possession but the termination date for the initial term of the Lease shall continue to be March 31, 2009. If Tenant does not meet the plan delivery dates described below, or should Tenant substantially change such plans afterward, rental shall still commence on October 1, 1996 provided Landlord completes the Building Shell to a watertight condition by July 1, 1996 even if Tenant Improvements are not complete. The term of the Lease shall not commence until the Premises are Substantially Complete as defined herein. "Substantially Complete" shall mean that : (i) all necessary governmental approvals, permits, consents, and certificates have been obtained by or for Landlord for the lawful construction by Landlord, and occupancy by Tenant, (ii) all of the Premises' interior fully meet all of the Tenant Floor Plans A, (iii) all of the Premises' exterior substantially meets the applicable Tenant Floor Plans, including paved parking areas, and (iv) said interior is in a "broom clean" finished condition. If necessary, Landlord reserves the right to post a bond for the uncompleted portion of the landscaping. In the event items (i), (ii), (iii) and (iv) above are completed prior to October 1, 1996, Tenant agrees to accept such earlier completion date and agrees to pay a per diem rental in the amount of $1,868.00 for each day prior to October 1, 1996 that the premises are completed. Notwithstanding the above, if Landlord has not acquired title to the land and commenced construction of the Building Shell by June 1, 1996, Tenant may terminate this Lease as its sole remedy by giving Landlord written notice. Commencement of construction shall mean that Landlord has obtained all permits necessary to construct the Building Shell given the use contemplated hereby, and has commenced substantial excavation. The October 1, 1996 building delivery date contemplates that Tenant shall have provided Landlord with one-line drawings of Tenant wall layout and specifies all required electrical and mechanical equipment by March 1, 8 -4- 1996, and complete working drawings by April 1, 1996 and if Tenant fails to do so, the building delivery date shall be extended by one day for each day after the above dates until Tenant delivers such drawings. Provided further that Landlord shall complete the Building Shell to a watertight condition by July 1, 1996 and Tenant Interior Improvements by October 1, 1996 unless it has been delayed for causes beyond its reasonable control such as, but not limited to, strikes, unavailable equipment or materials, changes made by Tenant, or delays caused securing approval of governmental agencies. In the event of a delayed Lease Commencement Date beyond December 1, 1996 plus additional time for the unavoidable delays described above, Tenant is to receive one day of free rent for every day beyond December 1, 1996 that the Premises are not ready for Tenant's occupancy. 8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER. When Tenant enters hereunder, Tenant shall accept the Premises as being in good and sanitary order, condition and repair, except for latent defects and except for the "punch list" to be provided Landlord within thirty (30) days after Tenant's occupancy. The Tenant agrees on the last day of the tern hereof, or on the sooner termination of this Lease, to surrender the Premises unto Landlord in good condition and repair, reasonable wear and tear consistent with first class office and light manufacturing uses excepted. "Good condition" shall mean that the interior walls of all office and warehouse areas, the floors of all office and warehouse areas, all suspended ceilings and any carpeting will be cleaned. Tenant shall ascertain from Landlord at least thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition as of the Lease Commencement Date, reasonable wear and tear consistent with first class office and light manufacturing uses excepted, or to cause Tenant to surrender all alterations, additions, and improvements in place to Landlord. Tenant may request Landlord's decision at any time within six (6) months before the end of the Lease term and Landlord shall respond within thirty (30) days of Tenant's inquiry. Landlord's failure to respond within such period shall be deemed an election that Tenant surrender the Premises in their then current condition. If Landlord so elects as provided above, then Tenant shall remove such alterations, additions, and improvements as Landlord may require and shall repair and restore said Premises or such part or parts thereof to the condition before such removal, reasonable wear and tear excepted, before the termination of this Lease at Tenant's sole cost and expense. Tenant on or before the end of the Term or sooner termination of this Lease, shall remove all his or its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed to be abandoned by Tenant. Upon removal of its personal property and trade fixtures from the Premises by Tenant, then Tenant shall be fully responsible to repair any damage to the Premises caused by such removal and to return the Premises upon which such personal property and trade fixtures were located to the condition as existed prior to the installation, reasonable wear and tear excepted. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any reasonable claims made by any succeeding tenant founded on such delay. As used in this Lease, the words "trade fixtures" shall include equipment. 9 -5- Provided further that Landlord hereby warrants that all work will be performed in a good workmanlike manner free of all defects in construction and/or materials for a period of one year after Tenant accepts possession plus a period of two years from acceptance for the roof membrane or any other waterproof conditions. Landlord to further assign all sub-contractor and material supplier's warranties to Tenant. 9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed, any waste upon the said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in the project or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls, or ceiling which endanger the structure, or place any harmful liquids, waste materials, or hazardous materials in the domestic drainage system of or soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature or any waste materials, refuse, scrap or debris shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper or appropriately screened area unless completely enclosed in appropriate container that meets City approvals. See Article 20. 10. ALTERNATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any alteration or addition to the said Premises, or any part thereof, without the written consent of Landlord first had and obtained based upon Tenant's delivering to Landlord the proposed architectural and structural plans for all such alterations; any addition or alteration to the said Premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord. Alterations and additions which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. After having obtained Landlord's consent, Tenant agrees that it will not proceed to make such alterations or additions, until three (3) days from the receipt of such consent, or ten (10) working days after request for such consent, whichever is sooner, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Provided further that Tenant may make non-structural modifications to the premises costing less than FIFTY THOUSAND AND 00/100 ($50,000.00) per modification with a total of four (4) such modifications per year as long as Tenant provides Landlord an "As Built" drawing within ten (10) days following completion of the work. 11. LANDLORD'S AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS: Tenant acknowledges that this Lease is a net lease and the rental shall be paid to Landlord net of all taxes (as and to the extent provided in Article 14), utilities (as and to the extent provided in Article 15), insurance expenses (as and to the extent provided in Article 13), maintenance, service, janitorial, security and repair expenses (as and to the extent provided in Article 12) and other operating expenses commonly borne by tenants of like commercial buildings. Tenant shall pay all such expenses accruing after the Lease Commencement Date and during the term of this Lease. Lease costs and costs of management, financing and construction shall be Landlord's responsibility, except as otherwise provided in this Lease. 10 -6- Landlord will use its best effort to obtain separate tax assessments and insurance billings and separate utility meters for Tenant's building and leasehold improvements therein. Tenant will have the right to approve all vendors selected by Landlord that provide common area maintenance. 12. MAINTENANCE OF PREMISES: Except as provided in Article 11 or below, Tenant shall, at its sole cost, keep and maintain, repair and replace, said Premises and appurtenances and every part hereof, including but not limited to, exterior walls, roof glazing, sidewalks, parking areas, plumbing, electrical and HVAC systems, and all the Tenant Interior Improvements in good and sanitary order, condition and repair. Tenant shall provide Landlord with a copy of a service contract between Tenant and a licensed air-conditioning and heating contractor which contract shall provide for bi-monthly maintenance of all air conditioning and heating equipment at the Premises. Tenant shall pay the cost of all air-conditioning and heating equipment repairs or replacements which are either excluded from such service contract or any existing equipment warranties. Tenant shall be responsible for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if (i) Tenant contracts with a licensed roof contractor who is reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the roof membrane at least annually, with the first inspection due the sixth (6th) month after the Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide to Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. Landlord to be responsible for repairs or replacements of foundation, exterior walls (except painting), the structural portions of the roof, any problems caused by subsidence, and any defects in construction, workmanship or materials unless caused by Tenant's fault. All vinyl wall surfaces and floor tile are to be maintained in an as-good a condition as when Tenant took possession free of holes, gouges, or defacements, reasonable wear and tear excepted. Tenant agrees to limit attachments to vinyl wall surfaces exclusively to V-joints. Tenant agrees to water, maintain and replace, when necessary, any shrubbery and landscaping. Landlord to be responsible for landscape material replacement required for the first twelve (12) months of this Lease. 13. INSURANCE: Tenant shall not use, or permit said Premises, or any part thereof, to be used, for any purpose other than that for which the said Premises are hereby leased; and no use shall be made or permitted to be made of the said Premises, nor acts done, which will cause a cancellation of any insurance policy covering said Building, or any part thereof. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said Building and appurtenances. The Landlord agrees to purchase and keep in force fire, earthquake (if commercially available and if required by Institutional Lenders from time to time on the majority of similar industrial buildings in the City of Santa Clara), and extended coverage insurance covering the Premises in amounts not to 11 -7- exceed the actual insurable value of the Building, including the Premises, as determined by Landlord's insurance company's appraisers. Tenant's obligation to pay for Earthquake coverage shall be limited to a maximum additional cost over a normal fire and extended coverage policy of $35,000.00 per year subject to adjustment for Consumer Price Index increases utilizing October 1, 1996 as the base period or if no consumer price index is published for such period, then the nearest published information shall be utilized as the base. In addition, Tenant agrees to insure its additions, alterations, and those leasehold improvements paid for by Tenant which have become an integral part of the Building or real estate for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises of $10,000,000.00 combined single limit for bodily injury and property damage. Tenant shall name Landlord, Sobrato Development Companies, and any future owner of the fee interest, and the Institutional Lender on the building as loss payees as their interests may appear on the property insurance and as an additional insured on the liability insurance; shall deliver a Certificate of Insurance, additional insured endorsement and renewal certificates to Landlord, fee owner, and Lender. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation or termination. Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to the Landlord or the Tenant as the case may be, or to the Premises or its contents, and which arise from any risk covered by their respective insurance policies, as set forth above. The parties shall obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against the Landlord or the Tenant, as the case may be. 14. TAXES. Tenant shall be liable for all taxes levied against personal property and trade or business fixtures, and agrees to pay, as additional rental, all real estate taxes and special assessment installments levied on the Premises, upon the occupancy of the Premises and including any substitute or additional charges which may be imposed during the Lease term including real estate tax increases due to a sale or other transfer of the Premises, as they appear on the City and County tax bills during the Lease term, and as they become due. It is understood and agreed that Tenant's obligation under this Article will be pro rated to reflect the commencement and termination dates of this Lease. Tenant's obligation for taxes shall not apply to taxes accruing before the Lease Commencement Date of this Lease. In any time during the term of this Lease a tax, excise on rents, business license tax, or any other tax, however described, is levied or assessed against Landlord, as a substitute or addition in whole or in part for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge his pro rata share of such tax or excise on rents or other tax before it becomes delinquent, except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon the Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that the Tenant cannot pay and discharge his pro rata share of 12 -8- such tax on behalf of the Landlord, then at the sole election of the Landlord, the Landlord may increase the rental charged hereunder by the exact amount of such tax. 15. UTILITIES: Except as provided in Article 11, Tenant shall pay directly to the providing utility all water, gas, heat, light, power, telephone, and other utilities supplied to the Premises. Tenant to pay for all sewer discharge fees charged by the City of Santa Clara. 16. WAIVER OF LIABILITY: Failure by Landlord to perform any defined services, or any cessation thereof, when such failure is caused by accident, breakage repairs, strikes, lockout or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord, shall not render Landlord liable in any respect for damages to other person or property, nor be construed as an eviction of Tenant, nor cause an abatement of rent nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any of the equipment or machinery utilized in supplying the services listed herein break down, or for any cause cease to function properly, upon receipt of written notice from Tenant of any deficiency or failure of any defined Services, Landlord shall use reasonable diligence to repair same promptly, but Tenant shall have no right to terminate this Lease, and shall have no claim for rebate of rent or damages, on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant waives the provisions of California Civil Code Sections 1941 and 1942 concerning the Landlord's obligation of tenantability and Tenant's right to make repairs and deduct the cost of such repairs from the rent. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or its failure to furnish any of the foregoing. 17. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any time during the Term; and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on Premises shall be deemed to be abandoned, at the option of the Landlord, except such property as may be mortgaged to Landlord. 18. FREE FROM LIENS: Tenant shall keep the Premises and the Building in which the Premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Provided further that Tenant shall have the right to contest such lien provided it posts a bond indemnifying Landlord in an equivalent amount at Tenant's sole cost and expense. 19. COMPLIANCE WITH GOVERNMENTAL Regulations: Tenant shall, at its sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to the said Premises, and shall faithfully observe in the use of the Premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force provided further that Tenant reserves the right to contest such requirement and as a condition of such contest Landlord may require a bond be posted in a sufficient sum as Landlord reasonable determines is necessary to protect and indemnify Landlord's interest. All costs for such bond will be at Tenant's expense during the 13 -9- period of protest. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Landlord and Tenant. 20. TOXIC WASTE AND ENVIRONMENTAL DAMAGES: A. TENANT'S RESPONSIBILITY: Except as may be permitted by the 1994 Uniform Building Code F-1 Occupancy, without the prior written consent of Landlord, Tenant shall not bring, use, or permit upon the Premises, or generate, create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Division 22 Title 26 of the California Code of Regulations as the same may be amended from time to time ("Hazardous Materials"). In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. In the event Landlord consents to Tenant's use of Hazardous Materials on the Premises, Landlord may impose reasonable conditions relating to the use of such hazardous materials and the surrender of the Premises including requiring Tenant to comply with all applicable closure requirements which may be imposed by applicable authorities. B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall comply, at its sole cost, with all laws pertaining to, and shall indemnify and hold Landlord harmless from any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from such bringing, using, permitting, generating, emitting or disposing of Hazardous Materials by (i) Tenant, or by (ii) a third party through the surface soils of the Premises during the Lease Term. Tenant's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims after request for defense by Landlord. This Indemnity under this Paragraph B does not apply to claims covered under Paragraph C. C. LANDLORD'S REPRESENTATIONS AND INDEMNITY: Landlord represents to Tenant that no Hazardous Materials (as defined in Paragraph A) exists at the Premises or any portion thereof. Landlord will provide Tenant, for Tenant's approval, with a copy of all Phase I, Phase II or other environmental reports within five days of Landlord's receipt of such reports. If any 14 -10- report obtained by Landlord prior to commencement of construction discloses the presence of Hazardous Material on the Premises, Tenant may, without further liability, cancel its obligations under this Lease within 10 days of receipt of such report. Landlord acknowledges and agrees that Tenant has no responsibility for the conditions existing as of the date of the execution of this Lease in, on, under or about the Premises or for any Hazardous Materials which Tenant can prove were introduced to, on, in, under or about the Premises by Landlord or its affiliated companies during construction. Landlord shall indemnify and hold Tenant and its officers, directors, agents and employees ("Tenant Indemnities") harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant Indemnitees arising from the presence of Hazardous Materials on the Premises as of the execution of this Lease or Hazardous Materials which were used, generated, permitted, admitted, disposed of or brought onto the Premises by Landlord during the Landlord's or Landlord's affiliated companies' construction of the Building as required by this Lease. Landlord's indemnification and hold harmless obligations include, without limitation, all of the items referred to in subparagraphs (i) and (ii) of Paragraph B and all costs of defending such claims after request for defense by Tenant. Landlord agrees that the foregoing obligations are material conditions of this Lease, and that such obligations shall survive any termination, cancellation or expiration of this Lease. D. ACTUAL RELEASE BY TENANT: Tenant agrees to notify Landlord of any lawsuits which relate to, or orders which relate to the remedying of, the actual release of Hazardous Materials on or into the soils or groundwater at or under the Premises. Tenant shall also provide to Landlord all notices required by Section 25359.7(b) of the Health and Safety Code and all other notices required by law to be given to Landlord in connection with Hazardous Materials. Without limiting the foregoing, Tenant shall also deliver to Landlord, within twenty (20) days after receipt thereof, any written notices from any governmental agency alleging a material violation of, or material failure to comply with, any federal, state or local laws, regulations, ordinances or orders, the violation of which or failure to comply with, poses a foreseeable and material risk or contamination of the groundwater or injury to humans (other than injury solely to Tenant, its agents and employees within the Building). In the event of any release on or into the Premises or into the soil or groundwater under the Premises of any Hazardous Materials used, treated, stored or disposed of by Tenant, Tenant agrees to comply, at its sole cost and expense, with all laws, regulations, ordinances and orders of any federal, state or local agency relating to the monitoring or remediation of such Hazardous Materials. In the event of any such release of Hazardous Materials, Tenant agrees to meet and confer with Landlord and its Lender to attempt to eliminate and mitigate any financial exposure to such Lender and resultant exposure to Landlord under California Code of Civil Procedure section 736(b) as a result of such release and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical uses to which the Property has and continues to be used, the risks to public health posed by the release, the then available technology and the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and all applicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under Article 20.B of this Lease to indemnify and hold Landlord harmless from any claims liabilities, costs or expenses 15 -11- incurred or suffered by Landlord as provided in Article 20.B of this Lease. Tenant shall provide Landlord prompt written notices of Tenant's monitoring cleanup and remedial steps. In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant's obligation to Landlord under this Article 20.D concerning the Level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to the provisions of Article 45 of this Lease. E. ENVIRONMENTAL MONITORING: Tenant shall permit Landlord and the Lender and its agents and representatives reasonable rights to enter the Premises during Tenant's normal business hours, and upon reasonable notice, to observe the Premises, take and remove soil or groundwater samples and conduct tests on the Premises, provided (1) that such inspection and testing and sampling do not interfere with Tenant's use of the Premises as otherwise permitted under the Lease; and (2) that the Lender, its agents and representatives execute an appropriate Confidentiality Agreement reasonably satisfactory to Lender and Tenant agreeing to hold confidential all information relating to Tenant's products, processes and business operations learned from such inspection; provided, however, that such confidentiality shall not apply to any release of Hazardous Materials or contamination of the Property, Improvements, soil or groundwater or any disclosure required by law. 21. INDEMNITY: As a material part of the consideration to be rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said premises and for injuries to persons in or about said Premises, from any cause arising at any time, and Tenant will hold Landlord exempt and harmless form any damage or injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises by Tenant, or from the failure of Tenant to keep the Premises in good condition and repair, as herein provided, except for Landlord's proven negligence. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. This Article shall not apply to an injury or damage to person or property arising out of any construction defect. 22. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the said Premises any unusual or extraordinary signs, or any signs not approved by the City or other governing authority. The Tenant will not place, or permit to be placed, upon the Premises, any signs, advertisements or notices without the written consent of the Landlord as to type, size, design, lettering, coloring and location, and such consent will not be unreasonably withheld. Any sign so placed on the Premises shall be so placed upon the understanding and agreement that Tenant will remove same at the termination of the tenancy herein created and repair any damage or injury to the Premises caused thereby, and if not so removed by Tenant then Landlord may have same so removed at Tenant's expense. 16 -12- 23. ATTORNEY'S FEES: In case suit should be brought for the possession of the Premises, for the recovery of any sum due hereunder, or because of the breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee as part of its costs which shall be deemed to have accrued on the commencement of such action. 24. TENANT'S DEFAULT:: The occurrence of any of the following shall constitute a default and breach of this Lease by Tenant: (a) Any failure by Tenant to pay the rental or to make any other payment required to be made by Tenant hereunder, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; (b) The abandonment or vacation of the Premises by Tenant; (c) A failure by Tenant to observe and perform any other provision of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion; (d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of petition filed against Tenant, the same is dismissed after the filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. 24(a). REMEDIES: In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of award of the amount by which the unpaid rent would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform his obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, and (e) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. The term "rent," as used herein, shall be deemed to be and to mean the minimum monthly installments of rent and all other sums required to be paid by Tenant pursuant to the terms of this Lease, all other such sums being deemed to be additional rental due hereunder. As used in (a) and (b) above, the "worth at the time of award" is computed 17 -13- by allowing interest at the rate of the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. 24.(b) RIGHT TO RE-ENTER:In the event of any uncured monetary default as defined above or a default invoking a breach of Article 20 herein by Tenant, Landlord shall also have the right, with or without terminating this Lease, to reenter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 24.(c) ABANDONMENT: In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Article 24.(b) above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Article 24.(a) above, then the provisions of California Civil Code Section 1951.4, as amended form time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any prorated cost of such reletting; third, to the payment of the cost of any prorated alterations and repairs to the Premises; fourth, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefore by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also by to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 24.(d) NO TERMINATION: No re-entry or taking possession of the Premises by Landlord pursuant to 24.(b) or 24.(c) of this Article 24 shall be construed as an election to terminate this Lease unless a written notice of such intention to be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 25. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Building and Premises. Instead, at the option of Landlord, Tenant's surrender may terminate all or any existing sublease or subtenancies, or may operate as an 18 -14- assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 26. HABITUAL DEFAULT Notwithstanding anything to the contrary contained in Article 24, 24(a), (b), (c) and (d), the parties hereto agree that if the Tenant shall have defaulted in the performance of any monetary default or a default involving a breach of Article 20 herein of this Lease for three or more times during any twelve month period during the term hereof, then such conduct shall, at the election of the Landlord, represent a separate event of default which cannot be cured by the Tenant. Tenant acknowledges that the purpose of this provision is to prevent repetitive defaults by the Tenant under the Lease, which work a hardship upon the Landlord, and deprive the Landlord of the timely performance by the Tenant hereunder. 27. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord the reasonable opportunity to cure such failure prior to any claim for breach or for damages resulting from such failure. 28. NOTICES: All notices given to Tenant may be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed: Tenant at: Landlord at: Zycon Corporation Sobrato Interests III 445 El Camino Real 10600 North De Anza Boulevard, Suite 200 Santa Clara, California 95050 Cupertino, California 95014 or such other address advised by Tenant or Landlord in writing, whether or not Tenant has departed from, abandoned or vacated the Premises. All notices shall be deemed received three (3) days after posting. 29. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to enter into and upon said Premises at all reasonable times subject to any security regulations of Tenant for the purpose of inspecting the same or for the purpose of maintaining the Premises or the Building in which said Premises are situated, or for the purpose of making repairs, alterations to the Premises, or building on adjacent land leased by Landlord, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required without any rebate of rent or without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned. In the event of a substantial disruption to Tenant during such entry, Tenant will be entitled to reasonable reduction in rent determined by the percentage of the floor area of the building that can not be utilized by the Tenant; and Tenant shall permit Landlord and his agents, at any time within ninety (90) days prior to the expiration of this Lease, to place upon said Premises any "For Sale" or "For Lease" signs and exhibit the Premises to prospective tenants at reasonable hours. 30.DESTRUCTION OF PREMISES: If the Premises are damaged or destroyed from any cause during the term of this Lease (including option periods) Landlord will within thirty (30) 19 -15- days of the destruction, notify Tenant in writing: (1) whether or not the repairs can be made within one hundred fifty (150) days; (2) whether the destruction is a partial destruction as defined below; (3) if the destruction is an uninsured loss as defined below which Landlord declines to repair. Within thirty (30) days of such notice, either party may by written notice to the other terminate this Lease if the repairs cannot be made within one hundred fifty (150) days, or if the loss is an uninsured loss unless the Landlord elects to repair the same or if destruction exceeds more than one-half (1/2) of the replacement cost of the premises. If Landlord fails to timely give the notice, Tenant shall have ninety (90) days after destruction to give notice of termination. In the event of a partial destruction of the Premises from any cause then, unless the Lease is terminated as provided above, Landlord shall forthwith repair the same, provided such repairs can be made within one hundred fifty (150) days under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the said Premises in the reasonable judgment of Landlord. In the event that Landlord does not elect to make such repairs, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of Tenant. For purposes of this Article "partial destruction" shall mean destruction to the extent of one-half (1/2) of the Replacement Cost of the Premises or less. In the event the Premises are more than partially destroyed, Landlord, or Tenant, may elect to terminate this Lease. If not so terminated, Landlord shall proceed with repairs, this Lease continuing in full force and the rent to be proportionately reduced as aforesaid. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this Article, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Tenant. In all events a total or partial destruction of the Premises by an uninsured casualty with damage costing in excess of $500,000.00 to repair, such event shall terminate this Lease at the option of Landlord. In the event of any dispute between Landlord and Tenant relative to the provisions of this Article, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding upon both Landlord and Tenant, who shall bear the cost of such arbitration equally between them. In all events Landlord shall not be required to restore additions, alterations or improvements made by Tenant after commencement of this Lease or replace Tenant's fixtures or personal property. This exception shall not apply to the Tenant Interior Improvements covered by Article 7 provided sufficient insurance proceeds are available to Landlord to restore such improvements or modifications. If the Landlord does not rebuild the Premises, then Tenant shall be entitled to the prorated portion of insurance proceeds under the policy it carries under Article 13. The prorated portion shall be determined on a straight line basis over the original term of the Lease. 31.ASSIGNMENT OR SUBLEASE: In the event Tenant should desire to assign this Lease or any interest therein including, without limitation, a pledge, mortgage or other hypothecation, except as provided in Article 7, or sublet the Premises or any part thereof, Tenant shall give 20 -16- Landlord written notice of such desire at least thirty (30) days in advance of the date on which Tenant desires to make such assignment or sublet. After Tenant has located a subtenant satisfactory to Tenant, it shall provide further notice to Landlord. This further notice shall give the name and current address of the proposed assignee/subtenant, proposed use of the Premises, rental rate and current financial statement; and upon request to Tenant, Landlord shall be given additional information as reasonably required to determine whether it will consent to the proposed assignment or sublease. Landlord shall then have a period of five (5) working days following receipt of such notice within which to notify Tenant in writing that Landlord elects (i) to terminate this Lease as to the space so affected as of the date so specified by Tenant in which event Tenant will be relieved of all further obligations hereunder as to such space, (ii) to permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice, or (iii) refuse consent. If Landlord should fail to notify Tenant in writing of such election within said five (5) working day period, Landlord shall be deemed to have elected option (ii) above. Except as provided below, any rent or other consideration realized by Tenant under any such sublease and assignment in excess of the monthly rental installments payable hereunder, and all expenses payable under Article 11 less reasonable subletting and assignment costs, and costs payable by Tenant to modify the premises to suit the sub-tenant, shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration shall constitute an obligation for additional rent hereunder. Tenant shall first receive its subletting and modification costs without interest before dividing any excess profits with Landlord. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. If Landlord exercises its option to terminate this Lease in part in the event Tenant desires to sublet or assign part of the Premises, then (a) this Lease shall end and expire, with respect to such part of the Premises, on the date upon which the proposed sublease was to commence, and (b) from and after such date, the rent and Tenant's allocable share of all other costs and charges shall be adjusted, based upon the proportion that the rentable area of the Premises remaining bears to the total rentable area of the Premises. If Landlord does not exercise its option to terminate this Lease, Landlord's consent to the proposed assignment or sublease shall not be unreasonably withheld provided and upon condition that: (a) In Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in such a business, and the Premises, or the relevant part thereof, will be used in such a manner, that: (ii) is limited to the use expressly permitted under this Lease; (b) The proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the responsibility involved and Landlord has been furnished with reasonable proof thereof; (c) THIS PARAGRAPH INTENTIONALLY DELETED 21 -17- (d) The proposed sublease shall be in form reasonably satisfactory to Landlord; (e) There shall not be more than two (2) subtenants of the Premises at any one time; (f) THIS PARAGRAPH INTENTIONALLY DELETED (g) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and reasonable legal costs incurred in connection with the granting of any requested consent; (h) Landlord will not withhold consent to an assignment or a sublease of the Premises if Landlord does or is required to consent to an assignment or sublease of 445 El Camino Real, Santa Clara, 435 El Camino Real, Santa Clara, or 1270 Cambell Avenue, San Jose. Any sublease or assignment executed with the consent of Landlord shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent or additional rent by Landlord from any subtenant or assignee, Tenant shall and will remain fully liable for the payment of the rent and additional rent due, and to become due hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant shall further indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs, as described in Article 24 above. Any assignment or transfer shall be made only if and shall not be effective until the assignee shall execute, acknowledge and deliver to landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed. If Tenant is a corporation or partnership, all the above provisions shall apply to a transfer (by one or more transfers) of a majority of the stock of the corporation or the majority of 22 -18- ownership or control of the partnership, as if such transfer were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation or partnership that controls, is controlled by, or is under common control with Tenant, provided that, in any such events: (i) the successor to Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the net worth of Tenant immediately prior to such transfer; and (ii) proof satisfactory to Landlord of such newt worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. Notwithstanding the above, the sale or transfer of a majority of the Tenant's shares shall not constitute as assignment so long as immediately after such sale or transfer the corporation meets the net worth criteria set forth above. Without limiting the above, the issuance of new shares by Zycon in any private or public offering and the sale of any stock of existing shareholder in connection therewith, shall not constitute as assignment of the lease, provided the net worth of Tenant immediately following such sale is no less than the net worth of Tenant immediately prior to such stock sale. Notwithstanding the above, Tenant may assign this Lease without Landlord's consent to any corporation resulting from the merger or consolidation with Tenant or to any person or entity which acquires all or substantially all the assets of Tenant as a going concern of the business that is being conducted on the Premises provided that the assignee meets the net worth criteria set forth above and provided such assignee agrees in writing to abide by all of the terms of this Lease. Only the amount allocated to the Lease in the agreement between Tenant and the purchaser of the business shall be considered rent for purposes of the 50/50 sharing provided in the first paragraph of this Article 31. The termination of this Lease due to Tenant's default shall not automatically terminate any assignment or sublease then in existence. At the sole election of Landlord, the assignee or subtenant shall attorn to Landlord and Landlord shall undertake the obligations of the Tenant under the sublease or assignment; provided the Landlord shall not be liable for prepaid rent, security deposits or other defaults of the Tenant to the subtenant or assignee. 32. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall as to the part so taken, terminate as of the date title shall vest in the condemn or purchase, and the rent payable hereunder shall be adjusted so that the Tenant shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Landlord shall have the option to terminate this Lease as of the date when title to the part so taken vests in the condemnor or purchaser. Tenant to be notified in writing by Landlord of any pending or threatened condemnation proceedings within a reasonable period of time after Landlord's knowledge of same and whether Landlord intends to terminate the lease so as to give Tenant a reasonable opportunity to locate new facilities. If all of the Premises be taken, then Landlord and Tenant shall share in the balance of the compensation remaining after the application of the condemnation provisions of any existing Mortgage covering the Premises. The compensation 23 -19- shall be divided between Landlord and Tenant in proportion to the relative amounts spent by Landlord for the Building; shell and the appraised value of the land at the time of condemnation and Tenant for the Building shell Tenant Improvements as provided in this Lease. Tenant's share of the compensation shall not exceed the depreciated value of the improvements as provided in this Lease installed and paid for by Tenant less any amounts received or to be received by Tenant outside of the award as compensation for Tenant's interest in those improvements. If Tenant elects to remove some or all of the improvements pursuant to California Code of Civil Procedure Section 1263.260, then the value of such improvements removed shall be excluded form the calculation. Landlord shall have the exclusive right to negotiate or litigate the award with the authority exercising the power of eminent domain. Landlord shall cooperate with Tenant in Tenant's efforts to recover compensation for relocation costs, loss of personal property not treated as improvements pertaining to realty and loss of goodwill. Tenant waives the provisions of California Code of Civil Procedure Section 1265.130. 33. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the Owner for the time being of the land and Building, containing the Premises, so that, in the event of any sale, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations for the Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, if the purchaser has agreed in writing to carry out any and all covenants and obligations of the Landlord hereunder, and thereupon the Landlord shall be discharged from any further liability in reference thereto. 34. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease shall be subordinate to any deed of trust, or other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Tenant agrees to promptly execute any documents which may be required to effectuate such subordination. Notwithstanding such subordination, Tenant's right to quire possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease. At the request of any lender, Tenant agrees to execute and deliver any reasonable modifications of this Lease which do not adversely affect the leaseholder or Tenant's right hereunder. 35. WAIVER: The waiver by Landlord of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at time of acceptance of such rent. 36. HOLDING OVER: Any holding over after the termination or expiration of the said term, shall be construed to be a hold over tenancy and Tenant shall pay rent to Landlord at a rate equal to one and one-half (1 1/2) times the monthly rental installment due in the month preceding the termination or expiration of the Lease and shall otherwise be on the terms and conditions 24 -20- herein specified, except those provisions relating to the term and any options to extend or renew, which terms are expressly waived during any hold over. Furthermore, no holding over shall be deemed or construed to exercise any option to extend or renew this Lease in lieu of full and timely exercises of any such option as required hereunder. 37.SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 38. ESTOPPEL CERTIFICATES: Tenant shall at any time during the term of this Lease, upon not less than five (5) business days prior written notice from Landlord, execute and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that: (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are not uncured defaults in Landlord's performance. 39. OPTIONS TO EXTEND: Tenant shall have the option and right to extend the term of this Lease for two (2) separate additional and successive option periods of five (5) years each, (each such period being referred to as the "Renewal Term"). The rental during each such renewal term shall be determined by increasing the annual rental by 2.5% of the annual rental then being paid in the year immediately preceding the renewal term and continuing to be adjusted by increasing 2.5% each and every year throughout the renewal term. Tenant's options are subject to the following conditions precedent: (i) Tenant alone is in occupation of and is conducting g the business in at least sixty six and two-thirds percent (66 2/3%) of the Premises and Tenant, for itself and its successors and assigns, hereby expressly acknowledges and agrees that this Option to Extend is personal to Tenant; and (ii) Tenant has delivered written notice by certified mail to Landlord not less than one hundred and twenty (120) days prior and not more than one hundred and eighty (180) day prior to the expiration of the then existing term of the Lease of Tenant's intention to extend the term of the Lease. 40. THIS PARAGRAPH INTENTIONALLY DELETED. 41. THIS PARAGRAPH INTENTIONALLY DELETED. 42. OPTIONS: Except as provided in Article 39, all Options provided Tenant in this Lease are personal and granted to original Tenant and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord's sole 25 -21- discretion. In the event that Tenant hereunder has any multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. Notwithstanding the above, if the assignment is a result of the transfer of Tenant's stock as permitted by Article 31, the options to extend will survive the assignment. 43. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease, Tenant shall quietly have and hold the Premises for the term and any extensions thereof. 44. BROKERS: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease, and Tenant agrees to indemnify and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any broker or finder claiming through Tenant. 45. LANDLORD'S LIABILITY: If Tenant should recover a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of Landlord's interest in the Premises or any other Premises lease by Landlord to Tenant and owned by Landlord including the improvements and real property and neither Landlord or any of its partners shall be liable personally for an deficiency. 46. AUTHORITY OF PARTIES: If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 47. THIS PARAGRAPH INTENTIONALLY DELETED 48. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights and remedies in law and in equity. 49. THIS PARAGRAPH INTENTIONALLY DELETED If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. This Lease shall be governed by and construed in accordance with California law. All sums due hereunder, including rent and additional rent, if not paid when due, shall bear interest at the maximum rate permitted under California law accruing from the date due until the date paid to Landlord. Time is of the essence hereunder. 26 -22- The headings or titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof nor shall any phrases in capital letters have nay increased emphasis. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may without notice perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance within ten (10) days following Landlord's written notice for such payment. Any delinquent sum shall bear interest at the maximum lawful contract rate permitted to be charged under California law. If Landlord becomes a party to any litigation concerning this Lease, the Premises, the Building or the Project by reason of any act or omission of Tenant or Tenant's authorized representatives, Tenant shall be liable to Landlord for reasonable attorneys' fees, court costs and litigation expenses incurred by Landlord in the litigation, whether such litigation leads to actual court action. All monetary sums due from Tenant to Landlord under this Lease shall be deemed to be rent. Whenever a consent of a party to this Lease is required, such consent will not be arbitrarily or unreasonably withheld or delayed. IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day and year first above written. LANDLORD: TENANT: SOBRATO INTERESTS III ZYCON CORPORATION, a California Limited Partnership a Delaware Corporation By: /s/ John M. Sobrato By: /s/ Ronald H. Donati ---------------------------------- --------------------- John M. Sobrato, Trustee under THE Ronald H. Donati JOHN MICHAEL SOBRATO 1985 Its: President SEPARATE PROPERTY TRUST Its: General Partner 27 EXHIBIT "C" and "D" NOT USED 28 EXHIBIT "E" GUIDELINE SPECIFICATIONS PROJECT: ZYCON CORPORATION BUILDING SHELL DEFINITION BUILDING SHELL DEFINITION The Building Shell includes the following items: 1. Site Work a. Asphalt concrete paving, wheel stops, and stripping. b. Concrete sidewalks, concrete curbs extending through base rock, gutter, driveway, approaches, and plaster walls. c. Landscaping, landscape lighting, including photocells and automatic irrigation system. d. Underground utilities - one 3" water, gas, fire line, domestic sanitary line, site storm drainage system and, empty primary and secondary electrical line, all of which shall be stubbed into building. 2. Building Structure Includes all elements necessary to provide for a completely waterproof Building Shell including but not limited to: a. Concrete foundation and 5" slab-on-grade including all reinforcing steel and wire mesh for 3,000 lb. loading including loading dock if applicable. b. Structural steel columns and beams. c. Wood panelized glulam roof structure with #420 WMD or equal fiberglass built-up roofing including roof drainage plumbing tied into site storm system. d. Glass, glazing and perimeter roll up or hollow metal doors including normal passage hardware. e. Concrete tilt-up or plaster on metal stud framed exterior walls. f. Exterior painting. 29 -2- g. 6" sewer gut line run from front to back wall of building. h. A park standard flag pole and monument sign without lettering. i. Concrete depressed loading with two docks including manual dock levers, 10' x 12' high lift doors and forklift ramp. j. Concrete refuse pads adequately screened. k. 2' x 8' roof access including ships ladder. l. 3" over 10" paving at loading areas and dedicated truck lanes. m. The cost of providing home office and on site supervision and administration of the shell construction. TENANT INTERIOR IMPROVEMENT DEFINITION The Tenant Interior Improvements to be specified by Tenant subject to the reasonable approval of Landlord shall include the following. 1. Insulation: Thermal or sound insulation, except requirements of Title 24 to be included in shell cost. 2. Partitions: Textured gypboard or demountable vinyl covered partitions over metal stud framing at 24" on center, with 2-1/2" rubber base as required per Tenant Floor Plan. 3. Stairs, handrails, and shafts including sound insulation (if multi-story). 4. Elevators: Elevators and shafts (if multi-story). 5. Doors and hardware: Full height, solid core, laminate doors with anodized aluminum frame and lever handle latch set hardware as required per Tenant Floor Plan. 6. Ceiling: Suspended T-bar ceiling with 2' x 4' 5/8" thick fire rated acoustical tile or textured sheetrock over metal stud framing as required per Tenant Floor Plan. 7. Lighting: 2' x 4' recessed fluorescent lighting fixtures as required per Tenant Floor Plan. 8. Electrical: Primary and secondary wire, main switchgear, power and lighting panels, electrical outlets, telephone outlets, light switches and other required electrical distribution per Tenant Floor Plan. 30 -3- 9. Floor Covering: Cut pile or textured loop glued down carpet or VAT as required per Tenant Floor Plan. 10. Window Covering: Horizontal aluminum one-inch salt blinds as required per Tenant Floor Plan. 11. Life Safety Systems: Semi-recessed ceiling-mounted fire sprinklers and gridwork as required per Tenant Floor Plan, including required fire hoses, cabinets and fire extinguishers. 12. HVAC: Roof or pad mounted built-up or package units including high and low pressure ducting and shafts, VAV boxes, supply and return diffusers, and mechanical screening if required. 13. Plumbing: Restrooms and janitor closets including ceramic tile, fixtures, mirrors, partitions and accessories, drinking fountains, sinks, floor drains, coffee bars and other plumbing work as required per Tenant Floor Plan. 14. Millwork: Millwork or cabinetry as required per Tenant Floor Plan. 15. Interior Glazing: Glass or glazing as required per Tenant Floor Plan. 16. The cost of Governmental permit fees including but not limited to sewer discharge fees, construction taxes, electrical connection fees, City plan check and permit fees; architectural and engineering fees to provide working drawings for Tenant's supplied preliminary plans. 17. The cost of all consultant fees required to obtain all the necessary governmental approvals for tenants use of toxic materials within the building. 18. THIS PARAGRAPH DELETED INTENTIONALLY. 19. The cost of the tenant improvements including fit-up of special areas shall include six percent (6.0%) fee to Sobrato Construction Corporation to cover all of the following: field superintendent, temporary on-site facilities; home office administration, supervision, and coordination; financing fees, construction interests; construction period insurance; on-site security and clean-up services during construction, and contractor's profit. Landlord and Tenant must each approve the Tenant Floor Plan for Tenant Interior Improvements to the building. Landlord will prepare the Tenant Floor Plan based on final improvement drawings and information supplied by Tenant. Tenant will have ten (10) business days from receipt to approve or disapprove any plans, and failure to timely disapprove shall mean approval. Said approval shall not be unreasonably withheld. Tenant, at Tenant's expense, 31 -4- to supply Landlord with preliminary improvement information including one-line drawings of Tenant's wall layout, preliminary electrical and air conditioning loads by March 1, 1996. Complete working drawings for all interior improvements including electrical, air conditioning, and piping, to be provided Landlord prior to April 1, 1996. Any substantial changes to the final Tenant interior working drawings provided after March 1, 1996 which Landlord can prove causes the Lease Commencement Date to be delayed, shall cause the Lease Commencement Date to occur one (1) day in advance of substantial completion as defined in the Lease for each day of delay. Provided further that a total of five (5) days in delay shall be granted Tenant for miscellaneous changes prior to the Landlord enforcing the terms of this Article. Tenant will be permitted to install its fixtures and assembly equipment during Landlord's construction of interior improvements at no rental cost, provided it does not interfere with Landlord's construction schedule, and employs Union labor unless Landlord and Tenant have secured agreements from sub-contractors permitting equipment suppliers and Zycon mechanics to install equipment. EX-11 9 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 HADCO CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS FOR THE YEARS ENDED OCTOBER, ENDED JANUARY ------------------------------- -------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- -------- (UNAUDITED) Primary: Net Income (Loss)..................... $ 9,943 $21,374 $32,014 $ 7,191 $(69,161) ======= ======= ======= ======= ======= Average shares outstanding............ 9,861 9,805 10,245 10,020 10,413 Add: Average common stock equivalents outstanding........................ 1,536 1,553 1,140 1,392 -- Less: Shares assumed repurchased under the treasury stock method.......... (677) (552) (301) (308) -- ------- ------- ------- ------- ------- Total......................... 10,720 10,806 11,084 11,104 10,413 ------- ------- ------- ------- ------- Per share amount...................... $ .93 $ 1.98 $ 2.89 $ .65 $ (6.64) ======= ======= ======= ======= =======
EX-12 10 COMPUTATION OF RATIOS 1 EXHIBIT 12 HADCO CORPORATION COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to fixed charges of Hadco Corporation for the period October 31, 1992 to January 25, 1997, including pro forma financial data. The ratio of earnings to fixed charges is computed by dividing net fixed charges (interest expense on all debt plus the interest portion of rent expense) into earnings before income taxes and fixed charges.
Fiscal Year Ended, Three Months Ended, --------------------------------------------------------------------- ------------------------------------ Oct. 31, Oct. 30, Oct. 29, Oct. 28, Oct. 26, Oct. 26, Jan. 27, Jan. 25, Jan. 25, 1992 1993 1994 1995 1996 1996 1996 1997 1997 -------- -------- -------- -------- -------- -------------- -------- -------- -------------- (Pro Forma) (Pro Forma) Earnings before income taxes 12,165 12,941 $16,434 $35,038 $52,481 $49,979 $11,794 $(62,496) $14,518 Interest expense, including interest portion of rental expense 2,045 1,402 891 537 338 16,197 95 933 4,669 Amortization of Debt Issuance Costs 125 -- 5 31 ------ ------ ------- ------- ------- ------- ------- -------- ------- Earnings before fixed charges 14,210 14,343 17,325 35,575 52,819 66,301 11,899 (61,558) 19,218 ------ ------ ------- ------- ------- ------- ------- -------- ------- Fixed Charges: Interest expense, including interest portion of rental expense 2,045 1,402 891 537 338 16,197 95 933 4,669 Amortization of Debt Issuance Costs -- -- -- -- -- 125 -- 5 31 ------ ------ ------- ------- ------- ------- ------- -------- ------- Fixed charges 2,045 1,402 891 537 338 16,322 95 938 4,700 ------ ------ ------- ------- ------- ------- ------- -------- ------- Ratio of earnings to fixed charges 6.9x 10.2x 19.4x 66.2x 156.3x 4.1x 125.1x -- 4.1x
EX-23.2 11 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Boston, Massachusetts February 18, 1997 EX-23.3 12 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23.3 The Board of Directors Hadco Corporation We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP San Jose, California February 17, 1997 EX-25 13 FORM T-1 1 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Senior Vice President and Corporate Secretary 225 Franklin Street, Boston, Massachusetts 02110 (617)654-3253 (Name, address and telephone number of agent for service) --------------------- HADCO CORPORATION (Exact name of obligor as specified in its charter) MASSACHUSETTS (04-2393279) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12A MANOR PARKWAY SALEM, NEW HAMPSHIRE 03079 -------------------- CONVERTIBLE SUBORDINATED NOTES (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 12TH DAY OF FEBRUARY 1997. STATE STREET BANK AND TRUST COMPANY By: /s/ GERALD R. WHEELER --------------------- GERALD R. WHEELER VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by HADCO CORPORATION. of its CONVERTIBLE SUBORDINATED NOTES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ GERALD R. WHEELER --------------------- GERALD R. WHEELER VICE PRESIDENT DATED: FEBRUARY 12, 1997 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company of Boston, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business September 30, 1996, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ..... 1,385,597 Interest-bearing balances .............................. 6,205,892 Securities ...................................................... 8,693,549 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary .................... 5,707,012 Loans and lease financing receivables: Loans and leases, net of unearned income .. 4,352,939 Allowance for loan and lease losses ....... 71,421 Loans and leases, net of unearned income and allowances 4,281,518 Assets held in trading accounts ................................. 702,030 Premises and fixed assets ....................................... 364,550 Other real estate owned ......................................... 1,100 Investments in unconsolidated subsidiaries ...................... 65,775 Customers' liability to this bank on acceptances outstanding .... 36,351 Intangible assets ............................................... 71,688 Other assets .................................................... 835,647 ---------- Total assets .................................................... 28,350,709 ========== LIABILITIES Deposits: In domestic offices .................................... 8,283,786 Noninterest-bearing .............. 6,040,773 Interest-bearing ................. 2,243,013 In foreign offices and Edge subsidiary ................. 9,309,212 Noninterest-bearing .............. 53,213 Interest-bearing ................. 9,255,999 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary .................... 7,014,421 Demand notes issued to the U.S. Treasury and Trading Liabilities 698,705 Other borrowed money ............................................ 690,865 Bank's liability on acceptances executed and outstanding ........ 37,357 Other liabilities ............................................... 695,718 ---------- Total liabilities ............................................... 26,730,064 ---------- EQUITY CAPITAL Common stock .................................................... 29,931 Surplus ......................................................... 277,023 Undivided profits ............................................... 1,311,920 Cumulative foreign currency translation adjustments ............. 1,771 ---------- Total equity capital ............................................ 1,620,645 ---------- Total liabilities and equity capital ............................ 28,350,709 ==========
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Charles F. Kaye 5 7 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter of the obligor, the trustee has relied upon the information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation duly organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the February 12, 1997. STATE STREET BANK AND TRUST COMPANY By: /s/ GERALD R. WHEELER ------------------------------- GERALD R. WHEELER VICE PRESIDENT 2 8 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by HADCO CORPORATION. of its CONVERTIBLE SUBORDINATED NOTES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ GERALD R. WHEELER ------------------------------- GERALD R. WHEELER VICE PRESIDENT DATED: FEBRUARY 12, 1997 3 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS OCT-25-1997 OCT-27-1996 JAN-25-1997 1 8,825 3,264 74,446 1,830 34,107 131,902 388,294 184,655 448,554 109,830 228,168 0 0 523 70,534 71,057 111,536 111,536 86,681 173,979 0 0 (53) (62,496) 6,665 (69,161) 0 0 0 (69,161) (6.64) 0
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