<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LASER POWER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3827 95-3423358
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
12777 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
(619) 755-0700
(ADDRESS, TELEPHONE NUMBER, OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
GLENN H. SHERMAN, PH.D.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
LASER POWER CORPORATION
12777 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
(619) 755-0700
(NAME, ADDRESS, TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
D. BRADLEY PECK, ESQ. MARK R. HIGH, ESQ.
ALEXANDER A. FITZPATRICK, ESQ. DICKINSON WRIGHT PLLC
ADAM C. LENAIN, ESQ. 500 WOODWARD AVENUE, SUITE 4000
COOLEY GODWARD LLP DETROIT, MI 48226-3425
4365 EXECUTIVE DRIVE, SUITE 1100 (313) 223-3500
SAN DIEGO, CA 92121
(619) 550-6000
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective and after the effective time of the
proposed Merger described in this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
=======================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE FEE
- -------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value..... 2,104,174 $1.83 $3,850,638 $1,136
=======================================================================================================
</TABLE>
(1) Represents the number of shares of Registrant's Common Stock, including
shares issuable upon exercise of options, which may be issued to the
securityholders of EMI Acquisition Corp. ("EMI") pursuant to the merger
described herein.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(f)(2) under the Securities Act
of 1933, as amended, on the basis of a book value per share of $3.39 of EMI
Common Stock (1,066,332 shares) on September 30, 1997, divided by an
applicable multiple of 1.8511 to determine an equivalent share price.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
LASER POWER CORPORATION
12777 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
JANUARY , 1998
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Laser Power Corporation, a Delaware corporation ("Laser
Power"), which will be held on February , 1998 at 9:00 o'clock a.m., local
time, at Laser Power's offices at 12777 High Bluff Drive, San Diego, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Reorganization, dated
December 23, 1997 (the "Merger Agreement"), among Laser Power, LPC Acquisition
Subsidiary, Inc., a newly formed, wholly owned California subsidiary of Laser
Power ("Laser Power Sub"), EMI Acquisition Corp., a California corporation
("EMI"), and certain shareholders of EMI and (ii) approve the merger (the
"Merger") of Laser Power Sub with and into EMI, pursuant to which, among other
things, Laser Power Sub will cease to exist and EMI will survive as a wholly
owned subsidiary of Laser Power (collectively, the "Merger Proposal"). As a
result of the Merger, each outstanding share of EMI Common Stock (other than any
shares of Common Stock owned by Laser Power, EMI, Laser Power Sub or any direct
or indirect wholly owned subsidiary of Laser Power or EMI) will be converted
into the right to receive 1.8511 shares of Laser Power Common Stock (the
"Exchange Ratio"). In addition, as a result of the Merger, options to acquire
Laser Power Common Stock will be substituted for outstanding options to acquire
EMI Common Stock, based upon the Exchange Ratio. If the requisite approval of
the stockholders of Laser Power and the shareholders of EMI is received and
other conditions to the Merger are satisfied or waived, the Merger is expected
to be consummated on or before February 27, 1998.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders and a Prospectus/Joint Proxy Statement relating to the
actions to be taken by Laser Power stockholders at the Special Meeting. The
Prospectus/Joint Proxy Statement more fully describes the proposed Merger and
the other proposals submitted hereby and includes information about Laser Power
and EMI. I urge you to read the Prospectus/Joint Proxy Statement carefully.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreement and the transactions provided for therein and has
concluded that these proposals are in the best interests of Laser Power and its
stockholders. In addition, in connection with its approval of the proposed
Merger, the Board of Directors has received a written opinion from its financial
advisor, Fredericks, Shields & Co. LLC ("FSC"), to the effect that the Exchange
Ratio is fair, from a financial point of view, to the stockholders of Laser
Power. A copy of FSC's written opinion, which sets forth a description of the
assumptions made, matters considered and limits of FSC's review, is attached to
the accompanying Prospectus/Joint Proxy Statement as Appendix B, and Laser Power
stockholders are urged to read carefully the opinion in its entirety. Your Board
of Directors has unanimously recommended that the stockholders of Laser Power
approve the Merger Proposal.
Approval of the Merger Agreement and the Merger requires the affirmative
vote of the holders of a majority of the outstanding shares of Laser Power
Common Stock.
I urge you to vote FOR approval of the Merger Proposal. On behalf of your
Board of Directors, thank you for your support.
Sincerely,
Glenn H. Sherman
Chairman of the Board
and Chief Executive Officer
<PAGE> 3
LASER POWER CORPORATION
12777 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY , 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Laser Power Corporation, a Delaware corporation ("Laser Power"),
will be held on February , 1998 at 9:00 o'clock a.m., local time, at Laser
Power's offices at 12777 High Bluff Drive, San Diego, California.
The special meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of
Reorganization, dated December 23, 1997, among Laser Power, LPC Acquisition
Subsidiary, Inc., a newly formed, wholly owned California subsidiary of
Laser Power ("Laser Power Sub"), EMI Acquisition Corp., a California
corporation ("EMI") and certain shareholders of EMI and (ii) approve the
merger of Laser Power Sub with and into EMI, pursuant to which, among other
things, Laser Power Sub will cease to exist and EMI will survive as a
wholly owned subsidiary of Laser Power (the "Merger"). As a result of the
Merger, each outstanding share of EMI Common Stock (other than any shares
of EMI Common Stock owned by Laser Power, EMI, Laser Power Sub or any
direct or indirect wholly owned subsidiary of Laser Power or EMI) will be
converted into the right to receive 1.8511 shares of Laser Power Common
Stock (the "Exchange Ratio"). In addition, as a result of the Merger,
options to acquire Laser Power Common Stock will be substituted for
outstanding options to acquire EMI Common Stock, based upon the Exchange
Ratio.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
THE BOARD OF DIRECTORS OF LASER POWER UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR ALL OF THE PROPOSALS DESCRIBED ABOVE.
Only holders of record of Laser Power Common Stock at the close of business
on [RECORD DATE] are entitled to notice of, and will be entitled to vote at, the
Special Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
James D. McFarland
Secretary
San Diego, California
January , 1998
<PAGE> 4
EMI ACQUISITION CORP.
36570 BRIGGS ROAD
MURRIETA, CALIFORNIA 92563-2347
JANUARY , 1998
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of EMI Acquisition Corp., a California corporation ("EMI"),
which will be held on February , 1998 at 8:30 a.m., local time, at EMI's
offices at 36570 Briggs Road, Murrieta, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Reorganization, dated
December 23, 1997 (the "Merger Agreement"), among EMI, Laser Power Corporation,
a Delaware corporation ("Laser Power"), LPC Acquisition Subsidiary, Inc., a
newly formed, wholly owned California subsidiary of Laser Power ("Laser Power
Sub") and certain shareholders of EMI and (ii) approve the merger (the "Merger")
of Laser Power Sub with and into EMI, pursuant to which, among other things,
Laser Power Sub will cease to exist and EMI will survive as a wholly owned
subsidiary of Laser Power (collectively, the "Merger Proposal"). As a result of
the Merger, each outstanding share of EMI Common Stock (other than any shares of
EMI Common Stock owned by Laser Power, EMI, Laser Power Sub or any direct or
indirect wholly owned subsidiary of Laser Power or EMI) will be converted into
the right to receive 1.8511 shares of Laser Power Common Stock (the "Exchange
Ratio"). In addition, as a result of the Merger, options to acquire Laser Power
Common Stock will be substituted for outstanding options to acquire EMI Common
Stock, based upon the Exchange Ratio. If the requisite approval of the
stockholders of Laser Power and the shareholders of EMI is received and other
conditions to the Merger are satisfied or waived, the Merger is expected to be
consummated on or before February 27, 1998.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING PROSPECTUS/JOINT PROXY STATEMENT AND THE APPENDICES
THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY.
The Board of Directors of EMI has carefully considered the terms and
conditions of the proposed Merger.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, EMI AND THE EMI SHAREHOLDERS. ACCORDINGLY, THE BOARD RECOMMENDS
THAT EMI SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Approval of the Merger Agreement and the Merger requires the affirmative
vote of the holders of a majority of the outstanding shares of EMI Common Stock.
Certain executive officers and directors of EMI owning in the aggregate
approximately 45.8% of the outstanding EMI Common Stock have each agreed to vote
or direct the vote of all EMI Common Stock over which they have voting power or
control in favor of the Merger Agreement and the Merger.
In view of the importance of the action to be taken at this Special Meeting
of EMI shareholders, we urge you to review carefully the accompanying Notice of
Special Meeting of Shareholders and the Prospectus/ Joint Proxy Statement,
including the appendices thereto, which also include information on Laser Power
and EMI. Whether or not you expect to attend the Special Meeting, please
complete, sign and date the enclosed proxy and return it as promptly as
possible.
Sincerely,
Dick Sharman
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 5
EMI ACQUISITION CORP.
36570 BRIGGS ROAD
MURRIETA, CALIFORNIA 92563-2347
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY , 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of EMI Acquisition Corp., a California corporation ("EMI"), will be
held on February , 1998, at 8:30 a.m., local time, at EMI's offices at 36570
Briggs Road, Murrieta, California.
The Special Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Reorganization dated December 23, 1997 (the "Merger
Agreement"), among EMI, Laser Power Corporation, a Delaware corporation
("Laser Power"), LPC Acquisition Subsidiary, Inc., a newly formed, wholly
owned California subsidiary of Laser Power ("Laser Power Sub") and certain
shareholders of EMI and (ii) approve the merger of Laser Power Sub with and
into EMI (the "Merger"), pursuant to which, among other things, Laser Power
Sub will cease to exist and EMI will survive as a wholly owned subsidiary
of Laser Power. As a result of the Merger, each outstanding share of EMI
Common Stock (other than shares of EMI Common Stock owned by Laser Power,
EMI, Laser Power Sub or any direct or indirect wholly owned subsidiary of
Laser Power or EMI) will be converted into the right to receive 1.8511
shares of Laser Power Common Stock (the "Exchange Ratio"). In addition, as
a result of the Merger, options to acquire Laser Power Common Stock will be
substituted for options to acquire EMI Common Stock, based upon the
Exchange Ratio.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
Holders of EMI Common Stock may be entitled to dissenters' rights with
respect to the proposed Merger by complying with Chapter 13 of the California
General Corporation Law (the "California Law"). See "The Merger and Related
Transactions -- Dissenters' Rights of EMI Shareholders" and Appendix C to this
Prospectus/Joint Proxy Statement which sets forth Chapter 13 of the California
Law.
THE BOARD OF DIRECTORS OF EMI UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL
OF THE PROPOSALS DESCRIBED ABOVE.
Only the holders of record of EMI Common Stock at the close of business on
[RECORD DATE] are entitled to notice of, and will be entitled to vote at, the
Special Meeting or at any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Pilar P. Garcia
Secretary
Murrieta, California
January , 1998
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 30, 1997
PROSPECTUS
LASER POWER CORPORATION
PROSPECTUS
------------------------
LASER POWER CORPORATION
AND
EMI ACQUISITION CORP.
JOINT PROXY STATEMENT
This Prospectus/Joint Proxy Statement is being furnished to the
stockholders of Laser Power Corporation, a Delaware corporation ("Laser Power"),
on behalf of the Laser Power Board of Directors (the "Laser Power Board") for
use at the Special Meeting of Stockholders of Laser Power to be held on February
, 1998 at 9:00 o'clock a.m., local time, at Laser Power's offices at 12777
High Bluff Drive, San Diego, California, and at any adjournments or
postponements thereof (the "Laser Power Meeting").
This Prospectus/Joint Proxy Statement is also being furnished to the
shareholders of EMI Acquisition Corp., a California corporation ("EMI"), on
behalf of the EMI Board of Directors (the "EMI Board") for use at the Special
Meeting of Shareholders of EMI to be held on February , 1998 at 8:30 a.m.,
local time, at EMI's offices at 36570 Briggs Road, Murrieta, California, and at
any adjournments or postponements thereof (the "EMI Meeting").
The Laser Power Meeting and the EMI Meeting are being called in connection
with the proposed merger of LPC Acquisition Subsidiary, Inc., a newly formed,
wholly owned California subsidiary of Laser Power ("Laser Power Sub"), with and
into EMI (the "Merger"), pursuant to an Agreement and Plan of Reorganization
(the "Merger Agreement"), dated December 23, 1997, among Laser Power, Laser
Power Sub, EMI and certain shareholders of EMI. The Merger will be consummated
on the terms and subject to the conditions set forth in the Merger Agreement, as
a result of which (i) Laser Power Sub will cease to exist and EMI will survive
as a wholly owned subsidiary of Laser Power, and (ii) each outstanding share of
EMI Common Stock will be converted into the right to receive 1.8511 shares of
Laser Power Common Stock (the "Exchange Ratio"). In addition, as a result of the
Merger, options to acquire Laser Power Common Stock will be substituted for
outstanding options to acquire EMI Common Stock, based upon the Exchange Ratio.
Holders of EMI Common Stock may be entitled to dissenters' rights with
respect to the proposed Merger by complying with Chapter 13 of the California
General Corporation Law (the "California Law"). See "The Merger and Related
Transactions -- Dissenters' Rights of EMI Shareholders" and Appendix C to this
Prospectus/Joint Proxy Statement which sets forth Chapter 13 of the California
Law.
------------------------
THE SHARES OF LASER POWER COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED BY LASER POWER OR EMI TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS/JOINT PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES
OR THE OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE, ANY SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY LASER POWER, EMI OR ANY OTHER PERSON. THIS PROSPECTUS/JOINT PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS/JOINT PROXY STATEMENT
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
(Continued on next page)
------------------------
THE DATE OF THIS PROSPECTUS/JOINT PROXY STATEMENT IS JANUARY , 1998.
Laser Power Common Stock is currently listed on the Nasdaq National Market under
the symbol "LPWR."
<PAGE> 7
Because the Exchange Ratio is fixed, changes in the market price of Laser
Power Common Stock will affect the dollar value of Laser Power Common Stock to
be received by shareholders of EMI in the Merger. Stockholders of Laser Power
and shareholders of EMI are encouraged to obtain current market quotations for
Laser Power Common Stock prior to their respective Special Meetings.
This Prospectus/Joint Proxy Statement also constitutes the Prospectus of
Laser Power with respect to the shares of Laser Power Common Stock to be issued
in the Merger in exchange for outstanding shares of EMI Common Stock. Based upon
the capitalization of EMI as of the close of business on the Record Date, an
aggregate of approximately 2,004,676 shares of Laser Power Common Stock (the
"Merger Consideration") will be issued in the Merger, and Laser Power will
substitute options to acquire approximately 99,498 additional shares of Laser
Power Common Stock for outstanding options to purchase EMI Common Stock.
If the requisite approvals of the stockholders of Laser Power and the
shareholders of EMI are received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be consummated on or before
February 27, 1998 (the "Closing").
All information contained or incorporated by reference in this
Prospectus/Joint Proxy Statement relating to Laser Power or Laser Power Sub has
been supplied by Laser Power, and all information contained in this
Prospectus/Joint Proxy Statement relating to EMI and its wholly owned
subsidiaries, Exotic Materials, Inc., a California corporation ("Exotic"), and
EMI International, Inc., a U.S. Virgin Islands corporation ("EMII"), has been
supplied by EMI.
This Prospectus/Joint Proxy Statement is first being mailed to stockholders
of Laser Power and shareholders of EMI on or about January , 1998.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/JOINT PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS OF LASER
POWER AND SHAREHOLDERS OF EMI ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY
THIS PROSPECTUS/JOINT PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS
REFERRED TO UNDER "RISK FACTORS," BEGINNING ON PAGE 18.
------------------------
AVAILABLE INFORMATION
Laser Power is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials 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 Commission's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of these materials can also
be obtained from the Commission at prescribed rates by writing to the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from shareholders of EMI to approve the Merger constitutes an offering
of the Laser Power Common Stock to be issued in connection with the Merger.
Accordingly, Laser Power has filed with the Commission a Registration Statement
on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to such offering (as amended from time to time, the "Registration
Statement"). This Prospectus/Joint Proxy Statement constitutes the prospectus of
Laser Power that is filed as part of the Registration Statement. Other parts of
the Registration Statement are omitted from this Prospectus/Joint Proxy
Statement in accordance with the rules and regulations of the Commission. Copies
of the Registration Statement, including the exhibits to the Registration
Statement and other material that is not included herein, may be inspected,
without charge, at
2
<PAGE> 8
the regional offices of the Commission referred to above, or obtained at
prescribed rates from the Public Reference Section of the Commission at the
address set forth above.
Statements made in this Prospectus/Joint Proxy Statement concerning the
contents of any contract or other document accurately describe the material
provisions of such contract or other document but are not necessarily complete.
With respect to each contract or other document filed as an exhibit to the
Registration Statement, reference is hereby made to that exhibit for a more
complete description of the matter involved, and each such statement is hereby
qualified in its entirety by such reference.
------------------------
3
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 5
RISK FACTORS.......................................................................... 18
THE LASER POWER MEETING............................................................... 26
THE EMI MEETING....................................................................... 28
THE MERGER AND RELATED TRANSACTIONS................................................... 29
Effects of the Merger............................................................... 29
Background of the Merger............................................................ 31
Reasons for the Merger.............................................................. 31
Laser Power Board Recommendation.................................................... 33
EMI Board Recommendation............................................................ 33
Opinion of Fredericks, Shields & Co. LLC............................................ 33
Merger Agreement.................................................................... 36
Escrow Agreement and Related Agreements; Interests of Certain Persons in the
Merger........................................................................... 39
Regulatory Matters.................................................................. 40
Certain Federal Income Tax Matters.................................................. 41
Accounting Treatment................................................................ 43
Dissenters' Rights of EMI Shareholders.............................................. 43
Merger Expenses and Fees and Other Costs............................................ 44
Affiliates' Restrictions on Sale of Laser Power Common Stock........................ 45
Treatment of Employee Equity Benefit Plans.......................................... 45
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.......................... 46
LASER POWER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 50
LASER POWER BUSINESS.................................................................. 53
LASER POWER MANAGEMENT................................................................ 64
LASER POWER PRINCIPAL STOCKHOLDERS.................................................... 73
EMI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 75
EMI BUSINESS.......................................................................... 78
EMI MANAGEMENT........................................................................ 79
EMI PRINCIPAL SHAREHOLDERS............................................................ 81
DESCRIPTION OF LASER POWER CAPITAL STOCK.............................................. 82
COMPARISON OF RIGHTS OF LASER POWER STOCKHOLDERS AND EMI SHAREHOLDERS................. 84
EXPERTS............................................................................... 91
LEGAL MATTERS......................................................................... 91
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
THE FOLLOWING APPENDICES ALSO CONSTITUTE PART OF THIS PROSPECTUS/JOINT PROXY
STATEMENT:
A -- Agreement and Plan of Reorganization
B -- Opinion of Fredericks, Shields & Co., LLC
C -- Chapter 13 of the California General Corporation Law
This Prospectus/Joint Proxy Statement contains registered trademarks and
trademarks of Laser Power, EMI and other companies.
4
<PAGE> 10
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Joint Proxy Statement. The summary does not contain a complete
description of the terms of the Merger and is qualified in its entirety by
reference to the full text of this Prospectus/Joint Proxy Statement and the
Appendices hereto. Stockholders of Laser Power and shareholders of EMI are urged
to read this Prospectus/Joint Proxy Statement and the Appendices in their
entirety.
Except for the historical information contained herein, the discussion in
this Prospectus/Joint Proxy Statement contains forward-looking statements that
involve risks and uncertainties. Laser Power's, EMI's and the combined company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the section entitled "Risk Factors" and elsewhere in this
Prospectus/Joint Proxy Statement and in the information and documents annexed
hereto or incorporated herein by reference.
GENERAL
This Prospectus/Joint Proxy Statement is being provided to stockholders of
Laser Power and shareholders of EMI in connection with the proposed Merger of
Laser Power Sub with and into EMI, pursuant to which Laser Power Sub will cease
to exist and EMI will survive the Merger as a wholly owned subsidiary of Laser
Power. The Merger will be effected pursuant to the Merger Agreement, a copy of
which is attached hereto as Appendix A.
THE PARTIES
Laser Power
Laser Power designs, manufactures and markets high performance lasers and
laser optics for industrial, medical and military applications. Laser Power was
incorporated in California in August 1979 and reincorporated in Delaware in July
1983. Unless otherwise indicated, "Laser Power" refers to Laser Power
Corporation, a Delaware corporation, and its subsidiaries. Laser Power's
executive offices are located at 12777 High Bluff Drive, San Diego, California
92130. Its telephone number is (619) 755-0700. See "Laser Power Business" for a
more detailed description of Laser Power's business. See "Risk Factors" for a
discussion of the risks associated with the ownership of Laser Power Common
Stock, including risks related to the Merger.
Laser Power Sub
Laser Power Sub was incorporated in California in November 1997 for the
sole purpose of effecting the Merger. It is a wholly owned subsidiary of Laser
Power and has no material assets or liabilities and has not engaged in any
activities except in connection with the proposed Merger. Laser Power Sub's
executive offices are located at 12777 High Bluff Drive, San Diego, California
92130. Its telephone number is (619) 755-0700.
EMI
EMI, through its operating subsidiary Exotic Materials, Inc. (doing
business as Exotic Electro-Optics), designs and manufactures a wide variety of
infrared window assemblies, missile domes and other optical elements primarily
for the defense market. EMI was incorporated in California in June 1993. EMI's
executive offices are located at 36570 Briggs Road, Murrieta, California. Its
telephone number is (909) 926-2994. See "EMI Business" for a more detailed
description of EMI's business.
MEETINGS OF LASER POWER STOCKHOLDERS AND EMI SHAREHOLDERS
Date, Time and Place
The Laser Power Meeting will be held on February , 1998 at 9:00 o'clock
a.m., local time, at Laser Power's offices at 12777 High Bluff Drive, San Diego,
California.
5
<PAGE> 11
The EMI Meeting will be held on February , 1998 at 8:30 a.m., local time,
at EMI's offices at 36570 Briggs Road, Murrieta, California.
Purposes of the Meetings
Laser Power Meeting. At the Laser Power Meeting, stockholders of Laser
Power will be asked to consider and vote upon proposals to (i) approve and adopt
the Merger Agreement, a copy of which is attached hereto as Appendix A and (ii)
approve the Merger (collectively referred to herein as the "Merger Proposal").
EMI Meeting. At the EMI Meeting, shareholders of EMI will be asked to
consider and vote upon the Merger Proposal.
Record Date; Shares Entitled to Vote
Laser Power. Only holders of record of Laser Power Common Stock at the
close of business on January , 1998 (the "Record Date") are entitled to notice
of and to vote at the Laser Power Meeting. At the close of business on the
Record Date, there were outstanding and entitled to vote 6,101,854 shares of
Laser Power Common Stock, each of which will be entitled to one vote on each
matter to be acted upon at the Laser Power Meeting.
EMI. Only holders of record of EMI Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the EMI Meeting. At the
close of business on the Record Date, there were outstanding and entitled to
vote 1,082,965 shares of EMI Common Stock, each of which will be entitled to one
vote on each matter to be acted upon at the EMI Meeting.
Vote Required
Laser Power. Approval of the Merger Proposal requires the affirmative vote
of the holders of a majority of the shares of Laser Power Common Stock
outstanding on the Record Date and entitled to vote on the Merger Proposal. As a
group, all executive officers and directors of Laser Power and their respective
affiliates beneficially owned 2,917,185 shares, or approximately 47.8%, of the
Laser Power Common Stock outstanding as of the Record Date.
EMI. Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of EMI Common Stock outstanding on the
Record Date and entitled to vote on the Merger Proposal. As a group, all
executive officers and directors of EMI and their respective affiliates
beneficially owned 495,670 shares, or approximately 45.8%, of the EMI Common
Stock outstanding as of the Record Date. Each of the executive officers and
directors of EMI has agreed to vote or direct the vote of all EMI Common Stock
over which they have voting power or control in favor of the Merger Agreement
and the Merger. See "The Merger and Related Transactions -- Merger Agreement."
RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Laser Power Board. The Laser Power Board has approved the Merger
Agreement and the Merger and has determined that the Merger is in the best
interests of Laser Power and its stockholders. The Laser Power Board has
unanimously recommended approval of the Merger Proposal by the Laser Power
stockholders. The primary factors considered and relied upon by the Laser Power
Board in reaching its recommendation are described below under "The Merger and
Related Transactions -- Reasons for the Merger."
The EMI Board. The EMI Board has approved the Merger Agreement and the
Merger and has determined that the Merger is in the best interests of EMI and
its shareholders. The EMI Board has unanimously recommended approval of the
Merger Proposal by the EMI shareholders. The primary factors considered and
relied upon by the EMI Board in reaching its recommendation are described below
under "The Merger and Related Transactions -- Reasons for the Merger."
6
<PAGE> 12
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of Laser Power and EMI.
OPINION OF LASER POWER'S FINANCIAL ADVISOR
Fredericks, Shields & Co. LLC ("FSC") has acted as financial advisor to
Laser Power in connection with the Merger. As part of its role as financial
advisor to Laser Power, FSC was engaged to render its opinion as to the fairness
of the Exchange Ratio, from a financial point of view, to the stockholders of
Laser Power. The full text of the opinion of FSC, which sets forth the
assumptions made, matters considered and limitations on the review undertaken by
FSC, is attached as Appendix B to this Prospectus/Joint Proxy Statement. Laser
Power stockholders are urged to read the opinion in its entirety. See "The
Merger and Related Transactions -- Opinion of Fredericks, Shields & Co. LLC."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the EMI Board with respect to the
Merger Proposal, holders of EMI Common Stock should be aware that members of the
EMI Board and the executive officers of EMI have certain interests in the Merger
that are in addition to the interests of the holders of EMI Common Stock
generally. In particular, certain employees of EMI will enter into
noncompetition agreements with Laser Power, and as a condition to consummation
of the Merger, Dick Sharman will be elected a director of Laser Power. The
members of the EMI Board, including the outside directors, were aware of these
interests and took such interests into account in approving the Merger Agreement
and the transactions contemplated thereby. See "The Merger and Related
Transactions -- Escrow Agreement and Related Agreements; Interests of Certain
Persons in the Merger," "-- Background of the Merger," and "-- Merger
Agreement."
REGULATORY MATTERS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states, Laser Power and EMI are
not aware of any governmental or regulatory approvals required for consummation
of the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
The Merger is expected to be a tax-free reorganization for federal income
tax purposes under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), so that no gain or loss will be recognized by the EMI
shareholders on the exchange of EMI Common Stock for Laser Power Common Stock,
except to the extent that EMI shareholders receive cash in lieu of fractional
shares or for exercising dissenters' rights. Neither EMI nor Laser Power will
obtain a ruling from the Internal Revenue Service as to the tax consequences of
the Merger. As a condition to each of Laser Power's and EMI's obligations to
consummate the Merger, Laser Power and EMI will receive an opinion at the
Closing from their respective legal counsel to the effect that the Merger will
be treated as a tax-free reorganization for federal income tax purposes. EMI
shareholders and Laser Power stockholders are urged to consult their own tax
advisors regarding the tax consequences of the Merger. See "The Merger and
Related Transactions -- Certain Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling-of-interests for
financial reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon receipt by Laser
Power of letters from Laser Power's independent auditors and from EMI's
independent auditors dated the date of the closing of the Merger to the effect
that pooling-of-interests accounting for the Merger is appropriate. See "The
Merger and Related Transactions -- Accounting Treatment" and "-- Merger
Agreement -- Conditions to the Merger."
7
<PAGE> 13
DISSENTERS' RIGHTS OF EMI SHAREHOLDERS
If the Merger Agreement is approved by the required vote of EMI
shareholders and is not abandoned or terminated, the holders of EMI Common Stock
may be entitled to exercise dissenters' rights, pursuant to Chapter 13 of the
California Law, a copy of which is attached hereto as Appendix C, with respect
to shares voted in opposition to the Merger. IF FIVE PERCENT (5%) OR MORE OF THE
OUTSTANDING SHARES OF EMI COMMON STOCK BECOME OR HAVE THE RIGHT TO BECOME
ENTITLED TO EXERCISE DISSENTERS' RIGHTS, THEN LASER POWER WILL NOT BE OBLIGATED
TO CONSUMMATE THE MERGER. See "The Merger and Related
Transactions -- Dissenters' Rights of EMI Shareholders."
NO APPRAISAL RIGHTS OF LASER POWER STOCKHOLDERS
The stockholders of Laser Power are not entitled to appraisal rights in
connection with the Merger under the Delaware General Corporation Law (the
"Delaware Law").
THE MERGER
Terms of the Merger; Exchange Ratio. As a result of the Merger, EMI will
become a wholly owned subsidiary of Laser Power and each outstanding share of
EMI Common Stock (other than any shares of EMI Common Stock owned by Laser
Power, EMI, Laser Power Sub or any direct or indirect wholly owned subsidiary of
Laser Power or EMI) will be converted into the right to receive 1.8511 (the
"Exchange Ratio") shares of Laser Power Common Stock. Cash will be paid in lieu
of issuing fractional shares. Based upon the capitalization of EMI as of the
close of business on the Record Date, an aggregate of approximately 2,004,676
shares of Laser Power Common Stock (the "Merger Consideration") will be issued
in the Merger, and Laser Power will substitute options to acquire approximately
99,498 additional shares of Laser Power Common Stock for outstanding options to
acquire EMI Common Stock. See "The Merger and Related Transactions -- Effects of
the Merger -- Conversion of Shares."
Other Effects of the Merger. The Merger will be consummated promptly after
the approval by the Laser Power stockholders and the EMI shareholders of the
Merger Proposal and the satisfaction or waiver of the other conditions to
consummation of the Merger (the "Closing Date"). The Merger will become
effective on the date that a certificate of merger is duly filed with the
California Secretary of State (the "Effective Time"). At the Effective Time,
Laser Power Sub will merge with and into EMI, with the result that EMI will be
the surviving corporation in the Merger and a wholly owned subsidiary of Laser
Power (the "Surviving Subsidiary"). The shareholders of EMI will become
stockholders of Laser Power (as described below), and their rights will be
governed by Laser Power's Restated Certificate of Incorporation (the "Laser
Power Certificate"), the Bylaws of Laser Power (the "Laser Power Bylaws") and
the Delaware Law. See "The Merger and Related Transactions -- Effects of the
Merger" and "Comparison of Rights of Laser Power Stockholders and EMI
Shareholders."
Exchange of EMI Stock Certificates. Promptly after the Effective Time,
Laser Power, acting through American Securities Transfer & Trust, Inc. as its
exchange agent (the "Exchange Agent"), will deliver to each EMI shareholder of
record, as of the Effective Time, a letter of transmittal with instructions to
be used in surrendering the certificates which represented shares of EMI Common
Stock in exchange for certificates representing shares of Laser Power Common
Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF EMI COMMON STOCK
UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT,
AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH LETTER OF TRANSMITTAL. See
"The Merger and Related Transactions -- Effects of the Merger -- Conversion of
Shares."
EMI Options; Stock Purchase Plan. At the Effective Time, Laser Power will
substitute an option (a "Laser Power Exchange Option") to purchase that number
of shares of Laser Power Common Stock equal to the number of shares of EMI
Common Stock issuable immediately prior to the Effective Time upon exercise of
each unexpired and unexercised option under stock option plans in effect on the
date of the Merger Agreement which has been granted to current or former
directors, officers, employees, consultants or
8
<PAGE> 14
independent contractors of EMI by EMI (each, an "EMI Option") (without regard to
actual restrictions on exercisability) multiplied by the Exchange Ratio, with an
exercise price per share equal to the exercise price per share which existed
under the corresponding EMI Option divided by the Exchange Ratio. As of the
Record Date, 53,760 shares of EMI Common Stock were issuable upon the exercise
of outstanding EMI Options, which options will be substituted by Laser Power
Exchange Options to acquire approximately 99,498 shares of Laser Power Common
Stock at the Effective Time. The weighted average exercise price per share of
all EMI Options outstanding as of the Record Date is approximately $1.86 per
share. Following the Merger the weighted average exercise price per share of all
Laser Power Exchange Options will be approximately $1.01 per share. The unvested
portion of each EMI Option will continue to vest as a Laser Power Exchange
Option upon the same schedule as the corresponding EMI Option. To the extent any
EMI Options are exercised from the date of the Merger Agreement to the Effective
Time, the issued EMI Common Stock will be converted at the Exchange Ratio.
Immediately prior to the Effective Time, EMI will terminate the EMI
Employee Stock Purchase Plan. On or prior to the Record Date, all amounts that
had been withheld but not yet applied to purchase shares of EMI Common Stock
pursuant to such plan were applied to purchase the number of shares of EMI
Common Stock available under the Employee Stock Purchase Plan, and such shares
(together with cash in lieu of fractional shares) were distributed to the
participating employees pursuant to the terms of such plan.
Promptly, and in any event within 30 days, following the Effective Time,
Laser Power will file on Form S-8 a post-effective amendment to the Registration
Statement to register shares of Laser Power Common Stock issuable as a result of
the exercise of Laser Power Exchange Options. See "The Merger and Related
Transactions -- Treatment of Employee Equity Benefit Plans."
Stock Ownership Following the Merger. Based upon the capitalization of EMI
as of the close of business on the Record Date, an aggregate of approximately
2,004,676 shares of Laser Power Common Stock will be issued to EMI shareholders
in the Merger and Laser Power will substitute options to acquire up to
approximately 99,498 additional shares of Laser Power Common Stock for
outstanding options to acquire EMI Common Stock. Based upon the number of shares
of Laser Power Common Stock issued and outstanding as of the Record Date, and
after giving effect to the issuance of Laser Power Common Stock as described in
the previous sentence and the exercise of all options to purchase EMI Common
Stock assumed by Laser Power, the former holders of EMI Common Stock and options
to purchase EMI Common Stock would hold, and have voting power with respect to,
approximately 20.3% of Laser Power's total issued and outstanding shares on a
fully diluted basis. The foregoing numbers of shares and percentages are subject
to change to reflect any changes in the capitalization of either Laser Power or
EMI subsequent to the dates indicated and prior to the Effective Time, and there
can be no assurance as to the actual capitalization of Laser Power or EMI as of
the Effective Time or of Laser Power at any time following the Effective Date.
Board of Directors; Management Following the Merger. There will be no
change in the current Laser Power Board and officers of Laser Power as a result
of the Merger, except that Dick Sharman, the current Chairman of the Board,
President and Chief Executive Officer of EMI, will become a director of Laser
Power, as a condition to the Closing. At the Effective Time, the officers of EMI
(as the Surviving Subsidiary) will be Glenn H. Sherman and Paul P. Wickman, Jr.,
and the sole director of EMI will be Glenn H. Sherman. See "The Merger and
Related Transactions -- Effects of the Merger."
Covenants. Pursuant to the Merger Agreement, EMI has agreed (on behalf of
itself and each of its direct and indirect majority-owned subsidiaries) that,
until the earlier of the termination of the Merger Agreement pursuant to its
terms and the Effective Time, subject to certain exceptions, and except to the
extent that Laser Power consents in writing, each will conduct its business and
operations in the ordinary course and in accordance with past practices and in
compliance with all applicable laws and regulations and the requirements of all
applicable material contracts; preserve intact its current business
organization; keep available the services of its current officers and employees
and maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and others with which it
has business relationships; use all reasonable efforts to keep in full force all
of its existing insurance policies; and provide all material notices, assurances
and support required by any material contract to which it is a party. In
addition,
9
<PAGE> 15
subject to certain exceptions, EMI has agreed that, without the prior written
consent of Laser Power, it will not perform or engage in certain activities in
the conduct of its business and the businesses of its subsidiaries. See "The
Merger and Related Transactions -- Merger Agreement -- Representations and
Covenants."
No Solicitation. Pursuant to the Merger Agreement, EMI has agreed that it
will not (i) solicit any alternate acquisition proposal, (ii) participate in any
discussions or negotiations with any other parties with respect to an alternate
acquisition proposal, or (iii) provide any non-public information concerning EMI
to any other parties in connection with any alternate acquisition proposal. See
"The Merger and Related Transactions -- Merger Agreement -- No Solicitation;
Break-Up Fee."
Conditions to the Merger. Consummation of the Merger is subject to certain
conditions, including (i) declaration by the Commission of the effectiveness of
the Registration Statement, (ii) approval of the Merger Proposal by the Laser
Power stockholders and the EMI shareholders, (iii) absence of any material legal
proceeding relating to the Merger, (iv) receipt by Laser Power and EMI of legal
opinions that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, (v) receipt by Laser Power of letters dated the
Closing Date from the independent accountants of Laser Power and of EMI to the
effect that such accountants concur with Laser Power's management's conclusion
that no conditions exist that would preclude Laser Power from accounting for the
Merger as a pooling-of-interests, (vi) subject to certain materiality
thresholds, the accuracy of the representations and warranties made by each
party in the Merger Agreement, (vii) subject to certain materiality thresholds,
performance of all covenants required by the Merger Agreement, and (viii)
execution of the noncompetition agreements. In addition, Laser Power's
obligation to consummate the Merger is further conditioned upon, among other
things, (i) the receipt of resignations of each officer and director of EMI,
(ii) the holders of less than 5% of the outstanding shares of EMI Common Stock
having asserted or being entitled to assert dissenters' rights under the
California Law; (iii) the receipt by the Laser Power Board of the written
opinion of FSC to the effect that the consideration to be received by the
shareholders of EMI is fair, from a financial point of view, to the stockholders
of Laser Power; (iv) the receipt by Laser Power of a comfort letter (and bring
down letter) to be issued by McGladrey and Pullen, LLP and (v) the closing price
per share of Laser Power Common Stock as reported on the Nasdaq National Market
on the last trading day preceding the Closing Date being less than $9. EMI's
obligations to consummate the Merger are further conditioned upon, among other
things, the price per share of Laser Power Common Stock as reported on the
Nasdaq National Market on the last trading day preceding the Closing Date being
greater than $6. See "The Merger and Related Transactions -- Merger Agreement --
Conditions to the Merger."
Termination; Break-Up Fees. The Merger Agreement may be terminated by
either party under certain circumstances. Laser Power and EMI have agreed that,
if the Merger is not consummated under certain limited circumstances involving a
competing offer, EMI will pay to Laser Power a sum of $400,000. See "The Merger
and Related Transactions -- Merger Agreement -- Termination; Termination Fee,"
and "-- No Solicitation; Break-Up Fee."
Escrow Agreement. The Merger Agreement provides that, subject to certain
limitations such as those described below, Laser Power, Laser Power Sub and
other affiliates and representatives of Laser Power shall be indemnified,
defended and held harmless by the EMI shareholders, on a pro rata basis, from
and against any loss, expense, liability or other damages, including the
reasonable costs of investigation, penalties and attorneys' and accountants'
fees incurred in connection with or arising from or attributable to (i) any
breach of or inaccuracy in any representation or warranty made by EMI in the
Merger Agreement or in any certificate or document delivered in connection with
the Merger, (ii) any breach of or failure to perform any covenant of EMI set
forth in the Merger Agreement or (iii) the incurrence by EMI of certain fees and
expenses. Such indemnification rights as they relate to certain occurrences or
circumstances under the foregoing clauses (i) and (ii) are subject to a basket
of $250,000, so that liability under the foregoing clauses (i) and (ii) will not
exist as a result of such occurrences or circumstances until and except to the
extent the aggregate amount of such liability exceeds $250,000. Further, such
indemnification rights shall be the sole recourse of Laser Power, Laser Power
Sub and their affiliates following the Closing Date for claims against EMI.
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<PAGE> 16
The maximum liability of each EMI shareholder for such indemnification is
limited to ten percent (10%) of the aggregate number of shares of Laser Power
Common Stock to be received by such EMI shareholder in connection with the
Merger.
Pursuant to the terms of the Merger Agreement, each of the EMI shareholders
constitutes and appoints Dick Sharman, Robert N. Haro and Robert P. Perkins
(Sharman, Haro and Perkins, collectively, the "Shareholders' Agents"), as their
agents and attorneys-in-fact to take such action and exercise such rights, power
and authority under the Merger Agreement, including the indemnification
provisions therein, as they deem necessary and appropriate and to execute an
Escrow Agreement (the "Escrow Agreement") between Laser Power, EMI, American
Securities Transfer & Trust, Inc. (the "Escrow Agent") and the Shareholders'
Agents pursuant to which ten percent (10%) of the aggregate number of shares of
Laser Power Common Stock to be received by each EMI shareholder in connection
with the Merger will not be issued to such EMI shareholder at the Effective
Time, but will be retained in an escrow account (the "Escrow Shares") as
security for the EMI shareholders' indemnity obligations under the Merger
Agreement. See "The Merger and Related Transactions -- Escrow Agreement and
Related Agreements; Interests of Certain Persons in the Merger."
Shareholder Agreements. Concurrently with the execution of the Merger
Agreement, certain executive officers and directors of EMI owning in the
aggregate approximately 45.8% of the outstanding EMI Common Stock entered into
shareholder agreements with Laser Power (each a "Shareholder Agreement" and,
collectively, the "Shareholder Agreements"). Pursuant to the Shareholder
Agreements, each of such persons agreed to vote or direct the vote of all EMI
Common Stock over which such person has voting power or control in favor of the
Merger Agreement and the Merger. See "The Merger and Related Transactions --
Escrow Agreement and Related Agreements; Interests of Certain Persons in the
Merger -- Shareholder Agreements."
Affiliate Agreements. Each of the members of the EMI Board of Directors and
certain officers of EMI have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in respect
of the shares of EMI Common Stock held by them prior to the Merger and the
shares of Laser Power Common Stock to be received by them in the Merger so as to
comply with the requirements of applicable federal securities laws and to help
ensure that the Merger will be treated as a pooling-of-interests for accounting
and financial reporting purposes. See "The Merger and Related
Transactions -- Escrow Agreement and Related Agreements; Interests of Certain
Persons in the Merger -- Affiliate Agreements."
Noncompetition Agreements. It is a condition to the Merger that, on the
Closing Date, each of Dick Sharman and Robert N. Haro enter into a
Noncompetition Agreement with Laser Power, which agreements shall become
effective promptly after the effectiveness of the Merger. See "The Merger and
Related Transactions -- Escrow Agreement and Related Agreements; Interests of
Certain Persons in the Merger -- Noncompetition Agreements."
Merger Expenses and Fees and Other Costs. All fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement shall be paid by the party incurring such expenses, whether or
not the Merger is consummated; provided, however, that if the Merger is
consummated, the shareholders of EMI shall indemnify Laser Power and EMI from
any costs or expenses incurred by EMI in excess of $275,000. See "The Merger and
Related Transactions -- Merger Expenses and Fees and Other Costs."
Laser Power and EMI estimate that they will incur direct transaction and
integration costs of approximately $1 million associated with the Merger. These
nonrecurring transaction costs will be charged to operations upon consummation
of the Merger, expected in the quarter ending March 31, 1998. See "Unaudited Pro
Forma Combined Condensed Financial Information" and "Risk Factors -- Integration
of Operations."
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<PAGE> 17
MARKET PRICE DATA
Laser Power's Common Stock was first traded on June 19, 1997 on the Nasdaq
National Market under the symbol LPWR. The following table sets forth, for the
periods indicated, the high and low sales prices per share of Laser Power Common
Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
------------------------------------------------------------ ---- ----
<S> <C> <C>
Fiscal year ended August 31, 1997:
Fourth quarter (from June 19, 1997)....................... $7 7/16 $5 1/2
One month ended September 30, 1997.......................... $7 7/8 $6 1/2
Fiscal year ending September 30, 1998:
First quarter (through December 26, 1997)................. $9 3/4 $5 3/8
</TABLE>
As of the Record Date, there were approximately stockholders of
record of Laser Power Common Stock, as shown on the stock records of Laser
Power.
Neither Laser Power nor EMI has ever paid any cash dividends on its capital
stock. Laser Power anticipates that, for the foreseeable future, it will
continue to retain any earnings for use in the operation of its business.
On October 29, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the letter of intent relating to
the Merger Agreement, the closing price on Nasdaq for Laser Power Common Stock
was $8.50 per share. As of the Record Date, the closing price on Nasdaq for
Laser Power Common Stock was $ . There can be no assurance as to the
actual price of Laser Power Common Stock prior to or at the Effective Time of
the Merger or of Laser Power Common Stock at any time following the Effective
Time of the Merger. See "-- Comparative Per Share Data" and "Risk Factors."
Because the Exchange Ratio is fixed, changes in the market price of Laser
Power Common Stock will affect the dollar value of Laser Power Common Stock to
be received by shareholders of EMI in the Merger. Stockholders of Laser Power
and shareholders of EMI are encouraged to obtain current market quotations for
Laser Power Common Stock prior to their respective Special Meeting.
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<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
Laser Power's consolidated statements of operations for each of the five years
in the period ended August 31, 1997, and with respect to Laser Power's
consolidated balance sheets at August 31, 1993, 1994, 1995, 1996 and 1997, are
derived from the audited consolidated financial statements of Laser Power.
The consolidated statements of operations data for EMI for the years ended
December 31, 1995 and 1996 and the consolidated balance sheets data of EMI as of
December 31, 1995 and 1996 are derived from EMI's audited consolidated financial
statements. The consolidated statements of operations data for EMI for the
period June 10 to December 31, 1993, the year ended December 31, 1994, and for
the nine months ended September 30, 1996 and 1997 and the consolidated balance
sheets data for EMI as of December 31, 1993 and 1994 and September 30, 1997, are
derived from the unaudited consolidated financial statements of EMI. The results
of operations of EMI for the nine months ended September 30, 1997, are not
necessarily indicative of the results of operations for the full year or future
periods. The unaudited consolidated financial statements of EMI have been
prepared on a basis consistent with EMI's audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that management believed necessary for a fair presentation of EMI's
financial position and results of operations for such periods.
The data set forth below are qualified by reference to, and should be read
in conjunction with, the related "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes related thereto included elsewhere in this
Prospectus/Joint Proxy Statement.
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<PAGE> 19
LASER POWER SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales.................................. $ 8,720 $10,158 $11,859 $15,194 $17,197
Contract research and development.............. 963 1,727 2,714 3,713 6,156
------- ------- ------- ------- -------
Total revenues......................... 9,683 11,885 14,573 18,907 23,353
Costs and expenses:
Cost of product sales.......................... 5,392 6,550 7,994 9,888 11,882
Contract research and development.............. 766 1,308 2,059 2,942 4,849
Internal research and development.............. 1,184 1,568 2,857 2,689 1,027
Selling, general and administrative............ 2,971 3,204 3,583 4,306 4,526
------- ------- ------- ------- -------
Total costs and expenses............... 10,313 12,630 16,493 19,825 22,284
------- ------- ------- ------- -------
Income (loss) from operations.................... (630) (745) (1,920) (918) 1,069
Interest expense, net............................ 186 268 326 300 275
------- ------- ------- ------- -------
Income (loss) before income taxes................ (816) (1,013) (2,246) (1,218) 794
Income taxes..................................... -- -- 23 13 40
------- ------- ------- ------- -------
Net income (loss)................................ $ (816) $(1,013) $(2,269) $(1,231) $ 754
======= ======= ======= ======= =======
Net income (loss) per share(1)................... $ (0.25) $ (0.29) $ (0.59) $ (0.29) $ 0.15
Shares used in per share computations(1)......... 3,318 3,509 3,856 4,311 5,143
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents........................ $ 109 $ 394 $ 257 $ 298 $ 6,304
Working capital.................................. 1,745 1,723 2,311 2,838 10,476
Total assets..................................... 7,899 9,444 10,207 11,194 21,186
Long-term debt, net of current portion........... 943 1,049 802 559 1,171
Subordinated convertible debentures.............. 1,660 1,660 1,660 1,660 1,660
Total stockholders' equity....................... 3,234 3,787 4,670 5,320 14,065
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share and the number of shares
used in the per share calculation.
14
<PAGE> 20
EMI SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 10 TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- ----------------
1993 1994 1995 1996 1996 1997
------------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales................................ $ 4,095 $6,664 $7,281 $10,595 $ 7,473 $9,076
Cost of goods sold....................... 2,994 4,976 5,450 7,588 5,268 5,753
------- ------ ------ ------- ------ ------
Gross profit........................... 1,101 1,688 1,831 3,007 2,205 3,323
Operating expenses:
Engineering, research and
development......................... 28 285 238 171 116 267
Selling, general and administrative.... 563 967 1,048 1,253 962 1,368
Provision for bonus.................... 36 -- -- 135 103 314
------- ------ ------ ------- ------ ------
Total operating expenses............... 627 1,252 1,286 1,559 1,181 1,949
------- ------ ------ ------- ------ ------
Earnings from operations................. 474 436 545 1,448 1,024 1,374
Other income (expense):
Interest and other income.............. 10 72 87 36 26 53
Interest expense....................... (112) (196) (200) (189) (143) (149)
------- ------ ------ ------- ------ ------
Earnings before income taxes............. 372 312 432 1,295 907 1,278
Provision for income taxes............... -- -- -- (9) (5) (141)
------- ------ ------ ------- ------ ------
Earnings before extraordinary item....... 372 312 432 1,286 902 1,137
Gain on early extinguishment of
liability.............................. -- -- -- 119 119 --
------- ------ ------ ------- ------ ------
Net earnings............................. $ 372 $ 312 $ 432 $ 1,405 $ 1,021 $1,137
======= ====== ====== ======= ====== ======
PER SHARE DATA(1):
Net earnings............................. $ 372 $ 312 $ 432 $ 1,405 $ 1,021 $1,137
Less net earnings allocated to increase
in temporary shareholders' equity...... -- 80 343 1,342 929 950
------- ------ ------ ------- ------ ------
Net earnings applicable to nonredeemable
common and common equivalent shares.... $ 372 $ 232 $ 89 $ 63 $ 92 $ 187
======= ====== ====== ======= ====== ======
Average common and common equivalent
shares outstanding..................... 3 890 1,058 1,126 1,119 1,135
Less average redeemable common and common
equivalent shares...................... -- 876 991 1,073 1,060 1,118
------- ------ ------ ------- ------ ------
Average nonredeemable common and common
equivalent shares...................... 3 14 66 53 59 17
======= ====== ====== ======= ====== ======
Net earnings per nonredeemable share:
Earnings (loss) before extraordinary
item................................ $ 124.07 $16.19 $ 1.34 $ (1.06) $ (0.46) $11.24
Extraordinary item..................... -- -- -- 2.24 2.01 --
------- ------ ------ ------- ------ ------
Net earnings........................... $ 124.07 $16.19 $ 1.34 $ 1.18 $ 1.55 $11.24
======= ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
------------ ------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................ $ 737 $ 784 $ 577 $ 1,210 $1,949
Working capital.......................... 2,521 2,196 2,404 3,579 4,310
Total assets............................. 3,216 3,875 4,432 6,371 7,887
Long-term liabilities, net of current
portion................................ 2,129 2,106 2,121 2,081 2,059
Shareholders' Equity:
Temporary shareholders' equity......... -- 83 445 1,845 2,673
Other shareholders' equity............. 372 605 693 757 944
</TABLE>
- ---------------
(1) See Note A of Notes to Consolidated Financial Statements for a description
of the computation of net earnings and the number of shares used in the per
share calculation.
15
<PAGE> 21
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The selected pro forma combined financial data is derived from the
unaudited pro forma combined condensed financial statements, which give effect
to the Merger as a pooling-of-interests, and should be read in conjunction with,
and are qualified by reference to, such pro forma statements and the notes
thereto included elsewhere in this Prospectus/Joint Proxy Statement. For
purposes of the unaudited pro forma operating data, Laser Power's consolidated
financial statements for the three fiscal years ended August 31, 1997 have been
combined with the consolidated financial statements of EMI for the fiscal years
ended December 31, 1995 and 1996, and the twelve months ended September 30,
1997, respectively. For purposes of the unaudited pro forma combined balance
sheet data, Laser Power's consolidated financial data at August 31, 1997 has
been combined with EMI's consolidated financial data at September 30, 1997. No
dividends have been declared or paid on Laser Power Common Stock or EMI Common
Stock.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it necessarily indicative of future financial position
or results of operations.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues.................................................. $21,854 $29,502 $35,552
Cost of revenues.............................................. 15,503 20,418 24,805
------- ------- -------
Gross profit.................................................. 6,351 9,084 10,747
Operating expenses:
Research and development.................................... 3,095 2,860 1,348
Selling, general and administrative......................... 4,631 5,694 6,531
------- ------- -------
Income (loss) from operations................................. (1,375) 530 2,868
Interest and other income (expense), net...................... (439) (453) (408)
------- ------- -------
Income (loss) before income taxes............................. (1,814) 77 2,460
Provision for income taxes.................................... (23) (22) (185)
------- ------- -------
Income (loss) before extraordinary item(1).................... $(1,837) $ 55 $ 2,275
======= ======= =======
Earnings per share data:
Income (loss) before extraordinary item(1).................. $ (0.32) $ 0.01 $ 0.32
======= ======= =======
Shares used in per share computations(2).................... 5,679 6,654 7,222
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
1997
----------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 8,253
Working capital................................................................... 13,787
Total assets...................................................................... 29,073
Long-term obligations, net of current portion(3).................................. 4,890
Stockholders' equity.............................................................. 16,682
</TABLE>
- ---------------
(1) In 1996, EMI realized an extraordinary gain from the early repayment of
certain long-term liabilities.
(2) The shares used in per share computations include all of the Common Stock
outstanding of EMI, converted into Laser Power Common Stock at the Exchange
Ratio, since upon consummation of the Merger there would no longer be any
Temporary Redeemable Common Stock of EMI.
(3) The proforma combined balance sheet assumes that the note payable by EMI to
Vitec Group, plc would be replaced by debt with similar interest and
repayment provisions in the event that the note was paid off subsequent to
the Effective Time.
16
<PAGE> 22
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Laser
Power and EMI and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a pooling-of-interests basis of accounting
assuming the Merger has been effected for all periods presented. This data
should be read in conjunction with the selected historical financial data, the
unaudited pro forma combined condensed financial data and the separate
historical consolidated financial statements of Laser Power and EMI, and notes
thereto included elsewhere in this Prospectus/Joint Proxy Statement. The pro
forma combined financial data is not necessarily indicative of the operating
results that would have been achieved had the Merger been consummated as of the
beginning of the periods indicated nor is such data necessarily indicative of
future financial condition or results of operations. For purposes of the
comparative per share data, Laser Power's financial data at August 31, 1995,
1996 and 1997 have been combined with EMI's financial data for the years ended
December 31, 1995 and 1996 and September 30, 1997, respectively.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
HISTORICAL -- LASER POWER:
Net income (loss) per share.................... $(0.59) $(0.29) $ 0.15
Book value per share(1)........................ $ 1.21 $ 1.27 $ 2.31
HISTORICAL -- EMI:
Income before extraordinary item per
share(2).................................... $ 0.41 $ 1.14 $ 1.35
Book value per share(1)........................ $ 1.13 $ 2.36 $ 3.39
PRO FORMA COMBINED PER LASER POWER SHARE:
Income before extraordinary item per share..... $(0.32) $ 0.01 $ 0.32
Book value per share(1)(3)..................... $ 1.02 $ 1.27 $ 2.06
EQUIVALENT PRO FORMA COMBINED PER EMI
SHARE(3)(4)(5):
Income before extraordinary item per share..... $(0.60) $ 0.02 $ 0.58
Book value per share(1)........................ $ 1.88 $ 2.35 $ 3.82
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of Common Stock outstanding at the end of
each period. The pro forma book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of Laser Power
Common Stock outstanding at the end of each period.
(2) Computed on a basis as if the redemption obligation on all shares and stock
options outstanding was terminated as of the beginning of the respective
periods. The Merger Agreement requires that this feature be terminated upon
consummation of the Merger.
(3) Laser Power and EMI estimate they will incur transaction-related costs of
approximately $1 million associated with the Merger, including estimated
costs associated with integrating the two companies, which will be charged
to operations upon consummation of the Merger. The Pro Forma Combined Book
Value Per Share data give effect to estimated costs of $1 million, as if
such costs and charge had been incurred as of August 31, 1997. These costs
and charge are not included in the pro forma income per share data. See
"Unaudited Pro Forma Combined Condensed Financial Information" and
accompanying notes thereto.
(4) The equivalent EMI pro forma per share amounts are calculated by dividing
the Laser Power combined pro forma per share amounts by the Exchange Ratio.
(5) The shares used in per share computations include all of the Common Stock
outstanding of EMI converted into Laser Power Common Stock at the Exchange
Ratio, since upon consummation of the Merger there would no longer be any
Temporary Redeemable Common Stock of EMI.
17
<PAGE> 23
RISK FACTORS
The following risk factors should be considered by holders of Laser Power
and EMI Common Stock in evaluating whether to approve the Merger Proposal. These
factors should be considered in conjunction with the other information included
and incorporated by reference in this Prospectus/Joint Proxy Statement.
The discussion in this Prospectus/Joint Proxy Statement contains
forward-looking statements that involve risks and uncertainties. Laser Power's,
EMI's and the combined company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the sections
entitled "Laser Power Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Laser Power Business," "EMI Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"EMI Business," as well as those discussed elsewhere in this Prospectus/Joint
Proxy Statement.
INTEGRATION OF OPERATIONS
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems, employee compensation
and benefits and other aspects of operations, while managing a larger and
geographically expanded entity, will present a significant challenge to the
management of the combined company. There can be no assurance that the
integration process will be successful or that the anticipated benefits of the
business combination will be fully realized. The dedication of management
resources to such integration may distract attention from the day-to-day
business of the combined company. The difficulties of integration may be
increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. There can be no assurance that there
will not be substantial costs associated with the integration process, that such
activities will not result in a decrease in revenues or that there will not be
other material adverse effects of these integration efforts. Such effects could
materially reduce the short-term earnings of the combined company. Subsequent to
the Merger, Laser Power expects to incur a charge of approximately $1 million,
to reflect the transaction and integration costs expected to result from the
combination of the two companies. This amount is a preliminary estimate only.
There can be no assurance that Laser Power will not incur additional charges in
the current quarter and subsequent quarters to reflect costs associated with the
Merger.
FLUCTUATION IN QUARTERLY PERFORMANCE
Laser Power has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The combined company may
incur significant losses in the future due to product design, development,
manufacturing and marketing expenditures, especially in connection with the
combined company's microlasers and microlaser based products. If significant
variations were to occur between forecasts and actual orders with respect to the
combined company's business, the combined company may not be able to reduce its
expenses proportionately and in a timely manner, and operating results could be
adversely affected. Such variations have occurred in the past to Laser Power and
could occur again in the future as a result of increases in development
expenditures for proposed new products, product introductions by competitors,
changes in customer ordering patterns and other factors. In addition, the
combined company's ability to fill orders in a timely and responsive manner will
be dependent upon maintaining adequate manufacturing capacity and significant
inventories of raw material and finished optics for replacement orders. Laser
Power has experienced capacity constraints in the past which have resulted in
delays in order fulfillment and reduced gross margins. Future delays in order
fulfillment could lead to declines in product sales. If product sales or prices
were to decline substantially, inventory writedowns could occur. Price
reductions or increases in material costs could also have an adverse effect on
the combined company's business, financial condition and results of operations.
EMI's business consists of both a small number of large contracts which are
awarded on an irregular schedule, and a large number of small contracts which
are spread over the year. The timing of awarding large contracts could cause
significant fluctuations in the combined company's operating results. In
addition, the combined
18
<PAGE> 24
company's quarterly performance may be adversely affected by continuing
consolidation in the defense industry and the resultant impact on EMI's
historical customers and their procurement activities.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
As a result of substantial investments in research and development, Laser
Power has incurred operating losses in fiscal years prior to fiscal 1997 and, at
August 31, 1997, had an accumulated deficit of $4.5 million. The development,
sales, marketing and support of new products will require continued substantial
expenditures for the foreseeable future, which could result in additional
operating losses for the combined company. Laser Power has funded a substantial
portion of its product development efforts through development contracts. Any
failure by the combined company to maintain its external funding sources could
result in future operating losses. There can be no assurance that the combined
company will maintain its external funding sources or remain profitable in the
future or that present capital and any funds provided by operations will be
sufficient to fund the combined company's future capital requirements.
COMPETITION
In each of the markets that Laser Power or EMI serves, the combined company
will face competition from established companies, many of which have
substantially greater financial, engineering, research, development,
manufacturing, sales, marketing, service and support resources, including
greater name recognition, a larger installed base of products and long-standing
customer relationships. In addition, some of EMI's competitors are customers of
EMI which might have the ability to perform or obtain the capability to perform
projects which are presently being performed for them by EMI. There can be no
assurance that the combined company will be able to compete successfully in its
markets in the future, that the combined company will be able to maintain EMI's
existing or obtain additional contracts for projects at favorable rates, that
the combined company will be able to make the technological advances necessary
to maintain its competitive position or that its new products will receive
market acceptance. In addition, there can be no assurance that technological
changes or development efforts by the combined company's competitors will not
render the combined company's products or technologies obsolete or
uncompetitive.
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS
Certain materials used in the manufacture of Laser Power and EMI's products
are currently obtained from single or limited source suppliers. Laser Power and
EMI purchase all of their zinc selenide and zinc sulfide (critical raw materials
used in the manufacture of their products) from Morton International, Inc.
("Morton"). In addition, Laser Power believes that Cerac Incorporated ("Cerac"),
from which Laser Power and EMI purchase all of their thorium fluoride for use in
low absorption thin film coatings, is the sole source for high quality thorium
fluoride. EMI also relies upon Revtek, Inc. as an outside processor for the
application of conductive grids on missile domes. Any interruption or cessation
of supply by Morton, Cerac or Revtek would have a material adverse effect on the
combined company's business, financial condition and results of operations.
Laser Power does not have long term or volume purchase agreements with its
suppliers, and there can be no assurance that materials and components needed by
the combined company will be available in the quantities required, if at all.
DEVELOPMENT RISKS RELATING TO MICROLASER TECHNOLOGIES
Laser Power has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of Laser Power's
microlasers have been limited to low level production quantities. Other
microlasers and microlaser based products are still in the early stages of
development. There can be no assurance that the combined company's microlasers
will be successfully designed into customers' products or that such microlasers
will achieve widespread market acceptance. There can also be no assurance that
the combined company will successfully develop additional microlaser or
microlaser based products or that any of the combined company's products under
development will achieve commercial sales volumes. Laser Power believes that it
will be necessary to continue to reduce the cost of manufacturing and to broaden
the variety of wavelengths provided by its microlasers to achieve commercial
acceptance. If the combined company is
19
<PAGE> 25
unable to successfully gain market acceptance of its microlasers and microlaser
based products, the combined company's business, operating results and financial
condition will be materially and adversely affected.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES
To meet its strategic objectives, the combined company must continue to
develop, manufacture and market new products, develop new processes and improve
its existing processes. As a result, Laser Power expects the combined company to
continue to make significant investments in research and development and to
consider from time to time the strategic acquisition of businesses, products, or
technologies complementary to the combined company's businesses. The success of
the combined company in developing, introducing and selling new and enhanced
products depends upon a variety of factors, including product selection, timely
and efficient completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance in the field. There can be no assurance that
the combined company will be able to develop and introduce new products or
enhancements to existing products and processes in a manner that satisfies
customer needs or achieves market acceptance. The failure to do so would have a
material adverse effect on the combined company's business, financial condition
and results of operations.
LIMITED MICROLASER MANUFACTURING EXPERIENCE; SCALE-UP RISK
Laser Power has no experience in producing microlasers other than in low
level production quantities. Laser Power's microlasers are assembled from
component parts at its San Diego facility. Laser Power purchases component parts
for its microlasers, including laser crystals, nonlinear crystals and diode
lasers, from various sources around the world. However, none of Laser Power's
suppliers of microlaser component parts has experience in supplying components
with Laser Power's specifications at increased volumes. Laser Power does not
have long term or volume purchase agreements with any of its suppliers and
currently purchases components on a purchase order basis. There can be no
assurance that these suppliers will be able to provide components to the
combined company in the quantities, with the quality or at the prices necessary
for production quantities of Laser Power's microlaser products and products
under development. Laser Power is increasing its manufacturing capacity to
polish and coat crystals and to perform the required complex assembly steps.
Such an increase in its manufacturing capacity will require significant scale-up
expenditures and additions to the combined company's facilities. In the event
that the combined company is unable to locate sufficient sources of microlaser
component parts, or is unable to expand its manufacturing capacity to produce
microlasers and microlaser based products, the combined company will not be able
to manufacture its products on commercially reasonable terms, if at all, which
would have a material adverse effect on the combined company's business,
financial condition and results of operations.
LIMITED MICROLASER SALES, MARKETING AND DISTRIBUTION EXPERIENCE
Laser Power has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products in
commercial quantities. The combined company intends to sell microlasers and
microlaser based products through a direct sales force in North America and a
direct sales force and distributors in Europe. In Asia, the combined company
intends to sell microlasers and microlaser based products primarily through
agreements with distributors or representatives, although Laser Power has not
entered into any such agreements or arrangements to date. To the extent that
Laser Power (or the combined company) enters into distribution or representation
arrangements for the sale of its microlasers and microlaser based products, the
combined company will be dependent upon the efforts of third parties. There can
be no assurance that the combined company will be able to build a direct sales
force or marketing organization for microlasers or microlaser based products,
that establishing such a direct sales force or marketing organization will be
cost effective, or that the combined company's sales and marketing efforts will
be successful. There can be no assurance that Laser Power (or the combined
company) will be able to enter into agreements with distributors or
representation arrangements on a timely basis, if at all, or that such
distributors or representatives will devote adequate resources to selling the
combined company's microlasers and microlaser based products. Failure to build
an effective sales and marketing organization or to establish
20
<PAGE> 26
effective distribution or representation arrangements for the combined company's
microlaser products would have a material adverse effect on the combined
company's business, financial condition and results of operations.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The combined company's success will depend in large part on its ability,
and the ability of its licensees and licensors, to obtain patents for its
technologies and any products resulting from the application of such
technologies, to defend such patents once obtained and to maintain trade
secrets, both in the United States and in foreign countries. The commercial
success of the combined company will also depend upon avoiding the infringement
of patents issued to others and maintaining the technology licenses upon which
certain of its current products are, or any future products might be, based.
Laser Power owns certain U.S. patents and has filed additional patent
applications in the United States and foreign jurisdictions. There can be no
assurance that other patents will be issued to the combined company or its
licensors as a result of pending or future patent applications or that, if
issued, such patents will contain claims sufficiently broad to afford protection
against competitors with similar technology. Although the combined company may
file additional patent applications outside the United States, Laser Power
believes that obtaining foreign patents may be more difficult than obtaining
U.S. patents because of differences in patent laws and believes the protection
provided by foreign patents, if obtained, and any other foreign intellectual
property protection may be weaker than that provided in the United States. There
can be no assurance that any patents issued to the combined company, or for
which it has license rights, will not be challenged, narrowed, invalidated or
circumvented, or that the rights granted under such patents will provide
competitive advantages to the combined company. Litigation, which could result
in substantial cost to the combined company, may be necessary to enforce its
patent and license rights, to enforce or defend an infringement claim, or to
determine the scope and validity of others' proprietary rights. Some of Laser
Power's competitors have, or are affiliated with companies having, substantially
greater resources than the combined company, and such competitors may be able to
sustain the costs of complex patent litigation to a greater degree and for
longer periods of time than the combined company. Uncertainties resulting from
the initiation and continuation of any patent or related litigation could have a
material adverse effect on the combined company's business, financial condition
and results of operations. If others file patent applications that claim
technology also claimed by the combined company, the combined company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of invention, or opposition
proceedings in a foreign patent office, either of which could result in
substantial cost to the combined company, even if the outcome is favorable to
the combined company. An adverse outcome could subject the combined company to
significant liabilities to third parties and require the combined company to
cease using the technology or to license disputed rights from third parties,
which licenses may not be available at reasonable cost, if at all.
Laser Power has acquired a license to a Stanford University owned patent
covering certain technology used in Laser Power's blue microlaser from ATx
Telecom Systems, Inc. ("ATx Telecom"). Laser Power has received a letter from a
competitor claiming that Laser Power's license was transferred improperly by
Stanford and ATx Telecom. While Laser Power believes that such license was
properly transferred, there can be no assurance that its license would not be
challenged. In such an event, there can be no assurance that the combined
company would be able to obtain a replacement license on favorable terms, if at
all. Failure to obtain such a license would result in a material adverse effect
to the combined company's business, financial condition and results of
operations.
Laser Power is aware of patents held by other laser companies that may
relate to Laser Power's microlaser technology. Laser Power does not believe it
infringes any valid claims of such laser companies' patents or believes that it
has adequate design-arounds if it is held to be infringing. Nevertheless, for
certain cost or strategic reasons, Laser Power believes it may be advantageous
to enter into license agreements with such laser companies. Laser Power is
currently negotiating to obtain licenses from such parties for certain
technology covered by such patents. However, there can be no assurance that
Laser Power or the combined company will obtain the licenses on favorable terms,
if at all. If it is determined that the patents held by these
21
<PAGE> 27
other laser companies do cover the combined company's technology, the inability
to obtain licenses for such technology could have a material adverse effect on
the combined company's business, financial condition and results of operations.
Laser Power has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, Laser
Power has granted significant rights to the other parties under such contracts.
Laser Power's strategy is to continue to develop a significant portion of its
proprietary technology pursuant to funding received from development contracts.
There can be no assurance that the combined company will be able to continue to
obtain funding for the development of its proprietary technology, or that, if
received, the combined company will obtain rights to such technology sufficient
to permit it to develop and market new products or to prevent third parties from
using such technology to compete with the combined company.
In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, Laser Power requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with Laser Power. These agreements are
intended to enable Laser Power to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by Laser Power of proprietary technology developed at
Laser Power or with Laser Power's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the combined
company's trade secrets or other confidential information in the event of
unauthorized use or disclosure of such information or that adequate remedies
would exist in the event of such unauthorized use or disclosure. The loss or
exposure of trade secrets possessed by the combined company could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
Laser Power's academic collaborators have certain rights to publish data
and information in which Laser Power has rights. There is considerable pressure
on academic institutions to publish discoveries in the high technology and
physics fields. There can be no assurance that such publication would not
adversely affect the combined company's ability to obtain patent protection for
certain technologies in which it may have a commercial interest.
EXPOSURE TO GOVERNMENT MARKETS
Approximately 90% of EMI's revenues are derived from customers in the
defense industry. These customers in turn generally contract with a governmental
entity, typically the U.S. government. Many times, governmental programs are
subject to funding approval and can be modified or terminated with no warning
upon the determination of a legislative or administrative body. The loss or
failure to obtain certain contracts could have a material adverse effect on the
combined company's business, financial condition and operating results. In
addition, the loss of a major government customer, or any significant reduction
or delay in orders by such customer, would have a material adverse effect on the
combined company's business, financial condition and operating results.
DEPENDENCE ON SMALL CUSTOMER BASE
EMI sells a significant portion of its products to a small number of
customers. The number of EMI's customers has contracted in recent years as a
result of the continuing consolidation of defense industry contractors. In
fiscal 1995 and 1996 and the twelve months ended September 30, 1997, Lockheed
Martin Corporation represented over 50% of EMI's revenues. If the financial
condition and operations of this or any other significant customer deteriorated
substantially, or if any significant customer determined to withdraw its
projects from EMI, the combined company's business, financial condition and
operating results would be adversely affected.
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FUTURE CAPITAL REQUIREMENTS
Although Laser Power believes that the combined company's existing cash
balances, cash flow from operations and available lines of credit will be
sufficient to meet the combined company's capital requirements for at least the
next twelve months, the combined company may seek additional equity or debt
financing to compete effectively in the markets it serves. The timing and amount
of the combined company's capital requirements cannot be precisely determined at
this time and will depend on a number of factors, including the demand for the
combined company's products and products under development. There can be no
assurance that such additional financing will be available when needed, or, if
available, will be on terms satisfactory to the combined company. If additional
funds are raised by issuing equity securities, further dilution to the then
existing stockholders will result.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 45%, 44% and 47% of Laser
Power's total revenues in the fiscal years ended August 31, 1995, 1996 and 1997,
respectively, and Laser Power expects that international sales will continue to
account for a substantial portion of total revenues of the combined company. The
combined company may continue to expand its operations outside of the United
States and enter additional international markets, each of which will require
significant management attention and financial resources. International sales
are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulties in staffing and management and
integration of foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, currency fluctuations and potentially adverse
tax consequences. Since substantially all of Laser Power's foreign sales are
denominated in U.S. dollars, the combined company's products may also become
less price competitive in countries in which local currencies decline in value
relative to the U.S. dollar. The combined company's business and operating
results may also be materially and adversely affected by lower sales levels
which typically occur during the summer months and the calendar year end in
Europe and certain other overseas markets. The sales of many of Laser Power's
OEM customers are dependent on international sales, which increases the combined
company's exposure to the risks associated with international sales.
ENVIRONMENTAL, HEALTH AND SAFETY CONCERNS
Laser Power and EMI are subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of hazardous
materials used in connection with the manufacture of their respective products.
Both the governmental regulations and the costs associated with complying with
such regulations are subject to change in the future. There can be no assurance
that any such change will not have a material adverse effect on the combined
company's business, financial condition and results of operations. Laser Power
and EMI make investments in protective equipment, and continually review and
monitor process controls, manufacturing procedures and training to minimize the
risks to employees, surrounding communities and the environment due to the
presence and handling of such hazardous materials. The failure to properly
handle such materials could lead to harmful exposure to employees or to the
improper discharge of hazardous materials. Since neither Laser Power nor EMI
carries environmental impairment insurance, such a failure could result in a
material adverse effect on the combined company's business, financial condition
and results of operations.
DEPENDENCE ON KEY PERSONNEL
The combined company will be highly dependent upon the experience and
continuing services of certain scientists, engineers and production and
management personnel. Competition for the services of these personnel is
intense, and there can be no assurance that the combined company will be able to
retain or attract the personnel necessary for its success. The loss of the
services of the combined company's key personnel would have a material adverse
effect on the combined company's business, financial condition and results of
operations.
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CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES
Upon completion of the merger, the combined company's executive officers
and directors and their affiliated entities will, in the aggregate, beneficially
own approximately 40.8% of the outstanding shares of Laser Power's Common Stock.
As a result, these stockholders will be able to exercise effective control over
matters requiring stockholder approval, including the election of directors,
mergers, consolidations and sales of all or substantially all of the assets of
EMI. This control may prevent or discourage tender offers for Laser Power's
Common Stock unless the terms are approved by such stockholders.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Laser Power's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, including the inability
of stockholders to effect actions by written consent or to remove directors
without cause, may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the combined company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of Laser Power's
Common Stock. Certain provisions of the Restated Certificate will allow the
combined company to issue Preferred Stock without any vote or further action by
the stockholders. These provisions may make it more difficult for stockholders
to take certain corporate actions and could have the effect of delaying or
preventing a change in control of the combined company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Restated Certificate limits, to the maximum extent permitted by the
Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for any breach of fiduciary duty as a director.
Laser Power's Bylaws provide that it shall indemnify its executive officers and
directors and may indemnify its other officers, employees and agents to the
fullest extent permitted by law. Laser Power has entered into indemnification
agreements with its directors and certain officers containing provisions which
are in some respects broader than the specific indemnification provisions
contained in Delaware Law. The indemnification agreements may require the
combined company, among other things, to indemnify such officers and directors
against certain liabilities arising by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. Laser Power has
purchased directors' and officers' liability insurance in the amount of $5
million of coverage; however, there can be no assurance that the combined
company will be able to obtain such liability insurance in the future.
ADDITIONAL SHARES TO BE ISSUED BY LASER POWER; SHARES ELIGIBLE FOR FUTURE SALE
As a result of the Merger, it is anticipated that Laser Power will issue up
to 2,004,676 shares of Laser Power Common Stock. In general, those shares will
be eligible for sale in the public market following the Merger, subject to
certain volume and other resale limitations for affiliates of EMI or Laser
Power, pursuant to Rules 144 and 145 under the Securities Act and to agreements
not to sell to the extent required to cause the Merger to be accounted for as a
pooling-of-interests. An aggregate of approximately 917,531 of the shares issued
in the Merger will be beneficially owned by persons who may be deemed to be
affiliates of EMI or Laser Power and, therefore, subject to such limitations.
The sale of a significant number of the foregoing shares may cause substantial
fluctuations in the market price of Laser Power Common Stock. See "The Merger
and Related Transactions -- Escrow Agreement and Related Agreements -- Affiliate
Agreements."
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VOLATILITY OF STOCK PRICE
Until June 1997, there has been no public market for Laser Power Common
Stock, and there can be no assurance that an active public market for Laser
Power Common Stock will develop or be sustained. The trading price of Laser
Power Common Stock has been in the past, and will continue to be, subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in earning estimates by
analysts, announcements of technological innovations or new products by the
combined company or its competitors, general conditions in the combined
company's industries and other events or factors. In addition, the stock market
in general has experienced extreme price and volume fluctuations that have
affected the market price for many companies in industries similar or related to
that of Laser Power and that have been unrelated to the operating performance of
those companies. These market fluctuations may materially and adversely affect
the market price of Laser Power Common Stock. Following Laser Power's initial
public offering of Laser Power Common Stock, Nasdaq informed Laser Power that it
had revised its initial listing criteria for inclusion on the Nasdaq National
Market and that such revised criteria were to be applied retroactively. Nasdaq
further informed Laser Power that it would be subject to delisting proceedings
if it could not meet such revised listing criteria by November 21, 1997. In
accordance with procedures established by Nasdaq, Laser Power has requested a
hearing on this issue, which has been scheduled for January 15, 1998. Laser
Power believes that its Nasdaq National Market listing should be maintained, but
there can be no assurance that Laser Power will, in fact, maintain its Nasdaq
National Market listing. If the Laser Power Common Stock was delisted, trading
of the Laser Power Common Stock would thereafter be conducted on the Nasdaq
SmallCap Market.
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THE LASER POWER MEETING
DATE, TIME AND PLACE OF MEETING
The Laser Power Meeting will be held on February , 1998 at 9:00 a.m.,
local time, at 12777 High Bluff Drive, San Diego, California. Laser Power
intends to deliver this Prospectus/Joint Proxy Statement on or about January ,
1998, to all Laser Power stockholders entitled to vote at the Laser Power
Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Laser Power Common Stock at the close of business
on the Record Date are entitled to notice of and to vote at the Laser Power
Meeting. As of the close of business on the Record Date, there were
shares of Laser Power Common Stock outstanding and entitled to vote, held of
record by stockholders. Each Laser Power stockholder is entitled to
one vote for each share of Laser Power Common Stock held as of the Record Date.
VOTING OF PROXIES
The Laser Power proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the Laser Power Board for use at the Laser Power Meeting
and at any adjournment or postponement thereof. Laser Power stockholders are
requested to complete, date and sign the accompanying proxy and promptly return
it in the accompanying envelope. All proxies that are properly executed and
returned, and that are not revoked, will be voted at the Laser Power Meeting in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve the Merger Proposal and the other proposals submitted to
the Laser Power stockholders, each as recommended by the Laser Power Board, as
indicated herein. The Laser Power Board is not currently aware of any business
to be brought before the Laser Power Meeting other than the specific proposals
referred to in this Prospectus/Joint Proxy Statement and specified in the
accompanying notice of the Laser Power Meeting. As to any other business that
may properly come before the Laser Power Meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies.
REVOCABILITY OF PROXIES
A Laser Power stockholder who has given a proxy may revoke it at any time
before it is exercised at the Laser Power Meeting by (i) delivering to the
Secretary of Laser Power (by any means, including facsimile) a written notice,
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the Laser Power Meeting or (iii)
attending the Laser Power Meeting and voting in person (although attendance at
the Laser Power Meeting will not, by itself, revoke a proxy).
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of Laser Power Common Stock outstanding on
the Record Date. As a group, all executive officers and directors of Laser Power
and their respective affiliates beneficially owned 2,917,185 shares, or
approximately 47.8%, of the Laser Power Common Stock outstanding as of the
Record Date.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by proxy, of a majority of the shares of Laser
Power Common Stock outstanding on the Record Date is necessary to constitute a
quorum for the transaction of business at the Laser Power Meeting. Abstentions
and broker non-votes will each be included in determining whether a quorum is
present. Abstentions will have the same effect as a vote against a proposal.
Broker non-votes will not be counted for any purpose in determining whether any
of the proposals have been approved.
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SOLICITATION OF PROXIES AND EXPENSES
Laser Power will bear the costs of solicitation of votes from its
stockholders. Laser Power has engaged the firm of American Securities Transfer &
Trust, Inc. to assist it in the distribution of proxies and has agreed to pay
American Securities Transfer & Trust, Inc. a fee of $1,000 plus expenses for its
services. Copies of the solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
Laser Power Common Stock beneficially owned by others to forward to such
beneficial owners. Laser Power may reimburse persons representing beneficial
owners of Laser Power Common Stock for their costs of forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram, letter or personal solicitation by
directors, officers or other employees of Laser Power and by American Securities
Transfer & Trust, Inc. No additional compensation will be paid to directors,
officers and other regular employees for such services.
LASER POWER BOARD RECOMMENDATION
THE LASER POWER BOARD BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF LASER POWER AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS A VOTE
FOR APPROVAL OF THE MERGER PROPOSAL.
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THE EMI MEETING
DATE, TIME AND PLACE OF MEETING
The EMI Meeting will be held on February , 1998 at 8:30 a.m., local time,
at EMI's offices at 36570 Briggs Road, Murrieta, California. EMI intends to
deliver this Prospectus/Joint Proxy Statement on or about January , 1998, to
all EMI shareholders entitled to vote at the EMI Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record of EMI Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the EMI Meeting. As of
the Record Date, there were 1,082,965 shares of EMI Common Stock outstanding and
entitled to vote, held of record by 68 shareholders. Each EMI shareholder is
entitled to one vote for each share of EMI Common Stock held as of the Record
Date.
SHAREHOLDER VOTE REQUIRED
The presence, in person or by proxy, of a majority of the shares of EMI
Common Stock outstanding on the Record Date is necessary to constitute a quorum
at the EMI Meeting.
Approval of the Merger and the Merger Agreement requires the affirmative
vote of holders of a majority of the shares of EMI Common Stock outstanding on
the Record Date. Each record holder of EMI Common Stock on the Record Date is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
shareholders at the Special Meeting.
As a group, all directors and executive officers of EMI and their
respective affiliates beneficially owned 495,670 shares, or approximately 45.8%,
of the EMI Common Stock outstanding as of the Record Date. Concurrently with the
execution of the Merger Agreement, such directors and executive officers of EMI
have each signed a Shareholder Agreement obligating them to vote in favor of the
Merger and the Merger Agreement.
EXPENSES
EMI will bear the costs of solicitation of votes from its shareholders.
DISSENTERS' RIGHTS
Shareholders of record of EMI Common Stock may under certain circumstances,
and by following procedures prescribed by the California Law, exercise
dissenters' rights and receive cash for their respective shares of EMI Common
Stock. The failure of any dissenting shareholder of EMI to follow the
appropriate procedures may result in the termination or waiver of such rights.
See "The Merger and Related Transaction -- Dissenters' Rights of EMI
Shareholders" and Appendix C to this Prospectus/Joint Proxy Statement.
EMI BOARD RECOMMENDATION
THE EMI BOARD BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS
OF EMI AND ITS SHAREHOLDERS AND THEREFORE RECOMMENDS A VOTE FOR APPROVAL OF THE
MERGER PROPOSAL.
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THE MERGER AND RELATED TRANSACTIONS
This section of the Prospectus/Joint Proxy Statement describes certain
aspects of the proposed Merger. The Merger Agreement provides for the merger of
Laser Power Sub, a newly formed, wholly owned California subsidiary of Laser
Power, with and into EMI. The discussion in this Prospectus/Joint Proxy
Statement of the Merger and the description of the principal terms of the Merger
Agreement are accurate in all material respects but do not purport to be
complete and are subject to and qualified in their entirety by reference to the
Merger Agreement, a copy of which is attached to this Prospectus/Joint Proxy
Statement as Appendix A and incorporated herein by reference. All Laser Power
stockholders and EMI shareholders are urged to read the Merger Agreement in its
entirety.
EFFECTS OF THE MERGER
General
The Merger will be consummated promptly following approval of the Merger
Proposal by the Laser Power stockholders and EMI shareholders and the
satisfaction or waiver of all other conditions to consummation of the Merger.
The Merger will become effective on the date the Certificate of Merger is duly
filed with the California Secretary of State (the "Effective Time"). At the
Effective Time, Laser Power Sub will merge with and into EMI, with the result
that EMI will be the Surviving Subsidiary in the Merger and will be wholly owned
by Laser Power. As described below, the shareholders of EMI will become
stockholders of Laser Power, and their rights will be governed by the Laser
Power Certificate, the Laser Power Bylaws and the Delaware Law. See "Comparison
of Rights of Laser Power Stockholders and EMI Shareholders." The Articles of
Incorporation and the Bylaws of Laser Power Sub shall be those of the Surviving
Corporation.
There will be no change in the current Laser Power Board and officers of
Laser Power as a result of the Merger, except that Dick Sharman will be elected
to the Laser Power Board, as a condition to consummation of the Merger. At the
Effective Time, the officers of EMI (as the Surviving Subsidiary) will be Glenn
H. Sherman and Paul P. Wickman, Jr. and the sole director of EMI will be Glenn
H. Sherman.
Operations of the Combined Company Following the Merger
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems, employee compensation
and benefits and other aspects of operations, while managing a larger and
geographically expanded entity, will present a significant challenge to the
management of the combined company. There can be no assurance that the
integration process will be successful or that the anticipated benefits of the
business combination will be fully realized. The dedication of management
resources to such integration may detract attention from the day-to-day business
of the combined company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. There can be no assurance that there will not be substantial costs
associated with the integration process, that such activities will not result in
a decrease in revenues or that there will not be other material adverse effects
of these integration efforts. Such effects could materially reduce the
short-term earnings of the combined company. Subsequent to the Merger, Laser
Power expects to incur a charge of approximately $1 million, to reflect the
combination of the two companies, including transaction and integration costs.
This amount is a preliminary estimate only. There can be no assurance that Laser
Power will not incur additional charges in the current quarter and subsequent
quarters to reflect costs associated with the Merger.
Conversion of Shares
Exchange Ratio. At the Effective Time, each outstanding share of EMI Common
Stock (other than any shares of EMI Common Stock owned by Laser Power, Laser
Power Sub or any direct or indirect wholly owned subsidiary of Laser Power and
other than dissenting EMI shares) will be converted into the right to receive
1.8511 shares (the "Exchange Ratio") shares of Laser Power Common Stock. Each
share of EMI
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Common Stock owned by Laser Power, Laser Power Sub or any direct or indirect
wholly owned subsidiary of Laser Power immediately prior to the Effective Time
will be canceled and extinguished without any conversion thereof.
Based upon the capitalization of EMI as of the close of business on the
Record Date, an aggregate of approximately 2,004,676 shares of Laser Power
Common Stock (the "Merger Consideration") will be issued in the Merger, and
Laser Power will substitute options to acquire approximately 99,498 additional
shares of Laser Power Common Stock for all outstanding EMI options.
Immediately prior to the Effective Time, EMI will terminate the EMI
Employee Stock Purchase Plan. On or prior to the Record Date, all amounts that
had been withheld but not yet applied to purchase shares of EMI Common Stock
pursuant to such plan were applied to purchase the number of shares of EMI
Common Stock available under the Employee Stock Purchase Plan, and such shares
(together with cash in lieu of fractional shares) were distributed to the
participating employees pursuant to the terms of such plan. See "-- Treatment of
Employee Equity Benefit Plans."
Each share of Common Stock, $.001 par value per share, of Laser Power Sub
issued and outstanding as of the Effective Time will be converted into one
validly issued, fully paid and nonassessable share of Common Stock, without par
value, of the Surviving Subsidiary. Each certificate evidencing ownership of
shares of Laser Power Sub Common Stock will evidence ownership of such shares of
capital stock of the Surviving Subsidiary.
The Exchange Ratio will be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into Laser Power Common Stock or EMI
Common Stock), reorganization, recapitalization, reclassification or other like
change with respect to Laser Power Common Stock or EMI Common Stock occurring or
having a record date on or after the date of the Merger Agreement and prior to
the Effective Time.
Promptly after the Effective Time, Laser Power, acting through the Exchange
Agent, will deliver to each EMI shareholder of record, as of the Effective Time,
a letter of transmittal with instructions to be used in surrendering the
certificates which represented shares of EMI Common Stock in exchange for
certificates representing shares of Laser Power Common Stock. CERTIFICATES
SHOULD NOT BE SURRENDERED BY THE HOLDERS OF EMI COMMON STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN
ACCORDANCE WITH THE TERMS OF SUCH LETTER OF TRANSMITTAL.
Fractional Shares. No fractional shares of Laser Power Common Stock will be
issued in the Merger. Instead, each EMI shareholder who would otherwise be
entitled to receive a fraction of a share of Laser Power Common Stock will
receive an amount in cash (without interest) determined by multiplying such
fraction by the closing price of Laser Power Common Stock as reported on the
Nasdaq National Market on the last trading date immediately preceding the
Effective Time. Laser Power intends to use its current cash resources to fund
the payments for fractional shares.
Escrow Agreement. At the Effective Time, an aggregate number of shares of
Laser Power Common Stock equal to 10% of the shares of Laser Power Common Stock
to be received in the Merger by each EMI shareholder will be delivered to
American Securities Transfer & Trust, Inc. in its capacity as Escrow Agent under
the terms of an Escrow Agreement among Laser Power, the Escrow Agent and Dick
Sharman, Robert N. Haro and Robert P. Perkins on behalf of all EMI Shareholders
(Messrs. Sharman, Haro and Perkins are referred to herein collectively as the
"Shareholders' Agents"). Such shares (the "Escrow Shares") will not be issued to
the EMI shareholders at the Effective Time but will be retained in an escrow
account as security for the indemnification obligations of the EMI shareholders
under the Merger Agreement. On or promptly after the earlier of (i) the
completion of the first audit of Laser Power subsequent to the Effective Time
(as evidenced by Laser Power's earnings release) or (ii) the first anniversary
of the Effective Time, the number of Escrow Shares equal to the difference, if
any, between (a) the total number of Escrow Shares deposited into the escrow
account at the Effective Time and (b) the number of Escrow Shares subject to a
claim for indemnification or claim for reimbursement shall be released from the
escrow account and delivered to the EMI shareholders. The Shareholders' Agents
have authority to give and receive notices and communications,
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to authorize delivery of Escrow Shares to the indemnitees in satisfaction of
claims for indemnification under the Merger Agreement, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
demand arbitration of and comply with awards of arbitrators with respect to
indemnification claims and to take any other actions deemed necessary or
appropriate by the Shareholders' Agents to accomplish any of the foregoing. In
addition, the Shareholders' Agents have a right to be reimbursed out of the
Escrow Shares for reasonable and appropriate legal or other professional fees
and expenses incurred by the Shareholders' Agents in connection with the
performance of their duties under the Escrow Agreement.
BACKGROUND OF THE MERGER
Laser Power initially expressed interest in a possible transaction in
August 1997, when Laser Power's Chairman contacted EMI's Chairman to discuss a
possible business combination. On August 7, 1997, Laser Power and EMI entered
into a mutual Proprietary Information Nondisclosure Agreement governing the
terms upon which information regarding the entities would be shared. On or about
August 13, 1997, EMI delivered a copy of its Confidential Offering Memorandum to
Laser Power. On or about August 27, 1997, Laser Power sent a preliminary
indication of interest letter to EMI expressing its desire to discuss further a
possible transaction. The managements of Laser Power and EMI continued to
communicate regarding a possible combination. On October 2, 1997 representatives
of Laser Power and EMI met to further discuss the terms upon which a merger
transaction might occur. Negotiations with respect to the terms of the proposed
transaction were conducted on October 16, 1997. On October 18, 1997, the Board
of Directors of Laser Power met and authorized the negotiation and execution of
a letter of intent providing for a merger transaction between Laser Power and
EMI. On October 29, 1997, Laser Power and EMI executed a letter of intent and
issued a joint press release announcing the proposed Merger. The parties
continued to discuss and negotiate the final terms of the transaction documents.
Following execution of the letter of intent, both Laser Power and EMI performed
due diligence investigations of the other entity. By early December 1997, the
parties were able to frame a transaction acceptable to the respective Boards of
Directors of Laser Power and EMI, and on December 6, 1997 and December 4, 1997,
respectively, the Boards of Laser Power and EMI approved the Merger Agreement
and the Merger. On December 23, 1997, the parties executed the definitive Merger
Agreement and issued a joint press release announcing the execution of the
Merger Agreement.
REASONS FOR THE MERGER
Laser Power's Reasons for the Merger
The Laser Power Board believes that the following are reasons for
stockholders of Laser Power to vote FOR approval and adoption of the Merger
Agreement and approval of the Merger:
- The increase in customer base from EMI may provide the combined company
with a "critical mass" necessary to maintain and increase its market
share in the laser optics industry.
- The Merger represents a strategic opportunity to diversify Laser Power's
product and services offering and to create a larger supplier of such
products and services.
- The combined company may be able to achieve certain operating
efficiencies as a result of the Merger.
- The Merger may result in increased earnings per share for the combined
company.
In the course of its deliberations, the Laser Power Board reviewed with
management a number of other factors relevant to the Merger, including, among
other things: (i) information concerning Laser Power's and EMI's respective
businesses, prospects, financial performance, financial condition, operations
and new product lines; (ii) the presentation made by FSC to the Laser Power
Board and their opinion rendered in connection therewith (see "-- Opinion of
Fredericks, Shields & Co. LLC"); (iii) an analysis of the respective
contributions to revenues, operating profits and net profits of the combined
company; (iv) the compatibility of the managements of Laser Power and EMI; (v)
alternatives for growth in the markets served by Laser Power and EMI; and (vi)
reports from management and legal advisors on the results of Laser Power's due
diligence investigation of EMI.
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The Laser Power Board also considered a variety of potentially negative
factors concerning the Merger, including (i) the risk that the combined company
might not achieve revenue equal to the sum of the separate companies'
anticipated revenue; (ii) the risk that the combined company might not achieve
sufficient operating efficiencies to ensure that the Merger would not have a
negative effect on Laser Power's earnings per share; (iii) the charges expected
to be incurred in connection with the Merger, including transaction costs and
costs of integrating the businesses of the companies, to be reflected in a
charge of approximately $1 million (see "Unaudited Pro Forma Combined Condensed
Financial Information"); (iv) the risk that the combined company's ability to
increase or maintain revenue might be diminished by intensified competition
among providers of similar or related services; (v) the risk that other benefits
sought to be obtained by the Merger would not be obtained; and (vi) other risks
described above under "Risk Factors."
Based on the factors described above, the Laser Power Board determined that
the Merger is fair to and in the best interests of Laser Power and its
stockholders, approved the Merger Agreement and the transactions contemplated by
the Merger Agreement and recommended that the stockholders of Laser Power vote
for adoption of the Merger Agreement.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the Laser Power Board. In reaching a determination whether to
approve the Merger, in view of the wide variety of factors considered, the Laser
Power Board did not find it practical to quantify or otherwise attempt to assign
any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
EMI's Reasons for the Merger
The EMI Board believes that the following are reasons for shareholders of
EMI to vote FOR approval and adoption of the Merger Agreement and approval of
the Merger:
- The Merger may provide EMI shareholders with a greater degree of
liquidity and the ability to optimize opportunities to obtain a fair
market value for their investment in EMI at a market price, and to
diversify the investments of the EMI shareholders beyond the shares of
the surviving company.
- The Merger may provide the ability to diversify the business of EMI by
associating with a business which has different product and market
characteristics than those of EMI.
- The Merger may provide EMI with the opportunity to more fully utilize its
facility and other assets, which have not historically been operating at
full capacity, thereby spreading its fixed cost burden over a larger
business base which would allow EMI to increase its profitability, become
more competitive or both.
In the course of its deliberations, the EMI Board reviewed with management
a number of other factors relevant to the Merger, including, among other
matters: (i) information concerning Laser Power's and EMI's respective business,
prospects, financial performances, financial condition, operations, and new
products; (ii) an analysis of the respective contributions to revenues,
operating profits, and net profits of the combined company; (iii) the
compatibility of the managements and other personnel of EMI and Laser Power; and
(iv) alternatives for growth in the markets served by EMI.
The EMI Board also considered a variety of potentially negative factors
concerning the Merger, including, among other things, (i) the risk that the
combined company might not achieve revenue equal to the sum of the separate
companies' combined revenue; (ii) the risk that the combined company might not
achieve sufficient operating efficiencies to ensure that the Merger would not
have a negative effect on the combined company's earnings per share; (iii) the
risk that the combined company may not have the ability to efficiently develop
profitable new products or introduce its products into new markets; (iv) the
short history of Laser Power as a publicly traded company; and (v) other risks
described above under "Risk Factors."
Based on the factors described above, the EMI Board determined that the
Merger is fair to and in the best interests of EMI and its shareholders,
approved the Merger Agreement and the various transactions
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contemplated by the Merger Agreement, and recommended that the shareholders of
EMI vote to adopt the Merger Agreement.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the EMI Board. In reaching a determination whether to approve the
Merger, in view of the wide variety of factors considered, the EMI Board did not
find it practical to quantify or otherwise attempt to assign any relative or
specific weights to the foregoing factors, and the individual directors may have
given different weights to different factors.
LASER POWER BOARD RECOMMENDATION
THE LASER POWER BOARD HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN
THE BEST INTERESTS OF LASER POWER AND ITS STOCKHOLDERS AND HAS RECOMMENDED A
VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
EMI BOARD RECOMMENDATION
THE EMI BOARD HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST
INTEREST OF EMI AND ITS SHAREHOLDERS AND HAS RECOMMENDED A VOTE FOR APPROVAL OF
THE MERGER PROPOSAL.
OPINION OF FREDERICKS, SHIELDS & CO. LLC
The following description of the opinion and presentation of FSC contains
forward-looking information. Without limiting the generality of the foregoing,
the projections and forecasts furnished to FSC were prepared by the respective
managements of Laser Power and EMI. Laser Power does not publicly disclose
internal management projections of the type provided to FSC in connection with
its analyses of the Merger, and such projections were not prepared with a view
toward public disclosure. These projections were based on numerous variables and
assumptions that are inherently uncertain and may be beyond the control of
management, including, without limitation, factors related to general economic
and competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in the opinions.
Laser Power retained FSC to act as its financial advisor and, in connection
with the Merger, to render an opinion to the Laser Power Board as to whether the
Merger Consideration to be paid to the shareholders of EMI is fair, from a
financial point of view, to the stockholders of Laser Power. On December 6, 1997
FSC rendered its written opinion to the Laser Power Board that, as of such date
and based upon and subject to certain considerations and assumptions, the Merger
Consideration to be paid to the shareholders of EMI as specified in the Merger
Agreement was fair, from a financial point of view, to the stockholders of Laser
Power. References herein to the "FSC Opinion" or similar references refer to the
written opinion of FSC dated December 6, 1997. The full text of the FSC Opinion,
which sets forth the assumptions made, matters considered and scope and
limitations of the review undertaken and procedures followed by FSC in rendering
its opinion, is attached to this Prospectus/Joint Proxy Statement as Appendix B
hereto and is incorporated herein by reference. THE FOLLOWING DESCRIPTION OF THE
FSC OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. LASER POWER STOCKHOLDERS ARE URGED TO READ CAREFULLY THE OPINION OF FSC
IN ITS ENTIRETY. NO LIMITATIONS WERE IMPOSED BY LASER POWER ON FSC WITH RESPECT
TO THE INVESTIGATIONS MADE OR PROCEDURES FOLLOWED IN RENDERING THIS OPINION.
In conducting its analysis and arriving at its opinion, FSC reviewed and
analyzed, among other things: (i) the Merger Agreement and the specific terms of
the Merger; (ii) unaudited condensed financial summaries of EMI for the years
ending December 31, 1994 through December 31, 1996 and nine-month unaudited
financial statements of EMI for the period ending September 30, 1997; (iii)
certain financial and operating information regarding the business, operations
and prospects of EMI, including forecasts and projections, provided to FSC by
the managements of EMI and Laser Power; (iv) audited financial statements of
Laser Power for the years ending August 31, 1995 through August 31, 1997; (v)
certain financial and operating information regarding the business, operations
and prospects of Laser Power, including forecasts and projections, provided to
FSC by the management of Laser Power; (vi) a comparison of the historical and
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projected financial results and financial condition of EMI with those of other
companies and businesses that FSC deemed relevant; (vii) a comparison of the
historical and projected financial results and financial condition of Laser
Power with those of other companies and businesses that FSC deemed relevant; and
(viii) a comparison of the financial terms of the Merger with the financial
terms of certain other recent transactions that FSC deemed relevant. In
addition, in arriving at its opinion, FSC also held discussions with EMI's and
Laser Power's management concerning their businesses, operations, assets,
financial conditions and prospects, including the prospects of Laser Power after
the Merger has been consummated. FSC also undertook such other studies, analyses
and investigations as it deemed appropriate.
In arriving at its opinion, although FSC visited certain properties and
facilities of Laser Power and EMI, FSC did not make, obtain or assume any
responsibility for any independent evaluation or appraisal of such properties
and facilities or of the assets and liabilities (contingent or otherwise) of
Laser Power or EMI. FSC assumed and relied upon the accuracy and completeness of
the financial and other information supplied to or otherwise used by it in
arriving at its opinion and did not attempt independently to verify, or
undertake any obligation to verify, such information. FSC further relied upon
the assurances of the managements of EMI and Laser Power that they were not
aware of any facts that would make such information inaccurate or misleading. In
addition, FSC assumed that the forecasts and projections provided to FSC and
Laser Power represented the best currently available estimates and judgment of
EMI's and Laser Power's managements as to the future financial condition and
results of operations of EMI and Laser Power, respectively, and assumed that
such forecasts and projections had been reasonably prepared based on such
currently available estimates and judgments. FSC assumed no responsibility for
and expressed no view as to such forecasts and projections or the assumptions on
which they are based. FSC further assumed, with the consent of Laser Power, that
the Merger will qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, as amended, and that, for
accounting purposes, the Merger will be accounted for as a pooling-of-interests.
FSC also assumed that the Merger described in the Merger Agreement would be
consummated on the terms set forth therein, without waiver of any of such terms.
FSC also took into account its assessment of general economic, market and
financial conditions and its experience in similar transactions, as well as its
experience in securities valuation in general. FSC noted that its opinion was
necessarily based upon conditions as they currently existed and that could be
evaluated on the date of its opinion.
FSC did not express any view as to what the value of Laser Power's stock
will be when issued to EMI shareholders pursuant to the Merger, or the price at
which Laser Power's stock will trade prior to or subsequent to the closing of
the Merger. FSC's opinion is for the benefit and use of the Laser Power Board in
its consideration of the Merger. The opinion does not constitute a
recommendation of the Merger over any alternative transactions that may be
available to Laser Power and does not address the underlying business decision
of the Laser Power Board to proceed with or effect the Merger. Furthermore, the
opinion does not constitute a recommendation by FSC to any stockholder to vote
in favor of the Merger.
The following is a brief summary of the financial analyses utilized by FSC
in rendering its opinion. Such summary does not purport to be a complete
description of all of the analyses performed by, or all the factors considered
by, FSC in connection with its opinion.
Analysis of Selected Publicly Traded Companies -- Using publicly available
information, FSC compared certain financial information and operating statistics
of EMI with similar financial information and operating statistics of APA
Optics, Inc., Coherent, Inc., Laser Power, Newport Corporation, Optical Coating
Laboratory, Inc., Precision Optics Corporation, Inc., II-VI Incorporated and
Tinsley Laboratories, Inc. (collectively referred to herein as the "EMI
Comparables"). Such information and operating statistics included, among other
things, certain historical profitability margins, certain historical and
projected growth rates, market values of equity, total enterprise values and
implied multiples of historical and estimated revenues, earnings before taxes,
interest, depreciation and amortization ("EBITDA") and earnings per share. Among
other things, this analysis indicated that the implied multiples for the EMI
Comparables were as follows: a) total market capitalization as a multiple of
trailing twelve months revenues ranged from 0.8x to 22.8x, with a median of 1.5x
and an average of 4.4x; b) total market capitalization as a multiple of trailing
twelve months
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EBITDA ranged from 6.4x to 342.4x, with a median of 9.0x and an average of
57.8x; c) total market capitalization as a multiple of estimated calendar 1997
earnings per share ranged from 12.6x to 47.5x, with a median of 20.2x and an
average of 23.1x; and d) total market capitalization as a multiple of estimated
1998 earnings per share ranged from 10.8x to 25.4x with a median of 15.9x and an
average of 16.7x. All implied financial multiples were based on closing market
prices on December 5, 1997.
Analysis of Selected Acquisitions -- FSC reviewed ten selected merger and
acquisition transactions deemed relevant by FSC. Among other things, FSC
analyzed the purchase price, estimated trailing twelve month revenues and the
estimated trailing twelve month earnings based on certain public information for
each of the selected acquisitions. This analysis indicated that the implied
financial multiples of the selected acquisitions were as follows: a) total
purchase price as a multiple of the trailing twelve months revenues ranged from
0.9x to 2.3x, with a median of 1.2x and an average of 1.5x; and b) total
purchase price as a multiple of the trailing twelve months earnings ranged from
5.9x to 30.0x, with a median of 13.3x and an average of 16.8x.
Pro Forma Merger Analysis -- FSC analyzed certain pro forma financial
effects resulting from the Merger, including the impact of the Merger on Laser
Power's projected earnings per share for calendar year 1998. Based on the
estimates of the respective managements of EMI and Laser Power and the Exchange
Ratio, and assuming that the Merger was treated as a pooling-of-interests for
accounting purposes, the results of the pro forma merger analysis suggested
that, in the absence of any potential operating synergies that may result from
the Merger, and excluding the effects on earnings per share of the transaction
and integration costs expected to result from the combination of the two
companies, the Merger will be accretive to Laser Power's earnings per share in
calendar year 1998. The actual results achieved by the combined company could
vary from projected results and the variations could be material.
FSC believes that its analyses must be considered in the aggregate, and
that selecting portions of its analyses or the factors considered by it without
considering all factors and analyses considered by FSC could create a misleading
view of the processes underlying its opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. In arriving at its opinion, FSC did not
attribute any particular weight to any one analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. In its analyses, FSC made numerous implicit
assumptions about industry and general economic conditions, and other matters,
many of which are beyond the control of Laser Power or EMI. Any estimates
contained therein are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies may actually be sold. Because such
estimates are inherently subject to uncertainty, none of Laser Power, EMI, FSC
or any other person assumes responsibility for their accuracy.
FSC is an investment banking firm engaged in, among other things, the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. FSC
previously served as a consultant to Laser Power during its initial public
offering of Common Stock in 1997.
Pursuant to the terms of an engagement letter, Laser Power has agreed to
pay FSC an aggregate of $20,000 for services provided to Laser Power in
connection with the Merger, of which the total represents the fee for rendering
its opinion. Laser Power also has agreed to reimburse FSC for its out-of-pocket
expenses, including reasonable fees and expenses for its legal counsel, and to
indemnify FSC and certain related parties against certain liabilities, including
liabilities under the federal securities laws, arising out of or in connection
with the services rendered by FSC under the engagement letter. The terms of the
fee arrangement with FSC were negotiated at arm's length between Laser Power's
management and FSC.
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MERGER AGREEMENT
Representations and Covenants
Under the Merger Agreement, EMI has made a number of representations,
including representations regarding the organization and capital structure of
EMI, its operations, financial condition, tax matters, material contracts,
employees, benefits plans, litigation and claims, compliance with laws,
environmental matters, properties, intellectual property, disclosure,
transactions with affiliates and other matters, including its authority to enter
into the Merger Agreement and to consummate the Merger. Under the Merger
Agreement, Laser Power has also made a number of representations, including
representations regarding the organization and capital structure of Laser Power
and its affiliates, their operations, filings with the Commission, financial
statements, disclosure, Common Stock to be issued and other matters, including
the authority of Laser Power and Laser Power Sub to enter into the Merger
Agreement and to consummate the Merger.
Laser Power and EMI have agreed in the Merger Agreement to (i) use
reasonable best efforts to perform and fulfill all conditions and obligations
under the Merger Agreement; (ii) use reasonable best efforts to obtain all
authorizations, consents and permits of others required to permit the
consummation of the Merger; (iii) file with any governmental agencies or
departments all notices, reports and other documents required by law with
respect to the Merger Agreement and the Merger; and (iv) seek the approval of
the Merger Agreement and the Merger by their stockholders and shareholders,
respectively. Further, each of Laser Power and EMI has agreed to (i) promptly
notify the other of certain changes or the occurrence of any event that causes
the representations or warranties made by the relevant representing party in the
Merger Agreement to be incomplete or inaccurate in any material respect; (ii)
promptly notify the other of any material breach by the other of any relevant
representation, warranty or covenant; and (iii) promptly notify the other of any
event, condition, fact or circumstance that would make unlikely or impossible
the timely satisfaction of the conditions to the obligations of the other party
to consummate the Merger.
EMI and the certain shareholders of EMI have each covenanted that, until
the consummation of the Merger or the termination of the Merger Agreement, they
will not take certain actions relating to the operation of EMI without the
consent of Laser Power. EMI and certain shareholders of EMI have also agreed
that neither they nor any of their affiliates will solicit, initiate, encourage,
negotiate, provide information for or otherwise cooperate in any way with or
facilitate any of the following: (i) any merger or consolidation of EMI with any
person other than Laser Power or Laser Power Sub; (ii) any sale of all or a
material portion of the business or assets of EMI to any person other than Laser
Power or Laser Power Sub; or (iii) the issuance, disposition or acquisition of
any capital stock or other equity security of EMI.
EMI has further agreed, among other things: (i) to use reasonable best
efforts to preserve intact its business organization, to keep available the
services of its present officers and employees and to maintain the goodwill of
all suppliers, customers and others having business relations with it; (ii) to
permit Laser Power and its authorized representatives to have reasonable access
to all of its personnel, assets, records, tax returns, contracts and documents
and to furnish to Laser Power such financial and other information, and all
copies, as Laser Power may from time to time reasonably request; (iii) to
deliver to Laser Power on the Closing Date the resignations of all directors and
officers of EMI; (iv) to conduct its business and operations in the ordinary
course and in substantially the same manner as prior to the execution of the
Merger Agreement; (v) not to declare an dividend, issue any capital stock, amend
its articles of incorporation or bylaws, or form a subsidiary or acquire an
interest in another entity; and (vi) to deliver to Laser Power or cause its
counsel or accountants to deliver to Laser Power certain closing documents
referred to in the Merger Agreement.
Under the Merger Agreement, Laser Power has also agreed: (i) to provide
certain access to documents and information previously publicly filed or
disclosed and make available its executive officers to answer questions of EMI
relating to Laser Power's business; and (ii) to deliver certain closing
documents referred to in the Merger Agreement.
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Conditions to the Merger
In addition to the requirement that the Merger Proposal be approved by the
requisite votes of the stockholders of Laser Power and shareholders of EMI, the
obligations of Laser Power and EMI to consummate the Merger are subject to the
satisfaction of a number of other conditions, including, among other things, (i)
the accuracy, in all material respects, of the representations and warranties
made by the other party as of the Closing Date, except for any inaccuracies
which, individually and taken as a whole, have not had a material adverse effect
on such party; (ii) the performance, in all material respects, by the other
party of its covenants; (iii) the receipt of certain legal opinions; (iv) the
receipt by the parties of all governmental approvals, consents, authorizations
or modifications as may be required to permit the performance in compliance with
applicable law by the parties of their respective obligations under the Merger
Agreement and the consummation of the Merger; (v) the receipt by the parties of
a fully executed copy of the Escrow Agreement; (vi) the receipt by the parties
from their respective counsel of an opinion to the effect that the Merger will
constitute a reorganization within the meaning of 368(a)(2)(E) of the Code; and
(vii) the absence of any order by any court or governmental agency to enjoin or
otherwise prevent the consummation of the Merger Agreement or the Merger.
Laser Power's obligations to consummate the Merger are further conditioned
upon, among other things, (i) the receipt of a letter from Ernst & Young LLP,
Laser Power's independent auditors, relating to the applicability of
pooling-of-interests accounting treatment to the Merger; (ii) the receipt of a
letter from McGladrey & Pullen, LLP, EMI's independent auditors, relating to the
applicability of pooling-of-interests accounting treatment with respect to EMI;
(iii) the receipt of resignations of each director and officer of EMI; (iv) the
holders of less than 5% of the outstanding shares of EMI Common Stock having
asserted or being entitled to assert dissenters' rights under the California
Law; (v) the execution of noncompetition agreements with certain shareholders
and officers of EMI, and other agreements and certificates; (vi) the receipt by
the Laser Power Board of the written opinion of FSC to the effect that the
consideration to be received by the shareholders of EMI is fair, from a
financial point of view, to the stockholders of Laser Power; (vii) the receipt
by Laser Power of a comfort letter (and bring down letter) to be issued by
McGladrey & Pullen, LLP; (viii) the closing price per share of Laser Power
Common Stock as reported on the Nasdaq National Market on the last trading day
preceding the closing date being less than $9; and (viii) the execution and
delivery to Laser Power of certain other documents, including the Related
Agreements. See "-- Escrow and Related Agreements; Interests of Certain Persons
in the Merger."
EMI's obligations to consummate the Merger are further conditioned upon,
among other things, the price per share of Laser Power Common Stock as reported
on the Nasdaq National Market on the last trading day preceding the closing date
being greater than $6.
At any time at or prior to the Closing Date, Laser Power or EMI, without
approval of the stockholders of Laser Power or the shareholders of EMI, may
waive compliance with any of the agreements or conditions contained in the
Merger Agreement to be performed by the other party.
Termination; Termination Fee
At any time prior to the Effective Time, the Merger Agreement may be
terminated as follows: (i) by mutual consent of all of the parties; (ii) by
Laser Power if there has been a material breach by EMI of any covenant,
representation or warranty contained in the Merger Agreement, Laser Power has
notified EMI in writing of the existence of such breach, and EMI has failed to
cure such breach within ten days after receiving such notice; (iii) by EMI if
there has been a material breach by Laser Power of a covenant, representation or
warranty contained in the Merger Agreement, EMI has notified Laser Power in
writing of the existence of such breach, and Laser Power has failed to cure such
breach within ten days after receiving such notice; (iv) by either Laser Power
or EMI if there should be a non-appealable order of a federal or state court in
effect preventing consummation of the Merger, or there shall be any action taken
or any statutes, rules, regulations or orders enacted, promulgated, issued or
deemed applicable to the Merger by any governmental entity that would make
consummation of the Merger illegal; (v) by either Laser Power or EMI if, upon a
vote at a duly held meeting of stockholders or shareholders, respectively, or
any adjournment thereof, any required
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approval of holders of Laser Power and EMI capital stock shall not have been
obtained; (vi) by Laser Power if at any time prior to approval of the Merger
Proposal by the EMI shareholders (a) the EMI Board of Directors fails to
recommend, or for any reason withdraws or amends or modifies in a manner adverse
to Laser Power, its unanimous recommendation in favor of the Merger or approval
of the Merger Agreement; (b) EMI fails to include in this Prospectus/Joint Proxy
Statement the unanimous recommendation of the EMI Board of Directors in favor of
approval of the Merger Agreement and the Merger; (c) the EMI Board of Directors
fails to reaffirm its unanimous recommendation in favor of approval of the
Merger Agreement and the Merger within five business days after Laser Power
requests in writing that such recommendation be reaffirmed; (d) the EMI Board of
Directors approves, endorses or recommends any acquisition proposal other than
the Merger; (e) EMI shall have entered into any letter of intent or similar
document or any contract relating to any other acquisition proposal; (f) EMI
shall have failed to hold the EMI Shareholder Meeting as promptly as practicable
and in any event within 45 days after the S-4 Registration Statement is declared
effective under the Act; (g) a tender or exchange offer relating to securities
of EMI commences and EMI fails to send to the EMI shareholders, within five
business days after the commencement of such tender or exchange offer, a
statement disclosing that EMI recommends rejection of such tender or exchange
offer; or (h) an acquisition proposal is publicly announced, and EMI (1) fails
to issue a press release announcing its opposition to such acquisition proposal
within five business days after such acquisition proposal is announced or (2)
otherwise fails to actively oppose such acquisition proposal; or (vii) by either
Laser Power or EMI if the respective conditions of the other party have not been
satisfied by February 27, 1998. In the event Laser Power elects to terminate the
Merger Agreement in accordance with clause (vi) above, EMI shall pay to Laser
Power an amount equal to $400,000.
At any time prior to the Closing Date, Laser Power, Laser Power Sub or EMI
may extend the time for the performance of any of the obligations or other acts
of Laser Power, Laser Power Sub or EMI.
Amendment
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of Laser Power, EMI and certain shareholders of EMI.
Resale by Affiliates
Although the shares of Laser Power Common Stock to be issued pursuant to
the Merger will have been registered under the Securities Act, any shareholder
of EMI receiving such stock who is an affiliate of EMI at the time of the EMI
Meeting (as "affiliate" is defined for purposes of Rule 145) will be subject to
the resale restrictions pursuant to Rule 145. See "The Merger and Related
Transactions -- Affiliates' Restrictions on Sale of Laser Power Common Stock."
Indemnity
The parties have certain rights to indemnification as set forth in the
Merger Agreement.
No Solicitation; Break-Up Fee
Under the terms of the Merger Agreement, EMI has agreed that, until the
Effective Time, it will not directly or indirectly, and will not authorize or
permit any subsidiary of EMI or any of its or its subsidiaries' officers,
directors, employees, agents, attorneys, accountants, advisors or
representatives directly or indirectly to, (i) solicit, encourage or cooperate
in any way with any Acquisition Proposal (as defined below); (ii) furnish any
information regarding EMI or any of its subsidiaries to any person or entity in
connection with or in response to an Acquisition Proposal; or (iii) engage in
discussions or negotiations with any person or entity with respect to any
Acquisition Proposal. An "Acquisition Proposal" means any offer, proposal or
inquiry (other than from Laser Power) contemplating or otherwise relating to (a)
any merger or consolidation of EMI or its subsidiaries, (b) any sale of assets
of EMI or any of its subsidiaries (other than sales of inventory in the ordinary
course of business), (c) any equity or debt investment (other than on terms
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approved by Laser Power) in EMI or any of EMI's subsidiaries, or (d) any
purchase of outstanding securities of EMI or any of EMI's subsidiaries by any
person.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of EMI's business described above, prior to the approval of the Merger
Proposal by the EMI shareholders, to the extent the EMI Board determines, in
good faith, after consultation with outside legal counsel, that the Board's
fiduciary duties under applicable law require it to do so, EMI may withdraw,
amend or modify its recommendation in favor of the Merger Proposal if an
unsolicited, bona fide written offer by a third party to purchase more than 50%
of the outstanding EMI Common Stock is made on terms that the EMI Board
reasonably determines, based upon the written advice of EMI's financial advisor,
to be more favorable to the EMI shareholders than the Merger Proposal. In the
event the EMI Board withdraws, amends or modifies its recommendation of the
Merger Proposal and the Merger Proposal is not approved by the EMI shareholders,
then EMI will pay to Laser Power a sum of $400,000.
ESCROW AGREEMENT AND RELATED AGREEMENTS; INTERESTS OF CERTAIN PERSONS IN THE
MERGER
Escrow Agreement
The Merger Agreement provides that, subject to certain limitations such as
those described below, and other terms described in the Escrow Agreement, Laser
Power, Laser Power Sub and other affiliates and representatives of Laser Power
shall be indemnified, defended and held harmless by the EMI shareholders, on a
pro rata basis, from and against any loss, expense, liability or other damages,
including the reasonable costs of investigation, penalties and attorneys' and
accountants' fees incurred in connection with or arising from or attributable to
(i) any breach of or inaccuracy in any representation or warranty made by EMI in
the Merger Agreement or in any certificate or document delivered in connection
with the Merger; (ii) any breach of or failure to perform any covenant of EMI
set forth in the Merger Agreement; (iii) brokerage or finder's fee claims
relating to the Merger; or (iv) incurrence by EMI of certain fees and expenses.
Such indemnification rights as they relate to certain occurrences or
circumstances under the foregoing clauses (i) and (ii) are subject to a basket
of $250,000, so that liability under the foregoing clauses (i) and (ii) will not
exist as a result of such occurrences or circumstances until and except to the
extent the aggregate amount of such liability exceeds $250,000. Further, such
indemnification rights shall be the sole recourse of Laser Power, Laser Power
Sub and their affiliates following the Closing Date for claims against EMI.
The maximum liability of each EMI shareholder for such indemnification is
limited to 10% of the aggregate number of shares of Laser Power Common Stock to
be received by such shareholder in connection with the Merger.
Pursuant to the terms of the Merger Agreement, each of the EMI shareholders
constitutes and appoints the Shareholders' Agents as their agents and
attorneys-in-fact to take such action and exercise such rights, power and
authority under the Merger Agreement, including the indemnification provisions
therein, as they deem necessary and appropriate and to execute an Escrow
Agreement (the "Escrow Agreement") between Laser Power, EMI, American Securities
Transfer and Trust, Inc. (the "Escrow Agent") and the Shareholders' Agents
pursuant to which 10% of the aggregate number of shares of Laser Power Common
Stock to be received by such Shareholder in connection with the Merger will not
be issued to the Shareholder at the Effective Time, but will be retained in an
escrow account (the "Escrow Shares") as security for the EMI shareholders'
indemnity obligations under the Merger Agreement.
On or promptly after the earlier of (i) the completion of the audit of
Laser Power's consolidated financial statements for the first fiscal year end
subsequent to the Effective Time (as evidenced by Laser Power's release to the
public of results of operations and earnings per share data) or (ii) the first
anniversary of the Effective Time, the number of Escrow Shares equal to the
difference, if any, between (a) the total number of Escrow Shares deposited into
the escrow account at the Effective Time less (b) the number of Escrow Shares
subject to a claim for indemnification or claim for reimbursement shall be
released from the escrow account and delivered to the EMI shareholders. The
Shareholders' Agents have authority to give and receive notices and
communications, to authorize delivery of Escrow Shares to the indemnitees in
satisfaction of claims for indemnification under the Merger Agreement, to object
to such deliveries, to agree to, negotiate, enter into
39
<PAGE> 45
settlements and compromises of, demand arbitration of and comply with awards of
arbitrators with respect to indemnification claims and to take any other actions
deemed necessary or appropriate by the Shareholders' Agents to accomplish any of
the foregoing. In addition, the Shareholders' Agents have a right to be
reimbursed out of the Escrow Shares for reasonable and appropriate legal or
other professional fees and expenses incurred by the Shareholders' Agents in
connection with the performance of their duties under the Escrow Agreement.
Promptly after resolution of all claims against the Escrow Shares, all remaining
Escrow Shares shall be released from the escrow account and delivered to the EMI
shareholders.
Affiliate Agreements
To help ensure that the Merger will be accounted for as a
pooling-of-interests, EMI affiliates (as defined for purposes of Rule 145) will
enter into agreements that prohibit such persons from disposing of their shares
of Laser Power Common Stock (except for certain de minimis transfers permitted
in pooling-of-interests transactions) until Laser Power publicly releases its
first report of financial statements including the combined financial results of
EMI and Laser Power for a period of at least 30 days of "combined operations,"
as defined by the Securities and Exchange Commission. Such affiliates will also
agree not to sell, pledge or otherwise transfer such shares except in compliance
with Rule 145 or under certain other limited circumstances.
Noncompetition Agreements
On the Closing Date, each of Dick Sharman and Robert N. Haro will enter
into a noncompetition agreement with Laser Power, under which they will agree
for a period of 18 months following the Effective Time not to, directly or
indirectly, own, manage, operate or control, or become engaged, directly or
indirectly, as a director, officer, employee, partner, principal, agent, or
representative of or consultant to, any business, enterprise, firm or person
engaged in direct competition with Laser Power's, EMI's, Exotic's or EMII's
current businesses or to solicit any employees or customers of Laser Power, EMI,
Exotic or EMII, except for participation solely as a passive investor in up to
5% of the publicly traded equity securities of any such business, enterprise or
firm.
Shareholder Agreements
Concurrently with the execution of the Merger Agreement, certain
shareholders of EMI entered into Shareholder Agreements with Laser Power
pursuant to which such shareholders agreed that prior to the earlier of the date
on which the Merger Agreement is terminated or the Effective Time, such
shareholder:
(a) will not sell, contract to sell, pledge, grant any options to
purchase or otherwise dispose of or transfer any share of EMI Common Stock
held by such person (unless the other party to such transfer shall have
executed a counterpart to the Shareholder Agreement and agreed to hold the
EMI Common Stock subject to the terms and conditions of the Shareholder
Agreement);
(b) will vote his EMI Common Stock to approve the Merger Agreement and
the Merger; and
(c) will not, directly or indirectly, solicit, encourage, negotiate,
provide information for, or otherwise cooperate in any way with, assist or
facilitate any merger or consolidation with, any sale of assets to, any
equity or debt investment in EMI by, or purchase of EMI securities by any
entity other than Laser Power or Laser Power Sub.
Election of Director
As a condition to the Merger, Dick Sharman shall be elected to the Board of
Directors of Laser Power.
REGULATORY MATTERS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states, Laser Power and EMI are
not aware of any governmental or regulatory approvals required for consummation
of the Merger.
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<PAGE> 46
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of EMI
Common Stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to Laser Power, the Laser
Power stockholders, EMI or EMI's shareholders, as described herein.
EMI shareholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular EMI
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are non-United States persons, who acquired their
shares in connection with the EMI Stock Option Plan or in other compensatory
transactions or who hold their shares as a hedge or as part of a hedging,
straddle, conversion or other risk reduction transaction. In addition, the
following discussion does not address the tax consequences of the Merger under
foreign, state or local tax laws or the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger).
Neither Laser Power nor EMI has requested, or will request, a ruling from
the Internal Revenue Service (the "IRS") with regard to any of the federal
income tax consequences of the Merger. As a condition to consummation of the
Merger, Cooley Godward LLP ("Cooley Godward"), counsel to Laser Power, and
Dickinson Wright PLLC ("Dickinson Wright"), counsel to EMI, will each render an
opinion (the "Tax Opinions") to Laser Power and the EMI shareholders,
respectively, that the Merger will constitute a tax-free reorganization under
Section 368(a)(2)(E) of the Code (a "Reorganization"). The Tax Opinions will be
subject to certain assumptions and qualifications and will be based on the truth
and accuracy of certain representations of Laser Power, EMI, Laser Power Sub and
the shareholders of EMI, including representations in certain certificates
delivered or to be delivered by the Closing Date to counsel by the respective
managements of Laser Power, EMI and Laser Power Sub and the shareholders of EMI.
See "-- Escrow Agreement and Related Agreements; Interests of Certain Persons in
the Merger -- Affiliate Agreements." Moreover, the Tax Opinions will not be
binding on the IRS nor preclude the IRS from adopting a contrary position. The
discussion below assumes that the Merger will qualify as a Reorganization, based
upon the Tax Opinions. The tax description set forth below has been prepared and
reviewed by Cooley Godward and reviewed by Dickinson Wright, and in their
opinion, to the extent such description relates to statements of law, it is
correct in all material respects.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following federal
income tax consequences should, under currently applicable law, result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of EMI Common Stock upon the receipt of Laser Power Common Stock
solely in exchange for such EMI Common Stock in the Merger (except to the
extent that cash is received in lieu of fractional shares).
- The aggregate tax basis of the Laser Power Common Stock so received by
EMI shareholders in the Merger (including any fractional shares of Laser
Power Common Stock not actually received) will be the same as the
aggregate tax basis of the EMI Common Stock surrendered in exchange
therefor.
- The holding period of the Laser Power Common Stock so received by each
EMI shareholder in the Merger will include the period for which the EMI
Common Stock surrendered in exchange therefor was considered to be held,
provided that the EMI Common Stock so surrendered is held as a capital
asset at the Effective Time of the Merger.
- Cash payments received by holders of EMI Common Stock in lieu of
fractional shares will be treated as if such fractional shares of Laser
Power Common Stock had been issued in the Merger and then redeemed by
Laser Power. An EMI shareholder receiving such cash will recognize gain
or loss upon such payment, measured by the difference (if any) between
the amount of cash received and the basis allocated to such fractional
share. The gain or loss should be capital gain or loss, provided that
each
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<PAGE> 47
such fractional share of Laser Power Common Stock was held as a capital
asset at the Effective Time of the Merger.
- A holder of EMI Common Stock who exercises dissenters' rights with
respect to a share of EMI Common Stock and receives a cash payment for
such share generally should recognize capital gain or loss (if such share
was held as a capital asset at the Effective Time of the Merger) measured
by the difference between the shareholder's basis in such share and the
amount of cash received, provided that such payment is not "essentially
equivalent to a dividend" within the meaning of Section 302 of the Code.
A sale of shares pursuant to an exercise of dissenters' rights generally
will not be "essentially equivalent to a dividend" if, as a result of
such exercise, the shareholder exercising dissenters' rights owns no
shares of capital stock of Laser Power (either actually or constructively
within the meaning of Section 318 of the Code) immediately after the
Merger.
One key assumption to the Merger's qualifying as a reorganization is that
the "continuity of interest" requirement will be satisfied in the Merger. In
order for this requirement to be met, shareholders of EMI must not, pursuant to
a plan or intent existing at or prior to the Effective Time of the Merger,
dispose of so much of (i) their EMI Common Stock in anticipation of the Merger,
plus (ii) the Laser Power Common Stock received in the Merger (collectively, the
"Planned Dispositions") such that the EMI shareholders, as a group, would no
longer have a "significant equity interest" in the EMI business being conducted
by Laser Power after the Merger. EMI shareholders will generally be regarded as
having a significant equity interest as long as the Laser Power Common Stock
received in the Merger (after taking into account Planned Dispositions), in the
aggregate, represents a "substantial portion" of the entire consideration
received by the EMI shareholders in the Merger. This requirement is frequently
referred to as the "continuity of interest" requirement. If the continuity of
interest requirement is not satisfied, the Merger would not be treated as a
Reorganization. The law is unclear as to what constitutes a "significant equity
interest" or a "substantial portion." The IRS ruling guidelines require a
minimum of 50% continuity (although such guidelines do not purport to represent
the applicable substantive law). The Merger Agreement and the Continuity of
Interest Certificates contemplate that the 50% standard will be applied. No
assurance, however, can be made that the "continuity of interest" requirement
will be satisfied, and if such requirement is not satisfied, the Merger will not
be treated as a Reorganization.
Pursuant to the terms of the Merger Agreement, 10% of the shares of Laser
Power Common Stock to be received by each EMI shareholder in the Merger will be
placed in escrow pursuant to the terms of the Escrow Agreement (the "Escrowed
Shares"). Although the matter is not free from doubt, the return of all or a
portion of the Escrowed Shares to Laser Power in satisfaction of an
indemnifiable claim should not result in the recognition of gain or loss to the
EMI shareholders. The return of such Escrowed Shares should be characterized as
an adjustment to the exchange terms of the Merger Agreement. Accordingly, the
basis of each share of Laser Power Common Stock received pursuant to the Merger
would be adjusted. EMI shareholders and Laser Power are urged to consult their
respective tax advisors regarding the tax consequences to them of the transfer
of the Escrow Shares.
A successful IRS challenge to the Reorganization status of the Merger may
result in significant adverse tax consequences to the EMI shareholders. An EMI
shareholder would recognize gain or loss with respect to each share of EMI
Common Stock surrendered equal to the difference between the shareholder's basis
in such share and the fair market value, as of the Effective Time, of the Laser
Power Common Stock received in exchange therefor. In such event, a shareholder's
aggregate basis in the Laser Power Common Stock so received would equal its fair
market value, and the shareholder's holding period for such stock would begin
the day after the Merger is consummated.
Recent United States tax legislation reduced to 20% the maximum rate of tax
on long-term capital gains on most capital assets held by an individual for more
than 18 months. In addition, gain on most capital assets held by an individual
for more than one year but not more than 18 months is subject to tax at a
maximum rate of 28%.
Even if the Merger qualifies as a Reorganization, a recipient of Laser
Power Common Stock would recognize income to the extent that, for example, any
such shares were determined to have been received in
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<PAGE> 48
exchange for services, to satisfy obligations or in consideration for anything
other than the EMI Common Stock surrendered. Generally, such income is taxable
as ordinary income upon receipt. In addition, to the extent that a EMI
shareholder were treated as receiving (directly or indirectly) consideration
other than Laser Power Common Stock in exchange for such shareholder's EMI
Common Stock, gain or loss would have to be recognized.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
EMI COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER
APPLICABLE TAX LAWS AND THE EFFECTS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
and the operating results of both Laser Power and EMI are carried forward to the
combined operations of the surviving corporation at their recorded amounts. No
recognition of goodwill in the combination is required of either party to the
Merger.
To support the treatment of the Merger as a pooling-of-interests, the
affiliates of EMI will enter into agreements imposing certain resale limitations
on their stock. It is a condition to Laser Power's obligation to consummate the
Merger that, among other things, Laser Power receive letters from Ernst & Young
LLP and McGladrey & Pullen, LLP relating to the applicability of
pooling-of-interests accounting treatment with respect to the Merger.
DISSENTERS' RIGHTS OF EMI SHAREHOLDERS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA LAW, THE
COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX C.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF DISSENTERS'
RIGHTS. AN EMI SHAREHOLDER WHO FAILS TO SIGN AND RETURN A PROXY CARD
DISAPPROVING AND WITHHOLDING AUTHORIZATION FOR THE MERGER OR TO ATTEND THE EMI
MEETING AND VOTE HIS OR HER SHARES AGAINST THE MERGER WILL NOT HAVE A RIGHT TO
EXERCISE DISSENTERS' RIGHTS. AN EMI SHAREHOLDER WHO DESIRES TO EXERCISE HIS OR
HER DISSENTERS' RIGHTS MUST ALSO SUBMIT A WRITTEN DEMAND FOR PAYMENT TO EMI
BEFORE THE DATE OF THE EMI MEETING.
Under Chapter 13 of the California Law, each EMI shareholder as of the
Record Date who votes against the Merger and who submits a written demand for
payment to EMI prior to the date of the EMI Meeting is entitled to receive
payment of the fair value of all or any portion of such holder's shares of EMI
Common Stock owned by such holder if the Merger is consummated. The fair value
of such shares is determined as of October 29, 1997, the last day before the
first announcement of the terms of the Merger. Any EMI shareholder who elects to
perfect such holder's dissenters' rights and demands payment of the fair value
of such holder's shares must strictly comply with Chapter 13 of the California
Law. The following summary does not purport to be complete and is qualified in
its entirety by reference to Chapter 13 of the California Law, the text of which
is attached hereto as Appendix C and is incorporated herein by reference. Any
holder of shares of EMI Common Stock considering demanding dissenters' rights is
advised to consult legal counsel. Dissenters' rights will not be available
unless and until the Merger (or a similar business combination) is consummated.
To perfect the right to dissent and receive the fair value of such holder's
shares, an EMI shareholder must vote against the Merger.
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<PAGE> 49
Prior to the date set for approval of the Merger, each EMI shareholder who
elects to exercise his or her dissenters' rights must make a written demand upon
EMI for the purchase of his or her EMI shares. The EMI shareholder's demand must
state the number and class of shares held of record by the EMI shareholder which
the EMI shareholder demands that EMI purchase, as well as a statement by the EMI
shareholder as to what such holder claims the fair market value of such shares
was as of the day prior to the announcement of the Merger. The statement of fair
market value constitutes an offer by the EMI shareholder to sell the shares at
such price. Voting against the Merger shall not constitute such written demand.
Within ten days after the date of approval of the Merger, EMI will mail to
each EMI shareholder who did not vote in favor of the Merger notice (the "EMI
Notice") of the approval of the Merger by the EMI shareholders, accompanied by a
copy of Sections 1300 through 1304 of the California Law. The EMI Notice shall
also state the price determined by EMI to be the fair market value of shares of
EMI Common Stock with respect to which dissenters' rights are properly exercised
under the California Law ("Laser Power Dissenting Shares") and a brief
description of the procedure to be followed by a shareholder who elects to
dissent.
Within the 30-day period following the mailing of the EMI Notice, the
dissenting shareholder must submit to EMI for endorsement certificates for any
shares which the EMI shareholder demands that EMI purchase. If EMI and the EMI
shareholder agree upon the price of the EMI Dissenting Shares, the dissenting
EMI shareholder is entitled to the agreed price with interest at the legal rate
on judgments from the date of such agreement. Payment must be made within 30
days of the later of the date of the agreement between the EMI shareholder and
EMI or the date the contractual conditions to the Merger are satisfied or
waived.
If EMI and the EMI shareholder cannot agree as to the fair market value or
as to the fact that such shares are EMI Dissenting Shares, such EMI shareholder
may file within six months of the date of mailing of the EMI Notice a complaint
with the California Superior Court for the County of San Diego demanding
judicial determination of such matters. EMI will then be required to make any
payments in accordance with such judicial determination. If the complaint is not
filed within the specified six-month period, the EMI shareholder's rights as a
dissenter are lost.
EMI Dissenting Shares lose their status as such if (i) EMI abandons the
Merger; (ii) the shares are transferred prior to submission for endorsement or
are surrendered for conversion into shares of another class in accordance with
the Articles of Incorporation; (iii) the EMI shareholder and EMI do not agree as
to the fair market value of such shares and a complaint is not filed within six
months of the date that the EMI Notice was mailed; or (iv) the dissenting EMI
shareholder withdraws, with the consent of EMI, his or her demand for purchase
of such shares.
If demands for payment are made with respect to 5% or more of the
outstanding shares of EMI Common Stock, then Laser Power will not be obligated
to consummate the Merger. Further, purchase by EMI of 5% or more of the
outstanding EMI Common Stock could prevent the Merger from being accounted for
as a pooling-of-interests. The receipt of letters from Ernst & Young LLP and
McGladrey & Pullen, LLP relating to the applicability of pooling-of-interests
accounting for the Merger is a condition to Laser Power's obligation to
consummate the Merger. See "-- Merger Agreement."
MERGER EXPENSES AND FEES AND OTHER COSTS
All fees and expenses incurred in connection with the Merger Agreement and
the transactions contemplated by the Merger Agreement shall be paid by the party
incurring such expenses, whether or not the Merger is consummated; provided,
however, that if the Merger is consummated, the shareholders of EMI shall
indemnify Laser Power and EMI from any costs or expenses incurred by EMI in
excess of $275,000. See "-- Merger Agreement -- Escrow Agreement and Related
Agreements; Interests of Certain Persons in the Merger."
Laser Power has agreed to pay to FSC an aggregate of $20,000 in connection
with rendering its fairness opinion and to reimburse FSC for reasonable
out-of-pocket expenses incurred by FSC in rendering services to Laser Power in
connection with the Merger. Laser Power has also agreed to indemnify FSC against
certain claims and liabilities, including certain claims arising under the
federal securities laws.
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<PAGE> 50
Laser Power estimates that it will incur transaction and integration costs
of approximately $1 million associated with the Merger. These nonrecurring costs
will be charged to operations upon consummation of the Merger. See "Unaudited
Pro Forma Combined Condensed Financial Information" and "Risk Factors --
Integration of Operations."
AFFILIATES' RESTRICTIONS ON SALE OF LASER POWER COMMON STOCK
The shares of Laser Power Common Stock to be issued pursuant to the Merger
and the Merger Agreement will have been registered under the Securities Act
pursuant to the Registration Statement, thereby allowing such shares to be
traded without restriction by all former holders of EMI Common Stock who (i) are
not deemed to be affiliates of EMI at the time of the EMI Meeting (as
"affiliates" is defined for purposes of Rule 145) and (ii) who do not become
affiliates of Laser Power after the Merger. The directors of EMI, certain
officers and significant shareholders of EMI may be deemed to be affiliates of
EMI at the time of the EMI Meeting. Dick Sharman will become a director and a
possible affiliate of Laser Power after the Merger. See "EMI Management."
The directors of EMI, and certain officers and significant shareholders of
EMI will enter into agreements not to make public sales of any Laser Power
Common Stock received upon conversion of EMI Common Stock in the Merger prior to
the date Laser Power shall have publicly released financial results for a period
that includes at least 30 days of combined operations of EMI and Laser Power
(unless otherwise permitted by certain de minimis exceptions relating to
pooling-of-interests transactions), and thereafter not to make any sale of Laser
Power Common Stock received upon conversion of EMI Common Stock in the Merger,
except in compliance with Rule 145 or under certain other limited circumstances.
See "-- Escrow Agreement and Related Agreements; Interests of Certain Persons in
the Merger -- Affiliate Agreements." In general, Rule 145, as currently in
effect, imposes restrictions on the manner in which such affiliates may make
resales of Laser Power Common Stock and also on the number of shares of Laser
Power Common Stock that such affiliates and others (including persons with whom
the affiliates act in concert) may sell within any three-month period. Rule 145
will not generally preclude sales by affiliates. These Rule 145 restrictions
will generally apply for a period of at least one year after the Effective Time
(or longer if the person remains or becomes an affiliate of Laser Power).
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS
Stock Options. As of the Effective Time, Laser Power will substitute
options to purchase Laser Power Common Stock for each outstanding EMI Option,
whether or not exercisable, to purchase EMI Common Stock. From and after the
Effective Time, (i) the number of shares of Laser Power Common Stock subject to
each Laser Power Exchange Option shall be equal to the number of shares of EMI
Common Stock subject to such option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounding down to the nearest whole share; (ii)
the per share exercise price under each Laser Power Exchange Option shall be
adjusted by dividing the per share exercise price under such option by the
Exchange Ratio and rounding up to the nearest cent; and (iii) any restriction on
the exercise of any such option shall continue in full force and effect and the
term, exercisability, vesting schedule and other provisions of each such option
shall otherwise remain unchanged.
Form S-8 Filing. Laser Power has agreed to file with the Commission on Form
S-8, promptly following the Effective Time, a post-effective amendment to the
Registration Statement to register shares of Laser Power Common Stock issuable
as the result of the substitution of the EMI Options.
Employee Stock Purchase Plan. Immediately prior to the Effective Time, EMI
will terminate the EMI Employee Stock Purchase Plan. On or prior to the Record
Date, all amounts that had been withheld but not yet applied to purchase shares
of EMI Common Stock pursuant to such plan were applied to purchase the number of
shares of EMI Common Stock available under the Employee Stock Purchase Plan, and
such shares (together with cash in lieu of fractional shares) were distributed
to the participating employees pursuant to the terms of such plan.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of Laser Power and EMI accounted for using the
pooling-of-interests method of accounting. These pro forma financial statements
are presented for illustrative purposes only and therefore are not necessarily
indicative of the operating results or financial position that might have been
achieved had the Merger occurred as of an earlier date, nor are they necessarily
indicative of operating results or financial position which may occur in the
future.
A pro forma combined condensed balance sheet is provided as of August 31,
1997, giving effect to the Merger as though it had been consummated on that
date. Pro forma combined condensed statements of operations are provided for the
years ended August 31, 1995, 1996 and 1997, giving effect to the Merger as
though it had occurred at the beginning of the earliest period presented. For
purposes of the unaudited pro forma statements of operations, Laser Power's
consolidated financial statements for the three fiscal years ended August 31,
1997 have been combined with the consolidated financial statements of EMI for
the fiscal years ended December 31, 1995 and 1996, and the twelve months ended
September 30, 1997, respectively. For purposes of the unaudited pro forma
balance sheet, Laser Power's consolidated balance sheet at August 31, 1997 has
been combined with EMI's consolidated balance sheet at September 30, 1997.
The pro forma combined condensed statements of operations for each of the
three years in the period ended August 31, 1997 are derived from the audited
historical consolidated financial statements of Laser Power and the audited and
unaudited historical consolidated financial statements of EMI and should be read
in conjunction with Laser Power's historical consolidated financial statements,
"Laser Power Management's Discussion and Analysis of Financial Condition and
Results of Operations," EMI's historical consolidated financial statements and
"EMI Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Prospectus/Joint Proxy Statement. The
pro forma combined condensed financial statements of EMI have been prepared on
the same basis as the historical information from the audited and unaudited
financial statements of EMI. In the opinion of EMI's management, the unaudited
financial statements of EMI, as of and for the year ended September 30, 1997,
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the financial position and results for such periods.
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<PAGE> 52
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
PRO FORMA FORMA
LASER POWER EMI ADJUSTMENTS COMBINED
----------- ------ ----------- -------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 6,304 $1,949 $ -- $ 8,253
Accounts receivable, net............................. 4,281 2,526 -- 6,807
Inventories, net..................................... 3,612 1,863 -- 5,475
Other current assets................................. 334 184 -- 518
------- ------ ------- -------
Total current assets......................... 14,531 6,522 -- 21,053
Property and equipment, net............................ 5,720 1,360 -- 7,080
Intangible and other assets, net....................... 935 5 -- 940
------- ------ ------- -------
Total assets................................. $21,186 $7,887 $ -- $29,073
======= ====== ======= =======
Current liabilities:
Accounts payable..................................... $ 1,933 $ 755 $ -- $ 2,688
Accrued compensation and related expenses............ 920 796 -- 1,716
Other current liabilities............................ 827 589 1,000 2,416
Current portion of long-term debt.................... 375 71 -- 446
------- ------ ------- -------
Total current liabilities.................... 4,055 2,211 1,000 7,266
Deferred rent.......................................... 235 -- -- 235
Long-term debt(3)...................................... 1,171 2,059 -- 3,230
Subordinated convertible debentures.................... 1,660 -- -- 1,660
Total stockholders' equity............................. 14,065 3,617 (1,000) 16,682
------- ------ ------- -------
Total liabilities and stockholders' equity... $21,186 $7,887 $ -- $29,073
======= ====== ======= =======
</TABLE>
- ---------------
(1) The above combined condensed balance sheets combine Laser Power's audited
consolidated balance sheet as of August 31, 1997 with the unaudited
consolidated balance sheet of EMI as of September 30, 1997.
(2) The pro forma adjustment relates to transaction and integration costs
estimated to be approximately $1 million. The estimated costs are
preliminary and subject to revision upon consummation of the Merger.
(3) The pro forma combined balance sheet assumes that the note payable by EMI to
Vitec Group, plc would be replaced by debt with similar interest and
repayment provisions in the event that the note was paid off subsequent to
the Effective Time.
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheets.
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<PAGE> 53
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------
1995 1996(1) 1997(1)
------- ------- -------
<S> <C> <C> <C>
Net revenues...................................................... $21,854 $29,502 $35,552
Cost of revenues.................................................. 15,503 20,418 24,805
------- ------- -------
Gross profit...................................................... 6,351 9,084 10,747
Operating expenses:
Research and development........................................ 3,095 2,860 1,348
Selling, general and administrative............................. 4,631 5,694 6,531
------- ------- -------
Income (loss) from operations..................................... (1,375) 530 2,868
Interest and other income (expense), net.......................... (439) (453) (408)
------- ------- -------
Income (loss) before income taxes................................. (1,814) 77 2,460
Provision for income taxes........................................ (23) (22) (185)
------- ------- -------
Income (loss) before extraordinary item(2)........................ $(1,837) $ 55 $ 2,275
======= ======= =======
Earnings per share data:
Income (loss) before extraordinary item(2)...................... $ (0.32) $ 0.01 $ 0.32
======= ======= =======
Shares used in per share computations(3)........................ 5,679 6,654 7,222
======= ======= =======
</TABLE>
- ---------------
(1) The above combined condensed statements of operations combine the audited
consolidated statements of operations of Laser Power for the years ended
August 31, 1995, 1996 and 1997 with EMI's audited consolidated statements of
operations for the years ended December 31, 1995 and 1996 and the unaudited
consolidated statement of operations for the year ended September 30, 1997,
respectively. The consolidated results of operations of EMI for the three
months ended December 31, 1996 were utilized in both the 1996 and 1997
periods above. Summarized information for the three months ended December
31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Net revenues...................................................... $3,122
Operating expenses................................................ $2,697
Income before extraordinary item.................................. $ 384
</TABLE>
(2) In 1996, EMI realized an extraordinary gain from the early repayment of
certain long-term liabilities.
(3) The shares used in per share computations include all of the Common Stock
outstanding of EMI converted into Laser Power Common Stock at the Exchange
Ratio, since upon consummation of the Merger there would no longer be any
Temporary Redeemable Common Stock of EMI.
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<PAGE> 54
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements of Laser
Power and EMI give retroactive effect to the Merger using the
pooling-of-interests method of accounting, and, as a result, the unaudited pro
forma combined condensed balance sheets and statements of operations are
presented as if the combining companies had been combined for all periods
presented. The unaudited pro forma combined condensed financial statements will
become the historical financial statements of Laser Power upon issuance of
financial statements for a period that includes the Merger date. The unaudited
pro forma combined condensed financial statements reflect the issuance of 1.8511
fully paid and nonassessable shares of Laser Power Common Stock for each share
of EMI Common Stock to effect the Merger. The unaudited pro forma combined
condensed financial statements, including the notes thereto, should be read in
conjunction with the historical financial statements of Laser Power and EMI
included in this Prospectus/Joint Proxy Statement.
2. The unaudited pro forma data are presented for informational purposes
only and do not give effect to any synergies that may occur due to the combining
of Laser Power and EMI's existing operations. Laser Power expects to incur
charges currently estimated to be approximately $1,000,000 to reflect costs
associated with combining the operations of the two companies and transaction
fees and costs incident to the Merger. This charge is reflected in the unaudited
pro forma combined condensed balance sheet but is not included in the unaudited
pro forma combined condensed statement of operations.
3. The accounting policies of the separate companies are currently being
studied from a conformity perspective. The impact of conforming accounting
policies, if any, is not presently estimable.
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LASER POWER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Laser Power's and the combined company's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Laser Power Business," as well as
those discussed elsewhere in this Prospectus/ Joint Proxy Statement.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
Revenues
For the fiscal year ended August 31, 1997, product sales were $17.2 million
compared to $15.2 million for fiscal 1996, an increase of $2.0 million or 13%.
Contract research and development revenues were $6.2 million for fiscal 1997
compared to $3.7 million for fiscal 1996, an increase of $2.5 million or 66%.
The increase in product sales was due primarily to increased demand for laser
optics for new lasers and as replacement parts in installed lasers. Initial
shipments of microlasers were not significant. The increase in contract research
and development revenues was primarily due to work performed on a commercial
microlaser display development contract that began in July 1996.
Laser Power's ability to increase product sales for fiscal 1998 will depend
on maintaining increased orders for products, integrating into operations
additional manufacturing equipment purchased and facilities leased during fiscal
1997, hiring and training new employees for its expanded facility in Mexico and
increasing shipments of microlasers for medical and other applications. Contract
research and development revenues are expected to decrease in fiscal 1998 due to
lower levels of funding for commercial microlaser display development.
Gross Profit
Gross profit on product sales was $5.3 million in fiscal 1997 and fiscal
1996. Gross profit on research and development revenues was $1.3 million in
fiscal 1997 compared to $771,000 in fiscal 1996, an increase of $536,000 or 69%.
Gross margin on product sales was 31% in fiscal 1997 compared to 35% in fiscal
1996. The decrease in gross margin was due to manufacturing start-up costs of
Laser Power's new microlaser products, and for optics products, to manufacturing
inefficiencies related to capacity constraints and facility expansion to
accommodate increased volume of orders and, to a lesser extent, reduced average
selling prices for optics in certain markets. Gross margin on contract research
and development revenues was 21% for both fiscal 1997 and fiscal 1996.
Internal Research and Development Expense
Internal research and development expenses were $1.0 million in fiscal 1997
compared to $2.7 million in fiscal 1996, a decrease of $1.7 million or 62%. The
decrease was due to the transition of funding for certain microlaser development
efforts from internal sources to contract sources. Laser Power expects to
increase funding for internal research and development of both microlaser and
laser optics products in future periods. The extent of increased internal
funding will depend in part on Laser Power's ability to maintain adequate levels
of contract research and development funding.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $4.5 million in fiscal
1997 compared to $4.3 million in fiscal 1996, an increase of $220,000 or 5%.
These expenses have decreased as a percentage of revenues as absolute spending
has increased at a slower rate than the growth in revenues. Selling, general and
administrative expenses are not expected to decrease further as a percentage of
revenues in the near-term due
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to planned increases in selling expenses for microlaser products and to the
additional expenses attributed to Laser Power becoming publicly held in June
1997.
Interest Expense
Net interest expense was $275,000 in fiscal 1997 compared to $300,000 in
fiscal 1996, a decrease of $25,000 or 8%. The decrease was due primarily to
income from investment of the net proceeds of Laser Power's initial public
offering, partially offset by increased borrowings for capital investments. In
the near-term, interest expense is expected to be lower due to repayment of
certain debt and income from investment of cash balances.
Income Taxes
Income taxes were $40,000 in fiscal 1997 compared to $13,000 in fiscal
1996, an increase of $27,000 or 201%. The increase was due to increased taxable
income. Laser Power's effective tax rate in fiscal 1997 was reduced
substantially by the utilization of federal and state tax net operating loss
carryforwards. The future availability of carryforwards may be limited by the
application of rules relating to a change in control as a result of the
completion of the initial public offering in August 1997.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
Revenues
Product sales were $15.2 million in fiscal 1996 compared to $11.9 million
in fiscal 1995, an increase of $3.3 million or 28%. Contract research and
development revenues were $3.7 million in fiscal 1996 compared to $2.7 million
in fiscal 1995, an increase of $1.0 million or 37%. The increase in product
sales was due to increased acceptance of Laser Power's OEM customers' lower
power lasers for certain industrial and medical applications and increased
worldwide demand for laser optics for new high power lasers and as replacement
parts in installed lasers. The increase in contract research and development
revenues was due to the increased number and average size of contracts awarded
to Laser Power.
Gross Profit
Gross profit on product sales was $5.3 million in fiscal 1996 compared to
$3.9 million in fiscal 1995, an increase of $1.4 million or 37%. Gross profit on
contract research and development revenues was $771,000 in fiscal 1996 compared
to $655,000 in fiscal 1995, an increase of $116,000 or 18%. Gross margin on
product sales increased to 35% in fiscal 1996 from 33% in fiscal 1995. The
increase in gross margin was primarily due to improved manufacturing
efficiencies resulting from higher manufacturing volume and from increased
production in Mexico. Gross margin on contract research and development revenues
decreased to 21% in fiscal 1996 from 24% in fiscal 1995. The decrease was
primarily due to a cost-sharing contract that supplemented internal funding of
technology development for microlasers and microlaser based projection displays.
Internal Research And Development Expense
Internal research and development expenses were $2.7 million in fiscal 1996
compared to $2.9 million in fiscal 1995, a decrease of $168,000 or 6%. The
decrease is due to the transition during the fourth quarter of fiscal 1996 from
internal funding to contract funding for certain microlaser development
activities.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $4.3 million in fiscal
1996 compared to $3.6 million in fiscal 1995, an increase of $724,000 or 20%,
due primarily to the addition of personnel necessary to support the growth in
product sales and the anticipated production of microlasers and to a lesser
extent company-wide bonus accruals; no bonuses were accrued in 1995. These
expenses decreased as a percentage of revenues as absolute spending increased at
a slower rate than the growth in revenues.
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Income Taxes
Income taxes were $13,000 in fiscal 1996 compared to $23,000 in fiscal
1995, a decrease of $10,000 or 43% which was due to lower taxable income for
state income and alternative minimum tax calculations.
LIQUIDITY AND CAPITAL RESOURCES
Laser Power completed its initial public offering in August 1997, raising
approximately $8.1 million, net of offering costs. Prior to the initial public
offering, Laser Power satisfied its liquidity requirements primarily from cash
generated from operating activities and the net proceeds of private sales of
preferred and common stock and, to a lesser extent, from issuance of
subordinated debentures and capital equipment leasing and bank debt.
Cash provided by operating activities was $441,000 in fiscal 1997 compared
to cash used in operating activities of $714,000 and $1.8 million in fiscal 1996
and 1995, respectively. The primary reason for the increase was the transition
of certain microlaser research and development activities from internal funding
to contract funding which resulted in increased operating income, and to a
lesser extent, increased operating income from sales of optics.
Cash used in investing activities was $3.1 million in fiscal 1997, compared
to $923,000 and $905,000 in fiscal 1996 and 1995, respectively. The increase is
primarily due to additions to plant and equipment to increase capacity and
automation for manufacture of optics products and to enable manufacturing of
microlaser products.
Cash provided by financing activities was $8.6 million in fiscal 1997
compared to $1.7 million and $2.6 million for fiscal 1996 and 1995,
respectively. For fiscal 1997, the primary source of financing was the initial
public offering. For fiscal 1996 and 1995, the primary source of financing was
the private sale of preferred stock. On August 1, 1997, a $1.3 million capital
equipment line of credit converted to a five-year term loan. Laser Power had no
amount outstanding under its bank line of credit at October 31, 1997.
Laser Power believes that its existing cash and cash equivalents together
with other sources of liquidity and anticipated cash provided by operations will
satisfy its cash requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries to represent years. For example, the year
"1997" would be represented by "97". These systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. Laser Power believes that its internal systems are Year 2000
compliant or will be replaced in connection with previously planned upgrades to
information systems prior to the need to comply with Year 2000 requirements.
However, many of Laser Power's customers may be affected by Year 2000 issues
that require that they expend significant resources to modify or replace their
existing systems, which may result in such clients having reduced funds to
purchase Laser Power's products.
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LASER POWER BUSINESS
Laser Power designs, manufactures and markets high performance lasers and
laser optics for industrial, medical and military applications. Laser Power's
optics products are sold to laser system OEMs and end users as original and
replacement components in high power CO(2) and other lasers. Laser Power's
proprietary miniature solid state lasers ("microlasers") are designed for use in
certain medical, telecommunications, projection display and other applications.
Laser Power's customers use high power CO(2) lasers in a variety of
industrial processing applications, such as sheet metal cutting, automobile body
welding, surface hardening for engine components and scribing and drilling
delicate ceramic circuits. Laser Power also sells high performance laser optics
to medical equipment OEMs for lower power CO(2) lasers used in certain
therapeutic and cosmetic procedures, including surgery and skin wrinkle removal.
In addition, Laser Power has developed very low absorption thin film coatings
for optics for laser anti-missile systems. Laser Power's core competencies lie
in its surface finishings and thin film coatings, which are key elements
involved in all high performance laser optics. Laser Power believes that its
expertise in these areas provides it with a significant competitive advantage.
Substantially all of Laser Power's product revenues to date are attributable to
the sale of laser optics products for lasers used in the industrial processing
and medical industries.
Laser Power also conducts contract research in the development and
applications of advanced solid state lasers. Sponsors of contract research
include various agencies and departments of the U.S. government, as well as
commercial entities.
Laser Power has leveraged its expertise in thin film coatings, surface
finishing and solid state lasers to develop proprietary miniature solid state
lasers that are excited or "pumped" by diode lasers. These microlasers have
significant size advantages and are generally 100 times more energy efficient
than conventional gas and solid state lasers. Further, they have longer
estimated lifetimes than conventional lamp pumped solid state and gas lasers.
Laser Power shipped the first microlaser evaluation units in March 1997 and has
begun deliveries of microlasers to a medical equipment OEM to replace gas lasers
in dermatology systems. Laser Power believes that microlasers can replace other
lasers in additional medical equipment and in other applications such as laser
light shows and as pump sources for other solid state lasers. Laser Power is
also developing microlasers for telecommunications and projection display
applications.
INDUSTRY AND MARKET OVERVIEW
The use of lasers in industrial and medical applications continues to grow
and to expand into new areas. High power CO(2) lasers are widely used in
industrial applications, such as welding automobile bodies, scribing delicate
ceramic circuits and sheet metal cutting. CO(2) lasers offer greater quality,
speed, flexibility and automation than conventional cutting and welding
technologies. Lower power CO(2) lasers and argon-ion and solid state lasers are
used in various medical procedures, including surgical, dermatology and
ophthalmology applications. Surgical laser procedures reduce blood loss and
post-operative pain compared to other procedures.
The precision optics which collect, form, reflect and transmit the laser
beam are crucial to a laser's function. In gas lasers, the lasing medium is
encased in a tube with precision optics at either end. These internal optics may
direct the beam from one tube to another, may turn the beam back on itself to
further energize the lasing medium or may allow part of the beam to exit the
tube while turning the rest of the beam back on itself. Conventional solid state
lasers are similar except that the tube is replaced by a laser crystal rod. In
addition to the internal optics, a number of external precision optics may be
used to deliver the beam for its intended application. These external optics may
include mirrors, beam splitters, focusing lenses and other special function
optics. The number of optics used in a laser system can be as many as 15 in a
high power CO(2) laser system. Since optics wear and become contaminated during
operation, they must be replaced routinely. Sales of optics as replacement parts
represent the majority of the optics market.
Lasers employing a semiconductor medium (diode lasers) are used in
printers, compact disk players and telecommunications equipment. Diode lasers
can also be used to excite or "pump" solid state lasers. Solid
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state lasers, which employ crystals as the lasing medium and are energized by
light from lamps, are used in various industrial, medical and biotechnology
applications. Recently, laser engineers have developed small, highly efficient
solid state lasers that are energized by diode lasers (diode pumped solid state
lasers or "DPSSLs"). Because of their small size and high efficiency, DPSSLs may
address many of the applications currently served by other lasers and may create
new applications. Microlasers are miniature DPSSLs.
Laser Power believes that because of their small size and high efficiency,
microlasers may replace gas, semiconductor and other solid state lasers in many
applications as well as enable new applications. For example, Laser Power's
microlasers are being used or evaluated as replacements for argon (gas) and
solid-state lasers in dermatology and ophthalmology applications and for laser
light shows. Microlasers may also be used as replacements for semiconductor
lasers and laser/amplifier combinations in broadband communications applications
such as cable television ("CATV") and dense wavelength division multiplexing
("DWDM"). Finally, Laser Power believes that microlasers may enable the
development of commercial solid state laser projection systems for use in flight
simulators, large meeting venues, video walls and, ultimately, electronic
cinema.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
High Performance Laser Optics Products
Laser Power produces optics, including total reflectors, output couplers,
beam splitters and lenses, for use in high power industrial, medical, scientific
and military lasers. Laser Power's expertise in the area of surface finishing
and, in particular, thin film coatings, is critical to producing high
performance laser optics. In general, the performance of an optic is primarily
dependent on the quality of the thin film coating. Thin film coatings include
various reflective coatings for mirrors and transmissive and partially
transmissive coatings for lenses, beam splitters and output couplers. Laser
Power believes that the high quality of its thin film coatings and its
commitment to customer service enhance its reputation as a supplier of high
power and technically advanced laser optics.
CO(2) Optics. Reliable operation of high power CO(2) lasers requires high
quality, low absorption optics. Laser Power supplies substantially all types of
optics used in CO(2) lasers and laser systems. Such optics fall broadly into two
categories: transmissive zinc selenide and reflective metal optics.
Zinc selenide is the substrate material of choice for high power CO(2)
laser transmissive optics such as lenses, output couplers and beam splitters
because of its low absorption of laser energy. Generally, zinc selenide optics
with low absorption thin film coatings are able to handle up to three kilowatts
of power. As laser power increases to the multi-kilowatt range, reflective metal
optics replace transmissive optics in certain applications.
Reflective metal optics (such as folding mirrors, phase shifting mirrors,
beam bending mirrors and focusing mirrors) utilize a metal substrate, such as
copper. Metal optics are fabricated by conventional polishing or single-point
diamond turning, a process which involves cutting by gem quality diamonds to
create a mirror finish. Laser Power is a leader in the use of single-point
diamond turning methods to produce both standard metal optics and those with
complicated surfaces such as aspheres, parabolas and hyperbolas, which are used
with higher power CO(2) lasers. Laser Power's fabrication and thin film coating
technologies have earned Laser Power a reputation as a leading manufacturer of
zinc selenide and metal optics.
Laser Power supplies optics to high power CO(2) laser and laser system
manufacturers and to the aftermarket as replacement parts. Because CO(2) laser
optics wear or become contaminated, every new laser installed increases the
market for replacement optics. In order to meet this growing aftermarket demand,
Laser Power provides same day shipment of critical replacement optics for most
high power CO(2) lasers.
Other Laser Optics. In addition to CO(2) laser optics, Laser Power provides
optics for a variety of lasers operating at different wavelengths. For example,
Laser Power has used coating technology developed in support of various military
defensive laser weapons programs to become a leading supplier of optics used in
Erbium:YAG lasers. These solid state lasers are used in various medical
applications such as surgery and skin resurfacing.
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Military Products. Working with Lockheed Martin Corporation and TRW, Inc.,
Laser Power has developed thin film coatings utilized in ongoing U.S. government
programs to develop laser weapons for missile defense. Laser Power has developed
very low absorption thin film coatings for uncooled optics, which are critical
to a space-based laser for defense against long range ballistic missiles. By
using uncooled optics, the weight of the laser system is reduced by
approximately one-half, allowing the laser to be boosted into orbit using one
rocket instead of two. Laser Power continues to develop these coatings for
Lockheed Martin. Laser Power has also developed coatings for TRW for use in
ground-based lasers to defend against short-range missiles. In addition, Laser
Power has supplied coatings for uncooled optics to TRW for an airborne laser
defense system for use against shorter range battlefield theater ballistic
missiles.
The technology used to produce coatings for these weapons-grade lasers is
derived from technology used by Laser Power for CO(2) laser optics. Laser Power
believes that participation in these military programs fosters continued
improvement in its optics technology and that these improvements provide a
significant competitive advantage.
PRODUCTS UNDER DEVELOPMENT
Optics Products
At laser power levels above three kilowatts, zinc selenide loses its
ability to resist distortion and is often replaced by more expensive, beam
quality limiting solutions such as aspheric metal optics or aerodynamic windows.
However, Laser Power's Turbo-Cooled technology enables zinc selenide optics to
function efficiently even at power levels in excess of 10 kilowatts. In
addition, Laser Power's MP-5 technology enhances the performance of zinc
selenide optics because it absorbs 25%-50% less laser energy than many
commercial thin film coatings. Because of its Turbo-Cooled and MP-5
technologies, Laser Power believes it will continue to be a leading supplier in
CO(2) laser optics as the industrial CO(2) laser industry continues to use
higher laser power.
Turbo-Cooled refers to Laser Power's patented cooling design for optical
assemblies. Turbo-Cooled optical assemblies incorporate transmissive zinc
selenide optics that operate with less distortion of the laser beam and at much
higher power levels than conventionally cooled optics. Laser Power has also
developed laser output couplers, focusing systems and beam integrators using
this technology.
MP-5 refers to Laser Power's new class of proprietary low absorption
coatings to replace thorium fluoride based thin film coatings for CO(2) laser
optics. Thorium fluoride, a low-level radioactive material, is used by virtually
every manufacturer of high performance CO(2) laser optics. MP-5 coatings absorb
significantly less laser energy than thorium fluoride based coatings and are
non-radioactive. Low absorption reduces optic heating caused by the laser beam.
Optic heating causes the beam quality to deteriorate. In addition, MP-5
technology will not require the expense of handling, storage and disposal of
low-level radioactive wastes associated with thorium fluoride. Laser Power has
filed a patent application to seek protection for the MP-5 technology. Laser
Power believes that optics manufactured with MP-5 coatings will gain market
share and command premium pricing in certain markets. Laser Power released MP-5
products for commercial sale in the fourth quarter of fiscal 1997.
Microlaser Based Products
Laser Power has developed microlasers, which are miniature DPSSLs. The
miniaturization is accomplished by reducing the size of the solid state material
to millimeter or sub-millimeter dimensions and replacing end mirrors with
complex thin film coatings applied to the polished ends of the laser crystals.
Microlasers have significant size advantages over gas and other lasers in areas
such as medicine, biotechnology and projection displays. In addition,
microlasers are generally 100 times more energy efficient than gas lasers
because they consume less electricity in creating their optical output and
require less cooling. Microlasers also have longer estimated lifetimes than gas
lasers. To date, revenues from sales of Laser Power's microlaser products have
been insignificant.
Green and Blue Microlasers. Laser Power's green microlaser has size and
energy efficiency advantages over gas lasers used in certain medical
applications. Laser Power began shipments of green microlasers for
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dermatology applications in fiscal 1997 and anticipates selling its green
microlaser for use in ophthalmology applications in fiscal 1998.
Laser Power believes its 0.5 watt blue microlaser is the only high power
all solid state compact blue laser in existence. This laser has a number of
applications in which it can successfully replace argon-ion lasers, such as
certain dentistry, biomedical, dermatology and printing applications.
Laser Power has developed prototype projectors using its green and blue
microlasers with commercially available red diode lasers to produce high quality
images with color quality equaling color movie film. Laser Power believes that
its high resolution projector produces higher resolution and more colors than
commercially available liquid crystal projectors. In addition, Laser Power
believes that it can produce microlaser based projectors that are smaller than
conventional projectors. Further, microlaser light sources have longer estimated
lifetimes compared to conventional light sources. Laser Power expects that
microlaser based projectors may provide advantages in a number of applications,
including entertainment displays, flight simulators, process and system control
room displays, portable large venue projectors, video walls and electronic
cinema.
Laser Power has been awarded several U.S. government contracts to develop
advanced multi-beam, direct write microlaser projector technology, for which
Laser Power retains commercial rights. Such direct write technology will impress
video information directly on the microlaser beams. The beam will write the
image directly onto a screen similar to the way an electron beam writes a
television image, except that multiple lines will be written simultaneously,
which may enable super high resolution up to 5,000 by 4,000 pixels. Laser Power
has been issued a U.S. patent covering such technology and has filed
applications seeking additional patent protection. Since the beam from red diode
lasers is not suitable for use in direct write projection systems, Laser Power
is developing a red microlaser as a replacement. There can be no assurance that
Laser Power will be able to complete development of a red microlaser, or if it
is unable to develop such a microlaser, that it will be able to acquire the
rights to a suitable red laser technology at a commercially reasonable cost, if
at all. If development of direct write technology can be completed, Laser Power
believes that such technology may be the best method to produce super high
resolution images required by electronic cinema.
In addition, Laser Power has a collaborative arrangement with
Laser-Display-Technologic KG ("LDT"), a joint venture between Daimler-Benz AG
and Schneider Rundfunkwerke AG to develop microlasers for a conventional single
beam direct write laser based projection display system. Such systems have been
commercially available using gas lasers for approximately the past 20 years at
very high prices ($200,000 to $500,000). LDT is developing technology which,
when available, and when combined with Laser Power's microlasers, will enable
compact high resolution projectors to be built with the ultimate aim of
producing high volume, low cost home entertainment systems.
1550 nm Microlaser. Distributed feedback ("DFB") diode lasers emitting at
1550 nm wavelength are used in the telecommunications industry to transmit
signals through fiber optic cables. Such lasers are gaining widespread
acceptance in upgrades and new installations of CATV and other
telecommunications systems worldwide. Microlasers generally create less signal
noise and are capable of generating higher power than DFB lasers. As a result,
CATV fiber optic systems employing 1550 nm microlasers will not require
amplification to the same extent as DFB lasers and will deliver a higher
quality, lower noise signal to the receiver. Laser Power believes that, if
successfully developed, the high output power of a 1550 nm microlaser could
reduce or eliminate the requirement for erbium-doped fiber amplifiers ("EDFAs")
which are needed to increase the power of existing DFB lasers in CATV head-end
and point-to-point transmitters. Laser Power expects to sell its 1550 nm high
power microlaser for substantially less than the typical DFB laser EDFA
combination, providing an impetus for industry adoption of its 1550 nm
microlaser.
Dense wavelength division multiplexing allows multiple laser beams with
different wavelengths to be launched into a single optical fiber. DWDM has been
rapidly embraced by long-haul carriers for digital transmission because of
significant cost and time savings overlaying additional fiber optic cable. In
addition, the Regional Bell Operating Companies ("RBOCs") and CATV operators are
beginning to use DWDM
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increasingly as the technology advances, cost of equipment decreases and digital
transmission becomes more popular for local traffic.
The wavelengths used for DWDM must be precisely controlled. DFB laser
manufacturers are not able to control their semiconductor processes to the level
required to produce precise wavelength devices on demand and therefore must go
through a selection process to find devices with the desired wavelengths.
Precise temperature control with active feedback is required to keep the
wavelength constant over the lifetime of the device. Laser Power's 1550 nm
microlaser under development is expected to be capable of being adjusted to any
wavelength over the entire DWDM band. The wavelength could be controlled with a
low-cost, passive optical element, and all devices could be manufactured
identically, with the desired wavelength selected with an adjustment of the
passive optic element. Laser Power believes these characteristics will provide
significant advantages for its 1550 nm microlaser under development in the DWDM
market.
STRATEGY
Laser Power's strategy is to expand its current precision optics business
and to leverage its core expertise in high performance laser optics, low
absorption thin film coatings and solid state lasers to become a world leader in
the manufacture, marketing and sale of microlasers and microlaser based
products. Key aspects of Laser Power's strategy include:
Continue to Grow High Performance CO(2) Laser Optics Business
Laser Power's core competencies in the design and manufacture of high
performance laser optics, including its polishing and diamond turning processes
and thin film coatings have made Laser Power one of the leading suppliers of
such components, especially for high power CO(2) lasers. Laser Power's strategy
is to continually improve quality and customer service costs and to introduce
new products, such as Laser Power's MP-5 coatings and Turbo-Cooled optics. See
"-- Products and Products under Development." Laser Power expects the high power
CO(2) laser segment to continue to grow and power levels to continue to rise. To
meet the increasing demand for optics for high power lasers, Laser Power will
continue to enhance its Turbo-Cooled and diamond turned metal optics
technologies. Laser Power believes it is well positioned to meet more stringent
requirements for optics used in higher power CO(2) lasers because of its
proprietary and state-of-the-art technologies.
Expand Markets for High Performance Optics Products
Laser Power believes that its technologies have applications in markets not
currently served by Laser Power. Laser Power plans to use its technology base
developed for CO(2) laser optics and microlaser crystal polishing and coating to
produce certain optics for neodymium:YAG lasers and visible lasers. Laser Power
also plans to enter other non-CO(2) infrared markets using CO(2) coatings.
Increase Margins on Optics Products
Laser Power has a multifaceted strategy to reduce costs and increase
margins on its optics products. To reduce costs, Laser Power plans to increase
automation which will reduce labor costs and improve yields on certain
manufacturing processes. Laser Power also plans to transfer additional
labor-intensive operations to its facility in Mexico. To increase margins, Laser
Power plans to intensify its sales efforts on higher margin products and to
serve high-performance, high-margin niches in such markets as the emerging high
power neodymium:YAG laser market.
Market Microlasers for Existing Industrial and Medical Applications
Laser Power intends to exploit the superior size and energy efficiency
characteristics of its microlasers to replace existing gas and solid state
lasers currently utilized in certain medical, industrial and other applications.
Laser Power is shipping green microlasers for use in medical, industrial and
entertainment applications. Laser Power expects to ship green and other
microlasers for additional applications in fiscal 1998.
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Develop and Market Microlasers for CATV and Telecommunications Applications
Laser Power is developing a high power, low noise 1550 nm microlaser that
it believes will provide substantial performance and cost advantages over
certain existing CATV transmission systems that are based on 1550 nm DFB lasers
and EDFAs. In addition, the ability to adjust and maintain the microlaser's
wavelength at any point over the entire EDFA wavelength acceptance band will
provide advantages over existing lasers used in digital CATV and DWDM
telecommunications applications. Laser Power expects to ship evaluation units of
its first 1550 nm laser product in the second quarter of fiscal 1998 and to ship
production units in the third quarter of fiscal 1998.
Develop and Market Microlasers for High End Projection Display Applications
Laser Power has developed blue and green microlasers and is developing a
red microlaser, all of which can be arrayed together as the light source for a
high end display projector. Laser Power believes that microlaser based
projectors will have significant performance and size advantages over existing
high end lamp based and CRT based projectors.
Supplement Product Development Activities Through Contract Funding
Laser Power will opportunistically secure research contracts that will
enhance and advance its products under development. Laser Power has spent
approximately $11.8 million on microlaser development and related display
technology programs, substantially all of which was paid for through joint
ventures with strategic partners such as the U.S. government, Proxima and LDT.
See "-- Research and Development."
Expand Capabilities Through Strategic Alliances and Acquisitions
Through alliances with other companies, Laser Power has enhanced its high
performance laser optics technologies, broadened its research activities and
developed its microlaser technology. Laser Power believes that similar
relationships with leading companies in the medical equipment, high end
projection display and telecommunications industries will facilitate its entry
into those markets. In addition, Laser Power will continue to acquire
technologies or other companies that complement its current technologies.
SALES AND MARKETING
As of October 31, 1997, Laser Power employed 19 persons in sales and
marketing at sales offices in the United States and Belgium. Laser Power
promotes its optics and intends to promote its microlaser based products to OEM
and end user customers through a multi-faceted program which includes trade
journal advertising, catalog distribution, direct mail promotion, field sales
presentations, technical seminars, trade show exhibits and direct telemarketing.
Laser Power sells its optics products through its direct sales force in the U.S.
and Belgium and through its distributors in the rest of the world. Laser Power
intends to sell its microlaser based products in North America, Europe and Asia
through a direct sales force and distributors.
RESEARCH AND DEVELOPMENT
Laser Power believes that its future success depends in large part on its
ability to complete products under development, to continue to enhance its
existing products and to develop new products. As of October 31, 1997, Laser
Power had 50 employees performing research and development in the United States
and Belgium. Laser Power spent $4.9 million, $5.6 million and $5.9 million
during fiscal years 1995, 1996 and 1997, respectively, on research and
development. The sources of such funds were contracts with customers and
strategic partners as well as internal Laser Power funds.
Laser Power continues to develop its 1550 nm microlaser for broadband
communications and its red microlaser for projection display applications. Also,
Laser Power continues laser projection display development under several U.S.
government and commercial research contracts. Laser Power intends to strengthen
its competitive position for all microlaser applications by developing higher
power microlasers and lower cost component and sub-assembly designs. In
addition, Laser Power is developing proprietary automated
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manufacturing processes for its optics manufacturing to lower costs and provide
a more flexible manufacturing environment.
The successful completion of development activities and the transition to
manufacture and sale of any resultant products is dependent on a number of
factors, including determination of demand and appropriate product design,
length of development period, development of appropriate manufacturing
processes, product performance and sales and marketing. There can be no
assurance that the 1550 nm and red microlasers or any of the other products or
improvements under development will be successfully developed, or that new
products developed by Laser Power will be commercially available or achieve
market acceptance. See "-- Products Under Development" and "Risk
Factors -- Development Risks Relating to Microlaser Technologies."
MANUFACTURING
Laser Power manufactures high performance laser optics, microlasers and
related components. Some materials and components are available only from single
suppliers.
Laser Power manufactures optics at its San Diego and Mexico facilities.
Thorium fluoride and zinc selenide are important to the manufacture of optics.
Laser Power purchases all of its thorium fluoride for use in its low absorption
thin film coating processes from Cerac Incorporated, which Laser Power believes
is the sole source for high quality thorium fluoride. Any interruption or
cessation of supply by Cerac would have a material adverse effect on Laser
Power's business, financial condition and results of operations.
In the case of zinc selenide, a critical raw material in a significant
percentage of Laser Power's optics products, Laser Power currently relies
exclusively on one supplier, the Advanced Materials Division of Morton
International, Inc. To date, Laser Power has not experienced any material
difficulties in the quantity or the quality of the zinc selenide delivered. If
any such problem arises in the future, Laser Power would have to seek an
alternate supplier. However, there can be no assurance that Laser Power would be
able to secure sufficient inventory of zinc selenide to produce sufficient
product to meet its customers' needs. A transition to alternate arrangements
would involve additional costs and delays in production.
The manufacture of optics is capital intensive. Future manufacturing
capacity requirements may require substantial investment in equipment and
facilities. See "Risk Factors -- Fluctuation in Quarterly Performance."
Laser Power's microlasers are assembled from component parts at Laser
Power's San Diego facility. Laser Power purchases component parts for its
microlasers, including laser crystals, nonlinear crystals, and semiconductor
diode lasers, from various sources around the world. Laser Power believes its
suppliers can supply the components in the quantities, with the quality and at
the prices required by Laser Power for volume production of microlasers for
medical, dental, telecommunications, industrial, display and other general
applications of Laser Power's microlaser products and products under
development. However, none of Laser Power's suppliers of microlaser component
parts has experience in supplying these components with Laser Power's
specifications at the increased volumes that Laser Power needs to achieve its
growth goals. In addition, certain future applications require substantially
lower cost components. Laser Power does not have long term or volume purchase
agreements with any of its suppliers and currently purchases components on a
purchase order basis. See "Risk Factors -- Limited Microlaser Manufacturing
Experience; Scale-Up Risk."
Moreover, Laser Power has no experience in producing microlasers other than
in low level production quantities. Laser Power is increasing its manufacturing
capability to polish and coat volume quantities of microlaser and nonlinear
crystals and to perform the required complex assembly steps. Such an increase in
its manufacturing capabilities will require significant scale-up expenditures
and additions to Laser Power's facilities. See "Risk Factors -- Limited
Microlaser Manufacturing Experience; Scale-Up Risk."
PATENTS AND PROPRIETARY RIGHTS
As of October 31, 1997, Laser Power's patent portfolio included four
patents issued by the U.S. Patent and Trademark Office ("USPTO") and one patent
granted by the European Patent Office (the "EPO"), subsequently filed in five
European countries. Laser Power has received Notices of Allowability on four of
its
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patent applications pending with the USPTO and has eight other patent
applications pending. Two patent applications have been filed in several foreign
jurisdictions and Laser Power has been granted licenses to two patent
applications owned by Proxima and filed with the USPTO. One of Laser Power's
U.S. patents, issued in November 1996, covers certain aspects of Laser Power's
blue microlaser technology and another, issued in July 1996, covers Laser
Power's direct write concept and other aspects of display technology associated
with microlasers. One of Laser Power's U.S. patents, issued in July 1992, covers
basic technology behind Laser Power's Turbo-Cooled optic products; Laser Power's
patent granted by the EPO in April 1993 covers this same technology. Many of
Laser Power's pending patent applications relate to microlaser technology. The
two pending U.S. patent applications licensed from Proxima cover certain aspects
of microlaser display technology. One pending application relates to the MP-5
coating technology.
Because of lesser protection afforded by and the high cost of pursuing
patents in certain foreign jurisdictions, Laser Power has elected not to seek
patent protection for certain of its inventions covered by its U.S. patents in
foreign jurisdictions. Nevertheless, Laser Power intends to selectively pursue
foreign patent filings where the cost of and protection afforded by such
patents, if issued, are justified. However, Laser Power in general believes
that, in certain cases, obtaining foreign patents may be much less useful than
obtaining domestic patents because of differences in patent laws and costs of
patent enforcement, and further believes that the protection provided by foreign
patents, if obtained, and any other foreign intellectual property protection may
be weaker than that provided domestically.
Laser Power's continued success will depend in part on its ability to
obtain patent protection for its products and processes, and to operate without
infringing the proprietary rights of third parties. There can be no assurance
that patent applications filed by Laser Power will result in patents being
issued, that the claims of such patents will offer significant protection of
Laser Power's technology, or that any patents issued to or licensed by Laser
Power will not be challenged, narrowed, invalidated or circumvented. Laser Power
may also be subject to legal proceedings that result in the revocation of patent
rights previously owned by or licensed to Laser Power, as a result of which
Laser Power may be required to obtain licenses from others to continue to
develop, test or commercialize its products. There can be no assurance that
Laser Power will be able to obtain such licenses on acceptable terms, if at all.
In addition, there may be pending or issued patents held by parties not
affiliated with Laser Power that relate to technology utilized by Laser Power.
As a result, Laser Power may need to acquire licenses to, assert infringement
of, or contest the validity of, such patents or other similar patents which may
be issued. Laser Power could incur substantial costs in defending itself against
patent infringement claims, interference proceedings, opposition proceedings or
other challenges to its patent rights made by third parties, or in bringing such
proceedings or enforcing any patent rights of its own.
The patent positions of laser optic, laser component and laser
manufacturing companies, including Laser Power, are generally uncertain and
involve complex legal and factual questions. As a result, these industries have
a history of patent litigation and will likely continue to have patent
litigation concerning laser technologies. A number of laser optic, laser
component and laser manufacturing companies maintain and continue to develop
patent positions that could prevent Laser Power from using technology covered by
these patents. The commercial success of Laser Power depends in part on not
infringing patents. Any action against Laser Power or its collaborative partners
claiming damages or seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting Laser Power to
potential liability for damages, require Laser Power or its collaborative
partners to obtain a license to continue to develop, manufacture or market the
affected products and processes. There can be no assurances that Laser Power or
its collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required would be made available
on commercially acceptable terms, if at all. If Laser Power becomes involved in
such litigation, it could consume a substantial portion of Laser Power's
managerial and financial resources, which could have a material adverse effect
on Laser Power's business, financial condition and results of operations.
Laser Power has acquired a license to a Stanford University owned patent
covering certain technology used in Laser Power's blue microlaser from ATx
Telecom Systems, Inc. Laser Power has received a letter
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from a competitor claiming that Laser Power's license was transferred improperly
by Stanford and ATx Telecom. While Laser Power believes that such license was
properly transferred, there can be no assurance that Laser Power's license would
not be challenged. In such an event, there can be no assurance that Laser Power
would be able to obtain a replacement license on favorable terms, if at all.
Failure to obtain such a license could result in a material adverse effect to
Laser Power's business, financial condition and results of operations.
Laser Power is aware of patents held by other laser companies that may
relate to Laser Power's microlaser technology. Laser Power does not believe it
infringes any valid claims of such laser companies' patents or believes that it
has adequate design-arounds if it is held to be infringing. Nevertheless, for
certain cost or strategic reasons, Laser Power believes it may be advantageous
to enter into license agreements with such laser companies. Laser Power is
currently negotiating to obtain licenses from such parties for certain
technology covered by such patents. However, there can be no assurance that
Laser Power will obtain the licenses on favorable terms, if at all. If it is
determined that the patents held by these other laser companies do cover Laser
Power's technology, Laser Power's inability to obtain licenses for such
technology could have a material adverse effect on Laser Power's business,
financial condition and results of operations.
Laser Power has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, Laser
Power has granted significant rights to the other parties under such contracts.
Laser Power's strategy is to continue to develop a significant portion of its
proprietary technology pursuant to funding received from development contracts.
There can be no assurance that Laser Power will be able to continue to obtain
funding for the development of its proprietary technology, or that, if received,
Laser Power will obtain rights to such technology sufficient to permit Laser
Power to develop and market new products or to prevent third parties from using
such technology to compete with Laser Power.
In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, Laser Power requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with Laser Power. These agreements are
intended to enable Laser Power to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by Laser Power of proprietary technology developed at
Laser Power or with Laser Power's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for Laser Power's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by Laser Power could have a material adverse effect on Laser
Power's business, financial condition and results of operations.
Laser Power's academic collaborators have certain rights to publish data
and information in which Laser Power has rights. There is considerable pressure
on academic institutions to publish discoveries in the high technology and
physics fields. There can be no assurance that such publication would not
adversely affect Laser Power's ability to obtain patent protection for certain
technologies in which it may have a commercial interest.
COMPETITION
The industries in which Laser Power sells its products are highly
competitive. Laser Power's competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service, the quality of its manufacturing processes, the compatibility
of its products with existing laser systems and Laser Power's ability to
participate in the growth of emerging technologies, such as microlasers and
their application to industries already served by gas and solid state lasers. In
the optics market, Laser Power primarily competes with II-VI, Inc., Coherent,
Inc. and Sumitomo Electric Industries, Ltd.
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II-VI produces its own supply of zinc selenide. Laser Power uses zinc selenide
as the substrate for 40% to 50% of the CO(2) laser optics sold by Laser Power
and purchases this raw material from Morton.
With regard to Laser Power's microlaser based products and products under
development, Laser Power faces competition from gas, solid state and DFB laser
manufacturers who already service the various markets the microlasers are
intended to address as well as from lamp manufacturers who are developing lamps
with extended lives for projection display. Competitive factors in the market
for microlaser applications include price, product performance and reliability,
strong customer support and service, customer relationships and the breadth of
product line. In these markets, Laser Power faces competition from companies
that have substantially greater financial, engineering, research, development,
manufacturing, marketing, service and support resources, greater name
recognition than Laser Power and long-standing customer relationships.
Specifically, Laser Power believes that its main competitors for its products
and products under development will be Spectra-Physics Lasers, Inc., Coherent,
Uniphase Corporation, Lightwave Electronics Corporation, LiCONiX, Light
Solutions Corporation, Omnichrome Corporation and Edinburgh Instruments Ltd.
With respect to 1550 nm microlasers and microlaser transmitters for supply to
OEMs, Laser Power believes its competitors will include Harmonic Lightwaves,
Inc., Ortel Corporation, Synchronous Group, Inc., Uniphase Corporation, SDL,
Inc., ATx Telecom, Scientific-Atlanta, Inc., Fujitsu Compound Semiconductor,
Inc., Lucent Technologies Inc. and NORTEL, Ltd. Other broadband communications
equipment suppliers as well as other laser companies who may develop microlaser
based products which compete directly with Laser Power's microlaser based
products may also enter this market.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Laser Power uses or generates certain hazardous substances in its research
and manufacturing facilities. Laser Power believes that its handling and
disposal of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each operating
location. Laser Power invests substantially in proper protective equipment,
process controls and specialized training to minimize risks to employees,
surrounding communities and the environment due to the presence and handling of
such hazardous substances. Laser Power conducts monthly workplace monitoring
regarding such substances. When exposure problems or potential problems have
been indicated, corrective actions have been implemented and reoccurrence has
been minimal or non-existent. Laser Power does not carry environmental
impairment insurance.
Laser Power uses a low-level radioactive material called thorium fluoride
to manufacture low absorption thin film coatings. The use, storage and disposal
of this material is governed by the State of California which last inspected and
licensed Laser Power's facilities and procedures in February 1996. All thorium
fluoride bearing by-products are collected and stored on site at Laser Power
until California develops a low-level radioactive waste storage capability.
Laser Power's non-radioactive coating, MP-5, will provide superior performance
to certain thorium fluoride coated optics and lessen the environmental hazards
associated with the special use, storage and handling of this low-level
radioactive substance.
The generation, use, collection, storage and disposal of all other
hazardous by-products resulting from Laser Power's manufacturing of its products
and research and development of new products, such as suspended solids
containing heavy metals or airborne particulates, are believed by Laser Power to
be in material compliance with local, state and federal regulations. Laser Power
believes that it possesses all of the permits and licenses required for
operation. Although Laser Power is not aware of any material environmental,
safety and health problems in its properties or processes, there can be no
assurance that problems will not develop in the future which would have a
material adverse effect on Laser Power.
BACKLOG
With the exception of military contracts, most customer orders for optics
are from stock or for deliveries within one to two months. As a result, backlog
of optics orders is typically two to three times monthly sales and was $3.9
million at August 31, 1997. Backlog of research contracts fluctuates based on
the timing of contract awards and was $2.7 million at August 31, 1997. Backlog
of microlaser orders is expected to reflect
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the longer-term commitments of OEM customers. At August 31, 1997, microlaser
backlog was $469,000, consisting of development funding and initial orders for
its microlaser products.
EMPLOYEES
As of October 31, 1997, Laser Power had 195 full time and 5 part time
employees in the United States and 42 full time employees in its foreign
subsidiaries. Of Laser Power's United States employees, 14 were engaged in
marketing, sales and related customer-support services, 46 in research and
development and 140 in operations, administration and finance. None of Laser
Power's employees is represented by a labor union or covered by a collective
bargaining agreement. Laser Power has not experienced any work stoppages and
considers its relations with its employees to be good.
FACILITIES
Laser Power's main facility and headquarters, approximately 44,000 square
feet, is located in San Diego, California. This facility is leased through
December 31, 2001 and may be purchased pursuant to an option which may be
exercised at the expiration of the lease with a purchase price equal to the
prevailing market value of the property. Laser Power also leases facilities in
Plymouth, Michigan, Tijuana, Mexico and Ghent, Belgium, consisting of
approximately 1,000, 4,600 and 3,900 square feet, respectively. The lease on the
Michigan facility is month to month and the leases on the Mexico and Belgium
facilities expire in September 1998 and December 1999, respectively. Laser Power
believes that its leased properties are adequately covered by insurance. Laser
Power believes that following expansion of its manufacturing, research and
office space, Laser Power's facilities will be adequate for its current and
projected needs and that additional space will be available as needed.
LEGAL PROCEEDINGS
Laser Power is not currently a party to any litigation.
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LASER POWER MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Laser Power are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Glenn H. Sherman, Ph.D............ 54 Chairman of the Board and Chief Executive Officer
Douglas H. Tanimoto, Ph.D......... 57 President, Laser Power Research Division, and Director
Richard P. Scherer................ 57 President, Laser Power Optics Division
Dean T. Hodges, Ph.D.............. 53 President, Laser Power Microlasers Division
Arthur P. Minich.................. 54 President, Laser Power Display Division
Paul P. Wickman, Jr............... 48 Senior Vice President and Chief Financial Officer
William G. Fredrick(1)............ 57 Director
Robert G. Klimasewski............. 54 Director
Richard C. Laird(2)............... 51 Director
Kenneth E. Olson(1)(2)............ 61 Director
John C. Stiska(1)(2).............. 55 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Glenn H. Sherman, Ph.D., the founder of Laser Power, has served as Chairman
of the Board and Chief Executive Officer of Laser Power since 1979. From 1972 to
1979, Dr. Sherman served as a director and Vice President of II-VI, Inc., an
electro-optical component manufacturer. Dr. Sherman received a B.S., M.S. and
Ph.D. in Electrical Engineering from the University of Illinois at Urbana.
Douglas H. Tanimoto, Ph.D. has served as the President of the Laser Power
Research Division since 1988 and has served as a director of Laser Power since
1984. Dr. Tanimoto served as the President of the Laser Power Optics Division
from 1986 to 1988. Dr. Tanimoto received a B.A. from the University of
California, Berkeley and an M.S. and Ph.D. in Physics from the University of
Oregon.
Richard P. Scherer has served as President of the Laser Power Optics
Division since March 1996. Mr. Scherer served as Laser Power's Senior Vice
President, Marketing and Business Development, from 1992 to March 1996. Mr.
Scherer received a B.S. in Electrical Engineering from Marquette University.
Dean T. Hodges, Ph.D. has served as President of the Laser Power
Microlasers Division since March 1996. Dr. Hodges served as President of the
Laser Power Optics Division from March 1994 to March 1996. From 1984 to March
1994, Dr. Hodges served as Senior Vice President of Newport Corporation, a
manufacturer of instruments for the laser and optics industries. Dr. Hodges
received a B.S. in mathematics and physics from Humboldt State College and a
Ph.D. in Applied Physics from Cornell University.
Arthur P. Minich has served as President of the Laser Power Display
Division since December 1996 and has been an employee of Laser Power since June
1997. From 1992 to November 1996, Mr. Minich served as Chief Technical Officer
and Vice President, Research and Development, of Proxima Corporation, a
manufacturer of computer display projectors. Mr. Minich received a B.S. in
Electrical Engineering from Iowa State University and an M.S. in Electrical
Engineering/Computer Science from the Hewlett-Packard Honors Cooperative
Program.
Paul P. Wickman, Jr. has served as Senior Vice President and Chief
Financial Officer of Laser Power since September 1992. From 1983 to 1992, he
served as Group Vice President, Finance, and Controller of The Titan
Corporation, a diversified high technology company. Mr. Wickman received a B.S.
in Accounting from San Diego State University and is a Certified Public
Accountant.
William G. Fredrick has served as a director of Laser Power since 1980. Mr.
Fredrick is the founder and President of Laser Mechanisms, Inc., a laser device
and accessory manufacturer, since 1980, and Oxid
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Corporation, a laser device and accessory manufacturer, since 1986. Mr. Fredrick
received a B.S. in Engineering Physics from the University of Michigan.
Robert G. Klimasewski has served as a director of Laser Power since 1980.
Mr. Klimasewski has been the President and Chief Executive Officer of
Transmation, Inc., an electronic instrumentation manufacturer, since 1994. In
1972, Mr. Klimasewski founded Burleigh Instruments, Inc., a scientific
instrument and laser manufacturer, and has been Vice Chairman of Burleigh
Instruments since 1972. Mr. Klimasewski is also a director of Transmation and
Burleigh Instruments. Mr. Klimasewski received a B.S. and M.S. in Optical
Engineering from the University of Rochester.
Richard C. Laird has served as a director of Laser Power since 1987. Mr.
Laird is Executive Vice President and a director of Union Miniere Inc., a
producer of cobalt powder and sales organization for metals refined by related
companies in Europe, where he has been employed since 1980. Mr. Laird received a
B.S. in Metallurgical Engineering from Michigan Technological University.
Kenneth E. Olson has served as a director of Laser Power since October
1994. Mr. Olson is Chairman of Board, acting President and Chief Executive
Officer of Proxima. Mr. Olson previously served as President and Chief Executive
Officer of Proxima from December 1990 to January 1996. Mr. Olson is a director
of Proxima, Lidak Pharmaceuticals and Applied Digital Access, Inc. Mr. Olson
received an M.B.A. from Pepperdine University.
John C. Stiska has served as a director of Laser Power since April 1987.
Mr. Stiska served as outside legal counsel to Laser Power from 1983 to 1990. In
February 1996, Mr. Stiska joined QUALCOMM Incorporated as Corporate Senior Vice
President and has served as General Manager of the Technology Applications
Division since January 1997. From 1990 to January 1996, Mr. Stiska served as
President and Chief Executive Officer of Triton Group Ltd., an operating-holding
company that emerged in 1993 from the Chapter 11 bankruptcy proceedings of
Triton Group Ltd. and Intermark, Inc. Mr. Stiska is a director of Jaymark, Inc.
and SpectraNet Interactive, Inc. Mr. Stiska received a B.B.A. and J.D. from the
University of Wisconsin.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Laird, Olson and Stiska. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by Laser Power's independent auditors and reviews
and evaluates Laser Power's audit and control functions.
The Compensation Committee consists of Messrs. Fredrick, Olson and Stiska.
The Compensation Committee makes recommendations regarding Laser Power's 1997
Plan and Employee Stock Purchase Plan as well as decisions concerning salaries
and incentive compensation for employees and consultants of Laser Power.
DIRECTOR COMPENSATION
Laser Power's non-employee directors receive $1,000 per meeting and $500
per committee meeting as payment for their services as a member of the Board of
Directors. In fiscal 1997, the total compensation paid to non-employee directors
was $51,800. Non-employee directors are also reimbursed for reasonable out-of-
pocket expenses in connection with attendance at Board and committee meetings.
In December 1996, Laser Power issued warrants to purchase up to 20,000 shares of
Laser Power's Common Stock to Union Miniere Inc. and warrants to purchase up to
6,666 shares of Laser Power's Common Stock to each of John Stiska, Kenneth
Olson, Siegfried Meder (a former director), Robert Klimasewski and William
Fredrick at an exercise price of $4.50 per share. Such warrants expire in
December 2006 except for the warrants granted to Mr. Meder, all of which expired
in July 1997 following his resignation from the Board. Union Miniere Inc.'s
warrant may be exercised in whole or in part at any time by the holder as long
as at least one representative of the holder remains a member of the Board of
Directors. In addition, entities affiliated with certain of the directors have,
from time to time, entered into transactions with Laser Power. See "-- Stock
Option Plans" and "-- Certain Transactions."
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Each director of Laser Power may receive stock option grants under the 1997
Equity Incentive Plan (the "1997 Plan"). To date, no options have been granted
to any director under the 1997 Plan.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended August 31, 1997
and 1996, compensation awarded or paid to, or earned by, Laser Power's Chief
Executive Officer and the four other most highly compensated executive officers
of Laser Power who earned in excess of $100,000 in salary and bonus
(collectively, the "Named Executive Officers") for services rendered Laser Power
during fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) SECURITIES
---------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)(2)
------------------------------ ----------- ------- ------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Glenn H. Sherman, Ph.D........ 1997 184,771 23,500 26,666 25,872
Chairman of the Board and 1996 170,600 25,000 10,000 25,704
Chief Executive Officer
Douglas H. Tanimoto, Ph.D..... 1997 149,904 14,000 -- 19,208
President, Laser Power 1996 145,500 14,500 6,666 19,930
Research Division,
and Director
Dean T. Hodges, Ph.D.......... 1997 144,904 10,000 -- 11,728
President, Laser Power 1996 140,500 24,000 6,666 15,225
Microlasers Division
Richard P. Scherer............ 1997 147,164 15,000 -- 8,820
President, Laser Power 1996 139,000 18,000 6,666 12,300
Optics Division
Paul P. Wickman, Jr........... 1997 119,808 15,000 26,666 11,585
Senior Vice President and 1996 110,400 16,000 6,666 14,104
Chief Financial Officer
</TABLE>
- ---------------
(1) In accordance with the rules of the SEC, the compensation described in this
table does not include medical, group life insurance or other benefits
received by the Named Executive Officers which are available generally to
all salaried employees of Laser Power and certain perquisites and other
personal benefits received by the Named Executive Officers which do not
exceed the lesser of $50,000 or 10% of any such officer's salary and bonus
disclosed in this table.
(2) Includes premium payments made by Laser Power for split dollar life
insurance policies that are owned by Named Executive Officers. The policy
owners have assigned to Laser Power the proceeds from termination of the
policies or from payment of death benefits in an amount equal to the lesser
of the cash surrender value or the cumulative payments made by Laser Power
on their behalf. The insurance premium payments (i) in fiscal 1996 amounted
to $23,400, $17,400, $14,800, $12,300 and $11,600 and (ii) in fiscal 1997
amounted to $22,036, $15,521, $9,903, $8,820 and $7,954 for Messrs. Sherman,
Tanimoto, Hodges, Scherer and Wickman, respectively. Also includes 401(k)
Plan employer matching contributions (i) in fiscal 1996 of $2,304, $2,530,
$425, $0 and $2,504 and (ii) in fiscal 1997 of $3,836, $3,687, $1,825, $0
and $3,631 for Messrs. Sherman, Tanimoto, Hodges, Scherer and Wickman,
respectively.
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<PAGE> 72
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended August 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK
------------------------------------------------------- PRICE
NUMBER OF PERCENTAGE OF APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------
NAME GRANTED(1) FISCAL YEAR(%)(2) ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------- ---------- ----------------- ----------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Glenn H. Sherman............... 26,666 6.4 4.50 12/07/06 75,465 191,195
Douglas H. Tanimoto............ -- -- -- -- -- --
Dean T. Hodges................. -- -- -- -- -- --
Richard P. Scherer............. -- -- -- -- -- --
Paul P. Wickman, Jr............ 26,666 6.4 4.50 12/07/06 75,465 191,195
</TABLE>
- ---------------
(1) Options become exercisable over a five-year period with 20% vesting each
anniversary from the date of grant. The options will fully vest upon a
change of control, as defined in Laser Power's option plans, unless the
acquiring company assumes the options or substitutes similar options. The
term of the options is ten years.
(2) Based on options to purchase 415,975 shares granted to employees in fiscal
1996, including to the Named Executive Officers.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the SEC, and do not reflect Laser Power's
estimate or projection of future stock price performance. Actual gains, if
any, are dependent on the actual future performance of Laser Power Common
Stock and no gain to the optionee is possible unless the stock price
increases over the option term, which will benefit all stockholders.
AGGREGATED FISCAL YEAR-END OPTION EXERCISES AND OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
August 31, 1997 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of August 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON AUGUST 31, 1997 (#)(1) AUGUST 31, 1997($)(2)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Glenn H. Sherman......... -- -- 68,666 34,666 297,414 99,665
Douglas H. Tanimoto...... -- -- 201,333 5,333 878,832 15,332
Dean T. Hodges........... -- -- 121,333 85,333 348,837 245,332
Richard P. Scherer(3).... -- -- 161,333 45,333 703,832 190,332
Paul P. Wickman, Jr...... -- -- 41,330 58,667 158,820 178,670
</TABLE>
- ---------------
(1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money"
options are options with exercise prices below the market price of Laser
Power's Common Stock.
(2) Based on the fair market value of the Common Stock as of August 31, 1997.
Amounts reflected are based on the fair market value minus the exercise
price and do not indicate that the optionee sold such stock.
(3) Includes warrants to purchase 200,000 shares issued in September 1992 in
payment for services rendered as a consultant.
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<PAGE> 73
STOCK OPTION PLANS
The 1997 Plan was adopted by the Board of Directors in March 1997. Under
the 1997 Plan, 1,000,000 shares of Laser Power's Common Stock are reserved for
issuance pursuant to the exercise of stock awards granted to employees,
directors and consultants. The 1997 Plan provides for the grant of both
incentive and nonstatutory stock options, as well as stock bonuses, the right to
purchase restricted stock and stock appreciation rights. The 1997 Plan was
adopted to provide a means by which selected officers and employees of and
consultants to Laser Power and its affiliates could be given an opportunity to
purchase stock in Laser Power, to assist in retaining the services of employees
holding key positions, to secure and retain the services of persons capable of
filling such positions and to provide incentives for such persons to exert
maximum efforts for the success of Laser Power. Options granted under the 1997
Plan may become exercisable in cumulative increments ("vest") as determined by
the Board. Shares covered by currently outstanding options under the 1997 Plan
typically vest over a four-year period with 25% vesting one year from the date
of grant and 1/48 of the remaining shares vesting monthly thereafter. Shares
covered by options granted in the future under the 1997 Plan may be subject to
different vesting terms. Options to purchase 12,332 shares of Laser Power Common
Stock under the 1997 Plan were outstanding as of August 31, 1997.
Laser Power's 1993 Stock Option Plan (the "1993 Plan") was adopted by the
Board of Directors in September 1993. The 1993 Plan provided for the grant of
incentive stock options to employees and nonstatutory stock options to
employees, directors and consultants of Laser Power and its affiliates. The 1993
Plan has been terminated by the Board of Directors, and no additional options
will be granted thereunder. Options to purchase 539,303 shares of Laser Power
Common Stock under the 1993 Plan were outstanding as of August 31, 1997, and
these options continue to vest until they terminate in accordance with their
terms.
Laser Power's Second Amended and Restated 1981 Stock Option Plan (the "1981
Plan") was adopted by the Board of Directors in September 1980, and was
subsequently amended in April 1986 and October 1990. The 1981 Plan provided for
the grant of incentive stock options under the Code and nonstatutory stock
options to employees of Laser Power. The 1981 Plan has been terminated by the
Board of Directors, and no additional options will be granted thereunder.
Options to purchase 400,991 shares of Laser Power Common Stock under the 1981
Plan were outstanding as of August 31, 1997, and these options continue to vest
until they terminate in accordance with their terms.
EMPLOYEE STOCK PURCHASE PLAN
The Laser Power Board of Directors adopted the Employee Stock Purchase Plan
(the "Purchase Plan") in March 1997. The Purchase Plan provides a means by which
employees of Laser Power (and any subsidiary of Laser Power designated by the
Board of Directors to participate in the Purchase Plan) may purchase Common
Stock through payroll deductions. The purpose of the Purchase Plan is to assist
Laser Power in retaining the services of its employees, to secure and retain the
services of new employees, and to provide incentives for such persons to exert
maximum efforts for the success of Laser Power. The Purchase Plan is implemented
by offerings of rights to all eligible employees from time to time by the Board.
Generally, each such offering is of six months' duration. Eligible employees
become participants in the Purchase Plan by delivering to Laser Power, prior to
the date selected by the Board as the offering date for the offering, an
agreement authorizing payroll deductions of up to 15% of such employees'
earnings paid during the purchase period for such offering. The purchase price
per share at which shares are sold in an offering under the Purchase Plan is the
lesser of (a) 85% of the fair market value of a share of Common Stock on the
date of commencement of the offering, or (b) 85% of the fair market value of a
share of Common Stock on the last day of the purchase period. The purchase price
of the shares is accumulated by payroll deductions over the offering period. At
any time during the purchase period, a participant may reduce or terminate his
or her payroll deductions.
401(K) PLAN
In September 1988, the Laser Power Board of Directors adopted a tax
qualified employee savings and retirement plan covering Laser Power's employees,
as amended and restated effective January 1, 1997 (the
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<PAGE> 74
"401(k) Plan"). Pursuant to the 401(k) Plan, eligible employees, including
officers, of Laser Power may elect to reduce their current compensation by up to
the lesser of 16% of such compensation or the statutorily prescribed annual
limit ($9,500 in 1997) and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan provides for Laser Power matching contributions of
50% of the employee's contributions to a maximum of 6% of the employee's
compensation and for discretionary profit-sharing contributions. Employees
become 20% vested in Laser Power's matching contributions after two years of
service, and increase their vested percentages by an additional 20% for each
year of service thereafter. The 401(k) Plan is intended to qualify under Section
401 of the Code, so that contributions to the 401(k) Plan, and income earned on
the 401(k) Plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by Laser Power will be deductible by
Laser Power when made. The trustees under the 401(k) Plan are Glenn H. Sherman
and Paul P. Wickman, Jr. The trustees, working with the plan sponsor, Reliastar,
at the discretion of each participant, invest the 401(k) Plan employee salary
deferrals and Laser Power contributions in selected investment options.
EMPLOYMENT AGREEMENTS
Laser Power has entered into employment agreements with the following
executive officers: (1) Glenn Sherman, Ph.D., Chairman of the Board and Chief
Executive Officer, (2) Dean Hodges, Ph.D., President, Laser Power Microlasers
Division, (3) Richard Scherer, President, Laser Power Optics Division, (4)
Douglas Tanimoto, Ph.D., President, Laser Power Research Division, (5) Arthur
Minich, President, Laser Power Display Division, and (6) Paul Wickman, Jr.,
Senior Vice President and Chief Financial Officer. Pursuant to such employment
agreements, Messrs. Sherman, Hodges, Scherer, Tanimoto, Minich and Wickman
receive annual salaries of $185,000, $145,000, $147,000, $150,000, $150,000 and
$120,000, respectively. Annual bonuses are determined by the Board of Directors.
The term of each employment agreement is three years and may be extended by
mutual written consent. Each employment agreement also provides that if
employment is terminated for cause or the employee voluntarily resigns, the
employee shall receive only the salary payments earned prior to the date of
termination. If employment is terminated without cause, the employee will
receive consulting fees equal to his base salary times the number of months
equal to the number of years he would have been employed at the next anniversary
date of his employment. As consideration for the consulting fees, the employee
will provide consulting services on an as needed basis. In addition, during the
term of employment, and for as long as the employee is receiving consulting
fees, the employee will not, subject to certain limitations, compete with Laser
Power.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Laser Power's Bylaws provide that Laser Power will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law as in effect from
time to time. Laser Power is also empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of Laser Power pursuant
to the foregoing provisions, or otherwise, Laser Power 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.
Laser Power has entered into indemnification agreements with each of its
directors and certain of its officers. Laser Power has obtained directors' and
officers' liability insurance in the amount of $5 million of coverage.
In addition, the Laser Power Certificate provides that directors of Laser
Power shall not be personally liable to Laser Power or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the directors' duty of loyalty to Laser Power or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derives any improper
personal benefit. The Restated Certificate also provides that if the Delaware
General Corporation Law is amended to authorize corporate action further
eliminating or limiting the personal
69
<PAGE> 75
liability of directors, then the liability of Laser Power's directors shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law. The Restated Certificate does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION(1)
Laser Power's executive compensation program is administered by the Board
of Directors (the "Board") and the Compensation Committee (the "Compensation
Committee") of the Board. The Compensation Committee is appointed by the Board
and is comprised of three non-employee directors.
Overall Compensation Policy. The Board believes that in order for Laser
Power to succeed it must be able to attract and retain qualified executives. The
objectives of the Board in determining the type and amount of executive officer
compensation are to provide a compensation package consisting of a base salary,
bonus, and long term incentives in the form of stock options that allows Laser
Power to attract and retain talented executive officers and to align their
interests with those of stockholders.
Base Salary. During fiscal 1997, the base salaries for the executive
officers were intended to be competitive with salaries of similar executive
positions in comparable companies in Laser Power's industry. Annual adjustments
in base salaries are made effective at the beginning of the fiscal year for
which they are intended to apply and therefore reflect in large part the prior
year's business and individual performance achievements. The Chief Executive
Officer's base salary for fiscal 1997 was determined in this manner to be
$185,000. See "-- Summary Compensation Table."
Bonus. Annual incentive bonuses are intended to reflect the Board's belief
that a significant portion of the annual compensation of each executive officer
should be contingent upon the performance of Laser Power, as well as the
individual contribution of each officer. Accordingly, the executive officers of
Laser Power, including the Chief Executive Officer, participate in an annual
executive incentive bonus plan ("Incentive Plan") which provides for cash
bonuses based upon Laser Power's overall financial performance and the
achievement of certain specified levels of profitability and certain other
financial and non-financial objectives and milestones for the fiscal year.
Awards are made by the Board upon receiving the Compensation Committee's
recommendations. The Compensation Committee annually establishes targeted
profitability levels for the ensuing fiscal year in conjunction with Laser
Power's annual operating plan. Upon the achievement of various increasing levels
of profitability above the minimum target level and based on the timing and the
degree to which certain other financial and non-financial objectives and
milestones are met or exceeded, the Compensation Committee may choose to
increase bonuses accrued to the Incentive Plan. The purpose of the Incentive
Plan is to reward and reinforce executive management's commitment to achieve
levels of profitability and return consistent with increasing stockholder value.
Cash bonuses earned under the Incentive Plan are paid each year upon
completion of Laser Power's annual audit of the results of operations for the
previous fiscal year by Laser Power's independent auditors.
Long Term Incentives. The final portion of the executive officers'
compensation during fiscal 1997 consisted of incentive stock options as listed
under "Option Grants in Last Fiscal Year." It is this award that Laser Power has
utilized to provide long term incentives.
Chief Executive Officer Compensation. During fiscal 1997, Dr. Glenn H.
Sherman, Chief Executive Officer and Chairman of the Board of Laser Power, was
eligible to participate in the same executive compensation plans as were
available to other executive officers of Laser Power. Based on the performance
of Laser Power in fiscal 1996 and the Board's assessment of Dr. Sherman's
ongoing personal performance in the position of Chief Executive Officer, Dr.
Sherman received a salary increase during fiscal 1997. Among the
- ---------------
(1) The material in this report is not "soliciting material," is not deemed
"filed" with the SEC and is not to be incorporated by reference in any filing of
the Company under the Securities Act or the Exchange Act whether made before or
after the date hereof and irrespective of any general incorporation language
contained in such filing.
70
<PAGE> 76
factors considered by the Board in its consideration of Dr. Sherman's
performance were improvement in operating performance of Laser Power, progress
in development of Laser Power's technologies and product lines and the further
strengthening of Laser Power's infrastructure.
Dr. Sherman's annual incentive bonus award was earned under the Incentive
Plan and was based substantially on the operating performance of Laser Power for
fiscal 1996. On that basis, Dr. Sherman received an annual incentive bonus award
of $25,000.
Dr. Sherman was granted stock options under the 1997 Plan for 26,666 shares
of Common Stock in December 1996, at an option price of $4.50 per share.
Laser Power entered into an employment agreement and a consulting agreement
with Dr. Sherman in April 1997. The Employment Agreement provides for an
employment term of three years and for an annual salary of $185,000, subject to
increases and additional bonuses as determined by the Board of Directors. The
employment agreement may be terminated without cause by either party upon 12
months notice, and terminated for cause under certain circumstances. The
consulting agreement requires Dr. Sherman to perform certain consulting services
on an as needed basis following termination of his employment for up to the
number of months equal to the number of years he would have been employed at the
next anniversary date of his employment if such employment is terminated for any
reason other than his death or disability, provided that Laser Power may elect
not to engage Dr. Sherman as a consultant if Laser Power has terminated him for
cause. In his capacity as a consultant, Dr. Sherman is entitled to compensation
in the amount of his annual base salary at the time his employment terminates.
The employment agreement and consulting agreement expire in April 2007.
Section 162(m) of the Internal Revenue Code. Section 162(m) of the Code
limits Laser Power to a deduction for federal income tax purposes of no more
than $1 million of compensation paid to certain executive officers in a taxable
year. At this time, the amount of compensation (as defined for Code Section
162(m) purposes) paid to Laser Power's executive officers does not exceed the $1
million pay limit and will most likely not be affected by the statute and
regulations in the near future. Compensation above $1 million may be deducted if
it is "performance-based compensation" within the meaning of the Code.
The Compensation Committee has determined that stock options granted under
the 1997 Plan with an exercise price at least equal to the fair market value of
the Company's common stock on the date of grant shall be treated as
"performance-based competition."
William G. Fredrick
Robert G. Klimasewski
Richard C. Laird
Kenneth E. Olson
Glenn H. Sherman
John C. Stiska
Douglas H. Tanimoto
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Compensation Committee consists of Messrs. Fredrick, Olson and Stiska.
Neither Dr. Sherman nor Dr. Tanimoto participated in deliberations of the Laser
Power Board of Directors concerning executive officer compensation. No member of
the Compensation Committee was at any time an officer or employee of Laser Power
or serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of Laser
Power's Board of Directors or compensation committee other than Mr. Fredrick who
is a director of Laser Mechanisms, Inc., Mr. Olson who is a director of Proxima
Corporation and Mr. Laird who is Executive Vice President and a director of
Union Miniere. "See Certain Transactions."
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<PAGE> 77
CERTAIN TRANSACTIONS
In November 1987, Union Miniere, s.a. purchased the Debentures in the
aggregate principal amount of $1,660,000 from Laser Power. The Debentures are
currently held by Union Miniere Inc. The Debentures bear interest at a rate
which is equal to Wells Fargo Bank's prime rate plus 1%; provided, however, that
the rate of interest shall in no event be less than 5 1/2% per annum nor higher
than the lesser of 11 1/2% per annum or the maximum rate then permitted by law.
Laser Power has paid interest on the Debentures semi-annually. The Debentures
were originally convertible into Common Stock at $3.00 per share and were due
and payable on October 30, 1992. The original due date was extended to October
30, 1997. Union Miniere Inc. desired to postpone the conversion and/or repayment
of the Debentures and in March and June 1997, Laser Power entered into a letter
agreement and definitive agreements with Union Miniere Inc. to extend the
maturity date of the Debentures to November 2, 2000 and to increase the
conversion price to $4.625 per share, as adjusted in accordance with such
agreements. As a result, 358,918 shares of Common Stock are now issuable upon
conversion of the Debentures. In addition, Union Miniere Inc. was granted
certain registration rights covering all shares of Common Stock now owned by it
or acquired by it upon conversion of the Debentures and exercise of its
warrants, including the right to request that Laser Power register the resale of
such shares no earlier than one year after the closing of Laser Power's initial
public offering. In December 1996, Laser Power issued warrants to purchase
20,000 shares of Common Stock at an exercise price of $4.50 per share to Union
Miniere Inc. in connection with the service of certain directors of Laser Power.
See "Management -- Director Compensation," and "Description of Laser Power
Capital Stock -- Debentures."
On September 1, 1991, Laser Power acquired substantially all of the assets
of Burleigh Northwest Optical, Inc. In consideration for the assets acquired,
Laser Power executed a secured promissory note in the amount of $150,000 payable
to Burleigh Instruments, Inc., an entity of which Robert G. Klimasewski is an
officer, director and stockholder. The note bears interest at 8.25% per annum
and is payable in 120 equal monthly installments. As of November 30, 1997, the
outstanding balance on such note was $71,000.
In May 1993, Proxima purchased 83,333 shares of Common Stock from Laser
Power for $250,000. In January 1994, Laser Power entered into a Stock Purchase
Agreement with Proxima, pursuant to which Proxima has purchased shares of Series
A Preferred Stock for an aggregate purchase price of $6.4 million. The Series A
Preferred Stock could be converted into Common Stock at an effective price of
$6.00 per share. However, under certain circumstances, the effective conversion
price could be reduced to $3.00 per share. In March and June 1997, to ensure the
exchange of the Series A Preferred Stock for Common Stock, Laser Power entered
into a letter agreement and definitive agreements with Proxima, pursuant to
which Proxima exchanged the Series A Preferred Stock for 1,193,252 shares of
Common Stock (a fixed conversion price of $5.40 per share) immediately prior to
the completion of Laser Power's initial public offering. In addition, Proxima
was granted certain registration rights covering all shares of Common Stock now
owned by it or acquired by it in exchange for the Series A Preferred Stock,
including the right to request that Laser Power register the resale of such
shares no earlier than one year after the closing of the initial public
offering. In July 1996, Proxima stated that it had written down a majority of
its investment in Laser Power because the microlaser technology developed by
Laser Power will initially be suited for the higher cost specialty projector
markets that will not be served by Proxima's products.
Laser Power purchases a number of products for resale from Laser
Mechanisms, Inc. ("LMI"). William G. Fredrick, Jr., a director of Laser Power,
is the founder, president and sole stockholder of LMI. In addition, LMI
purchases laser optics from Laser Power. LMI's sales to Laser Power in fiscal
1997 were $114,673. Laser Power's sales to LMI in fiscal 1997 were $384,996,
Laser Power believes that such transactions between Laser Power and LMI are on
terms as favorable to Laser Power as such terms would have been if negotiated
between Laser Power and unaffiliated persons.
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<PAGE> 78
LASER POWER PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of November 30, 1997, by (i) each
person who is known by Laser Power to own beneficially more that 5% of Laser
Power's outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table, (iii) each of Laser Power's directors, and (iv) all
current directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Laser Power Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
SHARES BENEFICIALLY OWNED(1)
DIRECTORS, OWNED(1) --------------------
EXECUTIVE OFFICERS ------------------- PRIOR TO AFTER
AND 5% STOCKHOLDERS NUMBER MERGER MERGER
---------------------- ------------------- --------- ------
<S> <C> <C> <C>
Proxima Corporation..................................... 1,276,585 20.9% 15.7%
9440 Carroll Park
San Diego, CA 92121-2298
Union Miniere Inc.(2)................................... 914,713 14.5 10.7
13847 West Virginia Dr.
Lakewood, CO 80228
Glenn H. Sherman, Ph.D.(3).............................. 637,748 10.3 7.8
Laser Power Corporation
12777 High Bluff Road
San Diego, CA 92130
Wellington Capital Management........................... 437,000 7.2 5.4
75 State Street
Boston, MA 02109
William G. Fredrick, Jr.(4)............................. 372,122 6.1 4.6
Laser Mechanisms, Inc.
P.O. Box 2064
Southfield, MI 48037
Douglas H. Tanimoto, Ph.D.(5)........................... 285,266 4.5 3.4
Dean T. Hodges, Ph.D.(6)................................ 122,666 2.0 1.5
Richard P. Scherer(7)................................... 202,666 3.2 2.5
Paul P. Wickman, Jr.(8)................................. 56,674 * *
Robert G. Klimasewski(9)................................ 69,491 1.1 *
Richard C. Laird(10).................................... 4,465 * *
Kenneth E. Olson(11).................................... 25,798 * *
John C. Stiska(12)...................................... 126,564 2.1 1.5
All directors and executive officers as a group(11
persons)(13).......................................... 4,134,758 56.5 44.3
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied by executive officers,
directors and principal stockholders and the National Association of
Securities Dealers, Inc. Beneficial ownership is determined in accordance
with the rules of the Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, Laser
Power believes that the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Percentage of beneficial ownership prior to the
Merger is based on 6,101,854 shares of Common Stock outstanding as of
November 30, 1997. Percentage of beneficial ownership after the Merger is
based on 6,101,854 shares of Common stock outstanding as of November 30,
1997 plus 2,004,676 shares of Laser Power Common Stock to be issued in the
Merger.
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<PAGE> 79
(2) Includes 358,918 shares issuable upon conversion of the debentures and
70,000 shares subject to warrants exercisable within 60 days of November
30, 1997. Union Miniere, s.a., a Belgium public company, owns approximately
75% of the shares of Union Miniere Inc. Sogem, s.a. owns the remaining
shares of Union Miniere Inc. Union Miniere, s.a. owns virtually all the
shares of Sogem, s.a.
(3) Includes 82 shares held by Inamaria Sherman, wife of Dr. Sherman, 1,333
shares held by Martina Sherman, daughter of Dr. Sherman, and 75,999 shares
subject to options exercisable within 60 days of November 30, 1997. Does
not include 150 shares held by Inamaria Sherman, for the benefit of Margoth
Klein, Mrs. Sherman's mother.
(4) Includes 10,666 shares held of record by Laser Mechanisms, Inc., of which
Mr. Fredrick is the President, and 23,332 shares subject to warrants
exercisable within 60 days of November 30, 1997.
(5) Includes 202,666 shares subject to options exercisable within 60 days of
November 30, 1997.
(6) Includes 122,666 shares subject to options exercisable within 60 days of
November 30, 1997.
(7) Includes 2,666 shares subject to options exercisable within 60 days of
November 30, 1997 and 200,000 shares subject to a warrant exercisable
within 60 days of November 30, 1997.
(8) Includes 51,330 shares subject to options exercisable within 60 days of
November 30, 1997.
(9) Includes 23,332 shares subject to warrants exercisable within 60 days of
November 30, 1997.
(10) Does not include 914,713 shares beneficially owned by Union Miniere Inc.
Mr. Laird, a director of Laser Power, is Executive Vice President and a
director of Union Miniere Inc.
(11) Includes 23,332 shares subject to warrants exercisable within 60 days of
November 30, 1997. Does not include 1,276,585 shares held by Proxima
Corporation, of which Mr. Olson is Chairman of the Board and acting
President and Chief Executive Officer.
(12) Includes 23,332 shares subject to warrants exercisable within 60 days of
November 30, 1997.
(13) Includes 495,327 shares issuable upon exercise of options exercisable
within 60 days of November 30, 1997, and 363,328 shares issuable upon
exercise of warrants exercisable within 60 days of November 30, 1997. Also
includes 1,276,585 shares held by Proxima Corporation, of which Mr. Olson
is Chairman of the Board and acting President and Chief Executive Officer;
Mr. Olson disclaims beneficial ownership of such shares. Also includes
485,795 shares and 358,918 shares issuable upon conversion of the
Debentures held by Union Miniere Inc., of which Mr. Laird is the Executive
Vice President and a director. Mr. Laird disclaims beneficial ownership of
such shares; Mr. Laird disclaims beneficial ownership of such shares.
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<PAGE> 80
EMI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. EMI's and the combined company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" as well as those discussed elsewhere in
this Prospectus/Joint Proxy Statement.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net sales for the first nine months of 1997 increased by $1.6 million or
21% over the first nine months of 1996. The higher sales resulted from volume
increases principally related to increases in sales to foreign customers. Net
sales of EMI's missile dome product line were approximately the same in each
period with higher unit volume offsetting a slight unit pricing reduction.
The gross margin percentage increased from 29.5% for the first nine months
of 1996 to 36.6% in the first nine months of 1997. The higher gross margin
percentage resulted from a decrease in adverse manufacturing variances and scrap
(12% of net sales in 1996 compared to 8% of net sales in 1997) and lower
manufacturing overhead rate resulting from the sales volume increase.
Engineering, research and development for the first nine months of 1997
increased by $151,000 over the comparable 1996 period. The increase resulted
from EMI's participation with a customer in a new window development program
that was partially funded by EMI. This development program was completed in the
third quarter of 1997.
Selling, general and administrative expenses increased from 13.0% of net
sales for the first nine months of 1996 to 15.1% of net sales in 1997. The
increase resulted for a higher level of sales personnel staffing in 1997 as
compared to 1996 and a $45,000 litigation settlement.
The provision for bonus increased by $258,000 in the first nine months of
1997 over the comparable 1996 period. The increase results from the higher level
of profitability.
Interest and other income increased by $27,000, which resulted from
increased interest earnings arising from the higher level of EMI's average cash
and cash equivalents. Interest expense was relatively flat which reflects the
relatively constant average debt outstanding.
The provision for income taxes increased from $5,000 for the first nine
months of 1996 to $141,000 for the first nine months of 1997. The increase
reflects the exhaustion of EMI's net operating loss carryforwards during 1997.
Such carryforwards were available to fully offset taxable income in 1996 (except
for alternative minimum taxes) while such remaining carryforwards were
insufficient to fully offset 1997 taxable income. EMI expects that its effective
income tax rate will substantially increase from historical levels in the fourth
quarter of 1997 and beyond because of the exhaustion of EMI's tax basis
operating loss carryforwards.
ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased by $3.3 million or
46% over the year ended December 31, 1995. The higher sales resulted from an
increase in both volume and pricing. Approximately $460,000 of the increase in
net sales resulted from higher prices which was principally driven by higher raw
material market prices. The balance of the increase resulted from increased
volume. Approximately $1,463,000 of the volume increase resulted from increases
in the sales of missile domes which represented an increase of 187% from the
1995 level for this product line.
The gross margin percentage increased from 25.1% in 1995 to 28.4% in 1996.
The higher gross margin percentage resulted from a decrease in manufacturing
variances and scrap (17% of net sales in 1995 to 12% of net sales in 1996) which
was partially offset by a slight increase in manufacturing overhead rates in
1996 over
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<PAGE> 81
1995. The increase in overhead rate resulted from higher levels of depreciation
arising from EMI's higher level of capital expenditures and an increase in EMI's
retirement plan contribution.
Engineering, research and development decreased by $67,000 in 1996 as
compared to 1995 as more of this department's effort was spent in direct support
of the manufacturing operations and the resultant classification of those
expenses as part of cost of goods sold.
Selling, general and administrative expenses increased by $205,000, but
declined as a percentage of net sales from 14.6% of net sales in 1995 to 12.0%
of net sales in 1996. The increase in cost was associated with the higher sales
level.
The provision for bonus expense in 1996 amounted to $135,000 compared to no
provision in 1995. The 1996 bonus resulted from the higher profitability level
experience by EMI in 1996 while profitability levels required to record a bonus
provision were not achieved in 1995.
Interest and other income declined by $51,000 from 1995 to 1996. The
decline resulted from a decline in other income which was realized in 1995 but
was not present in 1996.
Interest expense declined by $11,000 which reflects the lower level of
average debt outstanding in 1996 compared to 1995.
The provision for income taxes for both 1995 and 1996 reflects the
utilization of EMI's net operating loss carryforwards and the resultant
reduction in EMI's net deferred tax asset valuation reserve related to such
utilization. The provision for 1996 reflects the alternate minimum tax
liability.
LIQUIDITY AND CAPITAL RESOURCES
Since incorporation, the majority of EMI's operations have been financed
from internally generated funds. Cash flow from operating activities
approximated $860,000 in 1996 and $1.3 million for the first nine months of
1997. EMI's operating activities before working capital requirements generated
approximately $1.4 million and $1.3 million, for the respective periods.
Approximately $540,000 in 1996 was invested in net working capital to support
the higher sales level of EMI. No significant net working capital investment has
been required in 1997. Capital expenditures increased from $263,000 in 1996 to
$411,000 for the first nine months of 1997. The additional investment is
required to support the higher sales activity of EMI. After all other financing
activities, EMI added $633,000 in 1996 and $739,000 in 1997 to its existing cash
balances.
In addition to available cash balances ($1.9 million at September 30,
1997), EMI has available a $400,000 revolving line of credit under which no
borrowings were outstanding at September 30, 1997.
During the fourth quarter of 1997, EMI expects to expend approximately
$575,000 for new capital equipment which it currently plans to finance from
available cash balances. EMI also expects to exercise its option to purchase
from its landlord the land and building it currently leases and uses as its
manufacturing and office facility. The purchase option is at the facility's
current fair market value which EMI estimates at approximately $2.1 to $2.2
million. EMI expects to finance substantially all of the purchase price with a
first mortgage to be provided by EMI's existing commercial bank.
In order to provide a source of liquidity to its shareholders, EMI has
provisions in each of the Stock Distribution, Stock Option and Stock Purchase
Plans (the "Plans") that provide that each shareholder must first offer to EMI
any shares of common stock that were acquired under any of the Plans and EMI
must make an offer to purchase such shares. The shareholder may accept or reject
EMI's offer and, if rejected, is free to resell the shares to any other
qualified purchaser provided that the shares are sold at a price higher than
that offered by EMI. Because of the existence of this repurchase obligation, the
outstanding common shares which were issued under the Plans (all outstanding
shares except 3,000) and vested stock options (for which shares could be
acquired upon exercise) have been reported as temporary shareholders' equity at
the repurchase price in existence at the respective balance sheet dates. Under
the terms of these Plans, EMI has repurchased 32,902, 39,215 and 73,545 shares
of common stock for 1995, 1996 and 1997, respectively, for cash at an aggregate
price of $2,660, $8,007 and $186,816, respectively. Except for the repurchases
of unvested shares under the Stock Distribution Plan, EMI's repurchase
obligation under the Plans is not required to be a cash
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<PAGE> 82
offer. Although all EMI repurchase offers to date have been in the form of a
cash offer and EMI expects to continue to make its repurchase offers on a cash
basis, to the extent that such an offer or offers would materially affect its
liquidity position, EMI may elect to make such offers on a deferred payment
basis. Upon consummation of the merger with Laser Power, the repurchase
obligation under the Plans will be terminated.
OTHER DATA
EMI does not believe that general inflation has had a material impact on
its operations or financial results. EMI has recently experienced an increase in
wage inflation due to the tightened labor markets. EMI has been able to offset
most of this increase with improved productivity and operating efficiencies. EMI
has also experienced large price movements (both increases and decreases) in the
purchase cost of germanium, one of its principal raw materials. EMI has
historically protected itself from these large price movements by having
repricing provisions in its quotes which adjust all quotes to current market
cost for germanium at the date of acceptance of an order by EMI, and by active
trading in and stockpiling of germanium sufficient to protect its operating
margins from price fluctuations subsequent to acceptance of an order.
The Financial Accounting Standards Board has issued a number of new
accounting and disclosure standards, none of which is expected to have a
material impact on EMI's operations or financial results. EMI has also begun a
review of its computer operations to determine the impact, if any, on EMI's
software of "Year 2000" compliance. While such review is still in a preliminary
stage, it appears that some re-programming of its computer software will be
required, the cost of which is not expected to be significant.
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<PAGE> 83
EMI BUSINESS
EMI, through its operating subsidiary Exotic Materials, Inc. (doing
business as Exotic Electro-Optics, "Exotic"), designs and manufactures a variety
of infrared windows, window assemblies, missile domes and other optical elements
primarily for the defense market. Exotic's customers include both the U.S.
Government and large U.S. defense contractors. Exotic ships approximately 25,000
optical elements per year, which range in price from approximately $100 to
$100,000 per element.
Exotic's windows and window assemblies are incorporated into a number of
U.S. military infrared systems in ground vehicles, helicopters and fixed wing
aircraft. Significant U.S. government programs that Exotic has participated in
have included the U.S. Air Force B-52 electronic viewing system; U.S. Army AH-64
Apache pilot's night vision system and target acquisition and designation
system; U.S. Air Force/USN F-16/F-15/F-14 low-altitude navigation and targeting
infrared system; and forward looking infrared systems for the U.S. Army's M1A1
Abrams main battle tank, Bradley fighting vehicle, and the air defense and anti
tank system. Exotic has participated in the production phases of these programs
and continues to participate in the repair, refurbishment and replacement of
these systems that are currently in the field.
In addition to Exotic's window programs, Exotic also manufactures missile
domes for the U.S. Army's Javelin program (a shoulder launched infrared
anti-tank missile) and is currently in the development or pre-production phase
on a number of other U.S. Army and U.S. Air Force missile dome programs.
Exotic possess capabilities in growing crystal material for germanium
windows and optics, material fabrication for virtually all infrared and visible
materials, thin film coating capability and sub-systems assembly capability. The
materials fabrication capability includes CNC machining and high-speed
generating and polishing capability. The thin film coating capability includes
both physical vapor deposition and plasma assisted chemical vapor deposition
coating chambers.
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EMI MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of EMI who will be executive officers
or directors of Laser Power following the Closing Date are as follows:
<TABLE>
<CAPTION>
SERVED AS OFFICER
OF LASER POWER
NAME AGE POSITION WITH LASER POWER OR EMI SINCE
------------------------------ --- ------------------------------------ -----------------
<S> <C> <C> <C>
Dick Sharman.................. 63 Director 1993
Thomas J. Brawley............. 55 President of Exotic Materials, Inc. 1997
</TABLE>
Dick Sharman has served as Chairman of the Board, President and Chief
Executive Officer of EMI since June 1993, and has served as Chairman of the
Board of Exotic since 1988 and served as President and Chief Executive Officer
of Exotic from 1988 until June 1996, and again from June 1997 until November
1997.
Thomas J. Brawley has served as President of Exotic since November 1997.
From July 1990 to September 1997, Mr. Brawley was employed by Optical Coating
Laboratories, Inc., serving as Operations Manager, Santa Rosa Division from July
1990 to May 1992, as Director of Sales and Marketing, Santa Rosa Division from
May 1992 to August 1995, as Director, Asian Business Ventures from August 1995
to September 1996 and as Marketing Manager, Asian Business Ventures from
September 1996 to September 1997.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1996,
compensation awarded or paid to, or earned by, those directors and executive
officers of EMI who will be executive officers or directors of Laser Power
following the Closing Date who earned in excess of $100,000 in salary and bonus
for services rendered EMI during the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)
------------------------------------------ ----------- --------- -------- ---------------
<S> <C> <C> <C> <C>
Dick Sharman.............................. 1996 162,714 22,274 20,497(1)
Director
</TABLE>
- ---------------
(1) Includes a $950 matching contribution to EMI's 401(k) Plan, a $5,842
profit-sharing contribution to EMI's 401(k) Plan and a car allowance of
$13,704.
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EMPLOYMENT AGREEMENTS
Exotic has an employment agreement with Dick Sharman pursuant to which Mr.
Sharman is employed as a "Senior Executive" of Exotic. A "Senior Executive" is
defined as an employee who is, has been, or is eligible to be a member of the
Board of Directors of Exotic. The agreement is for a term through the date which
Mr. Sharman reaches the age of 65, unless earlier terminated pursuant to its
provisions, for a salary of $199,200 per annum, plus certain other benefits. The
agreement can be earlier terminated by Exotic under certain conditions. Under
the terms of the agreement, Mr. Sharman has assigned to Exotic any rights he may
have in any ideas, designs, or inventions, together with all patents, which he
has developed or may develop during the course of his employment with Exotic. In
addition, Mr. Sharman has agreed that he will not disclose or use any
confidential information of Exotic during his employment with Exotic or
thereafter.
Exotic also has an employment agreement with Mr. Brawley, pursuant to which
Mr. Brawley is employed as the President of Exotic. The agreement is without any
definite term, and can be terminated at any time by either party, with or
without cause. The agreement provides for a salary of $165,000 per annum, plus
certain other benefits. If Exotic terminates Mr. Brawley without cause on or
before the first anniversary of the agreement, Mr. Brawley shall be entitled to
an amount equal to three times his monthly salary at the time of termination; if
Exotic terminates Mr. Brawley without cause after the first anniversary of the
agreement, Mr. Brawley shall be entitled to an amount equal to six times his
monthly salary at the time of termination. In the agreement, Mr. Brawley has
assigned to Exotic any rights he may have in any ideas, designs, or inventions,
together with all patents, which he has developed or may develop during the
course of his employment with Exotic. In addition, Mr. Brawley has agreed that
he will not disclose or use any confidential information of Exotic during his
employment with Exotic or thereafter.
Salaries of Mr. Sharman and Mr. Brawley are subject to increases and the
payment of bonuses upon annual review by the Board of Directors of Exotic, but
there is no formula governing the award of increases or bonuses.
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<PAGE> 86
EMI PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of EMI Common Stock as of November 30, 1997, by (i) each
person who is known by EMI to own beneficially more than 5% of EMI's outstanding
Common Stock, (ii) each executive officer of EMI, (iii) each of EMI's directors,
and (iv) all current directors and executive officers as a group. Except as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of EMI Common Stock
shown as beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
DIRECTORS, SHARES OF EMI STOCK PERCENT OF EMI SHARES OF LASER POWER
EXECUTIVE OFFICERS BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
AND 5% STOCKHOLDERS PRIOR TO THE MERGER PRIOR TO THE MERGER(1) AFTER THE MERGER(2)
---------------------------- ------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Dick Sharman(3)............. 211,661 19.6% 391,805
36570 Briggs Road
Murrieta, CA 92563
Robert N. Haro(4)........... 128,041 11.8 237,016
36570 Briggs Road.
Murrieta, CA 92563
Robert P. Perkins(5)........ 111,319 10.3 205,062
36570 Briggs Road
Murrieta, CA 92563
Robert N. Donadio........... 21,318 2.0 39,461
36570 Briggs Road
Murrieta, CA 92563
Richard Twedt(6)............ 23,331 2.1 43,187
36570 Briggs Road
Murrieta, CA 92563
All directors and executive
officers as a group
(6 persons)............... 495,670 45.8 917,531
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Based on 1,082,965 shares of EMI Common Stock outstanding as of November 30,
1997.
(2) Assumes no transactions in shares of Laser Power Common Stock or EMI Common
Stock between November 30, 1997 and the Effective Date. Reflects the
Exchange Ratio of 1.8511 shares of Laser Power Common Stock for each share
of EMI Common Stock.
(3) Includes 1,000 shares which are owned in joint tenancy with Mr. Sharman's
wife, and 39,870 shares which are subject to the vesting terms of the EMI
Acquisition Corp. Stock Distribution Plan.
(4) Includes 1,000 shares which are owned in joint tenancy with Mr. Haro's wife,
and 24,849 shares which are subject to the vesting terms of the EMI
Acquisition Corp. Stock Distribution Plan.
(5) Includes 1,000 shares which are owned in joint tenancy with Mr. Perkins'
wife, and 19,800 shares which are subject to the vesting terms of the EMI
Acquisition Corp. Stock Distribution Plan.
(6) Includes 22,121 shares which are owned in joint tenancy with Mr. Twedt's
wife, and 1,210 shares held in an individual retirement account by Bank of
Commerce for the benefit of Mr. Twedt.
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<PAGE> 87
DESCRIPTION OF LASER POWER CAPITAL STOCK
The authorized capital stock of Laser Power consists of 15,000,000 shares
of Common Stock, $0.001 par value, and 3,000,000 shares of Preferred Stock,
$0.001 par value.
COMMON STOCK
As of November 30, 1997, there were 6,101,854 shares of Common Stock
outstanding held of record by approximately 190 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Laser Power, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive, conversion, subscription
or other such rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be sold in this
offering will be fully paid and nonassessable.
PREFERRED STOCK
Under the Laser Power Certificate, the Board of Directors has the authority
to issue up to 3,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges, and restrictions granted to or imposed
upon such Preferred Stock, including dividend rights, conversion rights, terms
of redemption, liquidation preference, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, can issue additional Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock could have the effect of
delaying, deferring or preventing a change in control of Laser Power. Laser
Power has no present plan to issue any shares of Preferred Stock.
DEBENTURES
Union Miniere Inc. is the holder of debentures in the aggregate principal
amount of $1,660,000 from Laser Power (the "Debentures"). The Debentures bear
interest at a rate which is equal to Wells Fargo Bank's prime rate plus 1%;
provided, however, that the rate of interest shall in no event be less than
5 1/2% per annum nor higher than the lesser of 11 1/2% per annum or the maximum
rate then permitted by law. The Debentures are subordinate to all bank debt,
limit the aggregate amount of debt Laser Power can incur, require that Laser
Power maintain minimum tangible net worth levels (which vary with the number of
outstanding shares) and require that Laser Power maintain an average annual cash
flow coverage ratio of 1:1. The Debentures also provide that Laser Power may
declare dividends only if it meets a minimum average cash flow coverage ratio of
2-to-1. The Debentures were originally due and payable on October 30, 1992,
which maturity date was extended to October 30, 1997. In March and June 1997,
Laser Power entered into a letter agreement and definitive agreements with Union
Miniere Inc. to extend the maturity date of the Debentures to November 2, 2000
and to adjust the conversion price to $4.625 per share. As a result, 358,918
shares of Common Stock are now issuable upon conversion of the Debentures. See
"Laser Power Management -- Certain Transactions."
WARRANTS
As of November 30, 1997, there were warrants outstanding to purchase an
aggregate of 548,328 shares of Common Stock at a weighted average exercise price
of $4.53 per share.
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<PAGE> 88
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Laser Power is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the preceding three years, did own) 15% or more of
the corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in control of Laser Power.
The Laser Power Certificate and Bylaws also require that action required or
permitted to be taken by stockholders of Laser Power must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing in lieu of meeting. In addition, special meetings of the
stockholders of Laser Power may be called only by the Board of Directors, the
Chairman of the Board, the Chief Executive Officer of Laser Power or by the
holders of shares entitled to cast not less than 50% of the votes at such
meeting. The Laser Power Certificate also specifies that the authorized number
of directors may be changed only by resolution of the Board of Directors. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Laser Power.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for Laser Power's Common Stock.
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<PAGE> 89
COMPARISON OF RIGHTS OF LASER POWER STOCKHOLDERS AND EMI SHAREHOLDERS
The rights of Laser Power stockholders are governed by Laser Power's
Certificate of Incorporation (the "Laser Power Certificate"), its Bylaws (the
"Laser Power Bylaws") and the Delaware Law. The rights of EMI shareholders are
currently governed by EMI's Articles of Incorporation (the "EMI Articles"), its
Bylaws (the "EMI Bylaws") and the California Law. Upon consummation of the
Merger, EMI shareholders will become stockholders of Laser Power with their
rights as stockholders governed by the Delaware Law, the Laser Power Certificate
and the Laser Power Bylaws.
The following is a summary of certain similarities and differences between
the rights of Laser Power stockholders and EMI shareholders under the foregoing
governing documents and applicable law. This summary does not purport to be a
complete statement of such similarities and differences. The identification of
specific similarities and differences is not meant to indicate that other
equally or more significant similarities and differences do not exist. Such
similarities and differences can be examined in full by reference to the
Delaware Law, the California Law and the respective corporate documents of Laser
Power and EMI.
Capital Stock. The authorized capital stock of Laser Power consists of
15,000,000 shares of Laser Power Common Stock, $.001 par value, of which
6,101,854 shares were issued and outstanding on November 30, 1997, and 3,000,000
shares of Preferred Stock (the "Laser Power Preferred Stock"), issuable in such
series and with such rights, powers and privileges as the Laser Power Board
shall determine. Laser Power currently has no shares of Preferred Stock
outstanding and has no present plan to issue any shares of Laser Power Preferred
Stock. The authorized capital stock of EMI consists of 3,000,000 shares of
Common Stock, no par value, of which 1,082,965 shares were issued and
outstanding on November 30, 1997.
Stock Repurchase Rights. Almost all of the outstanding Common Stock of EMI
was acquired under one of three stock benefit plans established by EMI. The
three plans are the Stock Distribution Plan, the Stock Option Plan, and the
Employee Stock Purchase Plan (collectively, the "EMI Plans"). EMI shareholders
who have received or purchased EMI stock through participating in the Stock
Distribution Plan or Employee Stock Purchase Plan or through exercising an
option to purchase stock granted under the Stock Option Plan currently have
rights under the EMI Plans, if they wish, to sell their stock back to EMI at the
then-current price established by EMI's Board of Directors. These rights were
provided to EMI shareholders because EMI stock is not readily tradable. Given
that the Laser Power Common Stock to be issued pursuant to the Merger will have
been registered under the Securities Act, and therefore freely tradable by
persons who are not affiliates of EMI or Laser Power, these stock repurchase
rights will no longer be necessary after the Merger. Therefore, EMI has amended
the EMI Plans to eliminate the repurchase provisions, effective only upon the
Merger being completed, and is separately requesting each EMI shareholder who
has obtained EMI Common Stock under the EMI Plans to consent to these amendments
and waive any rights he or she may have to exercise these repurchase rights. If
the Merger is completed and the EMI shareholders waive their repurchase rights,
EMI shareholders who receive Laser Power Common Stock will not be entitled to
sell their Laser Power Common Stock back to Laser Power.
Amendment of Bylaws. Under the Delaware Law, bylaws may be amended by
stockholders entitled to vote; however, a corporation may confer the power to
amend bylaws upon the directors. The fact that such power has been so conferred
upon the directors does not divest the stockholders of their power to amend the
bylaws. The Laser Power Certificate states that the Laser Power Bylaws may be
amended by the affirmative vote of at least 66 2/3% of the outstanding stock
entitled to vote thereon or by the Laser Power Board. Under the California Law
and the EMI Bylaws, the EMI Bylaws may be amended or repealed either by the EMI
Board or by the holders of a majority in interest of the outstanding shares of
EMI, except that the EMI Board shall not make or alter any bylaw specifying a
fixed number of directors or the maximum or minimum number of directors;
however, an amendment reducing the minimum number of directors to less than five
cannot be adopted if votes cast against its adoption are equal to or more than
16 2/3% of the outstanding shares entitled to vote thereon.
Amendment of Laser Power Certificate and EMI Articles. The Delaware Law
provides that approval of a majority of the outstanding stock entitled to vote
thereon is required to amend a certificate of incorporation. The Laser Power
Certificate provides that an amendment of certain provisions must be approved by
the
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<PAGE> 90
affirmative vote of at least 66 2/3% of all of the outstanding stock entitled to
vote thereon. Under the California Law, a corporation's articles of
incorporation may be amended by the approval of a majority of the outstanding
shares.
Special Meetings of Stockholders and Shareholders. Under the Delaware Law,
a special meeting of stockholders may be called by the board of directors or by
any other person authorized to do so in the certificate of incorporation or the
bylaws. The Laser Power Certificate permits a special meeting to be called for
any purpose or purposes by (i) the Chairman of the Laser Power Board, (ii) the
Chief Executive Officer, (iii) the Laser Power Board pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Laser Power Board for adoption) or (iv)
by the holders of the shares entitled to cast not less than 50% of the votes at
the meeting.
Under the California Law and the EMI Bylaws, a special meeting of
shareholders may be called by the board of directors, the chairman of the board
of directors, the president or the holders of shares entitled to cast not less
than 10% of the votes of such meetings.
Actions by Written Consent of Stockholders or Shareholders. Under the
Delaware Law, unless otherwise provided in the Laser Power Certificate, any
action which may be taken at a meeting of stockholders may be taken without a
meeting and without prior notice if written consents setting forth the action so
taken are signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all stock entitled to vote thereon were present and voted.
However, the Laser Power Certificate provides that no action shall be taken by
the stockholders by written consent.
Under the California Law, shareholders may execute an action by written
consent in lieu of a shareholder meeting. The EMI Bylaws provide that any action
which may be taken at a meeting of shareholders may be taken without a meeting
and without prior notice if written consents setting forth the action so taken
are signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted. The
EMI Bylaws provide further that directors may not be elected by written consent
except by unanimous written consent of all shares entitled to vote for the
election of directors; provided, however, that any vacancy on the EMI Board may
be filled by written consent of a majority of the outstanding shares entitled to
vote for the election of directors.
Size of the Board of Directors. The Delaware Law provides that the board of
directors of a Delaware corporation shall consist of one or more members. The
number of directors may be fixed by, or in the manner provided in, the
corporation's bylaws unless the certificate of incorporation fixes the number of
directors. The Laser Power Certificate requires that the number of directors
shall be fixed exclusively by one or more resolutions by the Board of Directors.
The number of directors of Laser Power is currently fixed at seven.
The California Law allows the number of persons constituting the board of
directors to be fixed by the bylaws or the articles of incorporation, or permits
the bylaws to provide that the number of directors may vary within a specified
range, the exact number to be determined by the board of directors. The
California Law further provides that, in the case of a variable board, the
maximum number of directors may not exceed two times the minimum number minus
one. The EMI Bylaws currently provide that the authorized number of directors of
EMI shall not be less than a minimum of four nor more than a maximum of seven;
the number of directors presently authorized is six.
Classification of Board of Directors. The Delaware Law permits, but does
not require, a classified board of directors, divided into as many as three
classes with staggered terms under which one-half or one-third of the directors
are elected for terms of two or three years, respectively. The California Law
generally requires that directors be elected annually but does permit a
"classified" board of directors if the corporation is "listed." A listed
corporation is defined under the California Law as one which (i) is listed on
the NYSE or American Stock Exchange or (ii) with a class of securities
designated as a national market system security on and by the National
Association of Securities Dealers Automatic Quotation System (or any successor
national
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market system) if the corporation has at least 800 holders of its equity
securities. If eligible for the classes, the California Law permits corporations
to provide for a board of directors divided into as many as three classes by
adopting an amendment to their articles of incorporation or bylaws, which
amendment must be approved by the shareholders. The size of the classes must be
as even as possible, and any change in number of classes must be approved by the
shareholders. Neither the Laser Power Bylaws nor the EMI Bylaws provide for a
classified board.
Cumulative Voting. Under the Delaware Law, cumulative voting in the
election of directors is not available unless specifically provided for in the
certificate of incorporation. There is no provision for cumulative voting in the
Laser Power Certificate. Under the California Law, cumulative voting in the
election of directors is mandatory upon notice given by a shareholder at a
shareholders' meeting at which directors are to be elected. To cumulate votes, a
shareholder must give notice at the meeting, prior to the voting, of the
shareholder's intention to vote cumulatively. If any one shareholder gives such
a notice, all shareholders may cumulate their votes. The California Law permits
a company, by amending its articles of incorporation or bylaws, to eliminate
cumulative voting when such company is "listed" (as defined above in the section
entitled "Classification of Board of Directors"). The EMI Bylaws permit any
person entitled to vote at an election for directors to cumulate the votes to
which such person is entitled; provided, however, that no shareholder shall be
entitled to cumulate such shareholder's votes unless the candidates for which
such shareholder is voting have been placed in nomination prior to the voting
and a shareholder has given notice at the meeting, prior to the vote, of an
intention to cumulate votes.
Removal of Directors. Under the Delaware Law, a director of a corporation
with a classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. A director of a corporation
that does not have a classified board of directors or cumulative voting may be
removed with the approval of a majority of the outstanding shares entitled to
vote with or without cause. The Laser Power Certificate provides that the Board
of Directors or any individual director may be removed from office at any time
with cause by the affirmative vote of the holders of the majority of the voting
power of all the outstanding stock entitled to vote thereon or without cause by
the affirmative vote of the holders of at least 66 2/3% of the outstanding stock
entitled to vote thereon. Under the California Law, a director may be removed
with or without cause by the affirmative vote of a majority of the outstanding
shares, provided that the shares voted against removal would not be sufficient
to elect the director by cumulative voting. In addition, when, by the provisions
of the articles of incorporation, the holders of shares of a class or series,
voting as a class or series, are entitled to elect one or more directors, any
director so elected may be removed only by the applicable vote of holders of
shares of that class or series.
Filling Vacancies in the Board of Directors. Under the Delaware Law,
vacancies may be filled by a majority of the directors then in office (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or bylaws. The Delaware Law further provides that if, at the time
of filling any vacancy, the directors then in office constitute less than a
majority of the board (as constituted immediately prior of any such increase),
the Delaware Court of Chancery may, upon application of any holder or holders of
at least 10% of the total number of the outstanding stock having the right to
vote for directors, summarily order a special election be held to fill any such
vacancy or to replace directors chosen by the board to fill such vacancies. The
Laser Power Certificate holds that any vacancies on the Laser Power Board
resulting from death, resignation, disqualification, removal or other causes and
any newly created directorships resulting from any increase in the number of
directors, shall, unless the Laser Power Board determines the vacancies should
be filled by the stockholders, be filled only by the affirmative vote of the
majority of the directors then in office, even though less than a quorum of the
Board of Directors, and not by stockholders.
Under the California Law, any vacancy on the board of directors other than
one created by removal of a director may be filled by the board. If the number
of directors in office is less than a quorum, a vacancy may be filled by the
unanimous written consent of the directors then in office, by the affirmative
vote of a majority of the directors at a properly noticed meeting or by a sole
remaining director. A vacancy created by removal of a director may be filled by
the board only if so authorized by a corporation's articles of incorporation or
by a bylaw approved by a corporation's shareholders. Furthermore, if, after the
filling of any vacancy by the directors of a corporation, the directors then in
office who have been elected by the corporation's shareholders
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constitute less than a majority of the directors then in office, then: (i) any
holder of more than 5% of the corporation's voting stock may call a special
meeting of shareholders, or (ii) the superior court of the appropriate county
may order a special meeting of the shareholders to elect the entire board of
directors of the corporation. The EMI Bylaws provide that the shareholders may
elect a director at any time to fill any vacancy not filled by the directors.
Any such election by written consent, other than to fill a vacancy created by
removal, requires the consent of a majority of the outstanding shares entitled
to vote. Any such election by written consent to fill a vacancy created by
removal requires the consent of all of the outstanding shares entitled to vote.
Payment of Dividends. The Delaware Law permits a corporation to declare and
pay dividends out of statutory surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or for the
preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. In addition,
the Delaware Law generally provides that a corporation may redeem or repurchase
its shares only if such redemption or repurchase would not impair the capital of
the corporation. The Laser Power Bylaws provide for the declaration of dividends
in accordance with the Delaware Law. The Laser Power Bylaws also provide that
the Laser Power Board may set aside as a reserve any funds the Laser Power Board
believes necessary prior to the payment of dividends. Under the California Law,
any dividends or other distributions to shareholders, such as redemptions, are
limited to the greater of (i) retained earnings or (ii) an amount which would
leave the corporation with assets (excluding certain intangible assets) equal to
at least 125% of its liabilities (excluding certain deferred items) and current
assets equal to at least 100% (or, in certain circumstances, 125%) of its
current liabilities.
Appraisal Rights. Under both the California Law and the Delaware Law, a
shareholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to appraisal (or
dissenters') rights pursuant to which such shareholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under the
Delaware Law, such rights are not available (i) with respect to the sale, lease
or exchange of all or substantially all of the assets of a corporation, (ii)
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than 2,000
holders if such stockholders receive only shares of the surviving corporation or
shares of any other corporation which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders, plus cash in lieu of fractional shares, or
(iii) to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
Inspection of Books and Records. Under the Delaware Law, any stockholder
may inspect, for any proper purpose, a company's stock ledger, a list of its
stockholders and any other books and records. Under the California Law, a
shareholder or shareholders holding at least 5% in aggregate of the outstanding
voting shares of a corporation or who hold at least 1% of those voting shares
and have filed a Schedule 14A with the Commission, shall have the absolute right
to do either or both of the following: (i) inspect and copy the record of
shareholders' names and addresses and shareholdings during usual business hours
upon five days' prior written demand upon the corporation, or (ii) obtain from
the transfer agent for the corporation, upon written demand and upon tender of
its usual charges for such a list, a list of shareholders' names and addresses,
who are entitled to vote for election of directors and their shareholdings, as
of the most recent record date for which it has been compiled or as of a date
specified by the shareholder subsequent to the date of demand.
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Limitation of Liability of Directors. The laws of both Delaware and
California permit corporations to adopt a provision in their certificate of
incorporation or articles of incorporation, respectively, eliminating, with
certain exceptions, the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty as a director. Under the Delaware Law, Laser Power may not eliminate or
limit director monetary liability for (i) breaches of the director's duty of
loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law;
(iii) unlawful dividends, stock repurchases or redemptions; or (iv) transactions
from which the director received an improper personal benefit. Such limitation
of liability provision also may not limit a director's liability for violation
of, or otherwise relieve directors from the necessity of complying with federal
or state securities laws, or affect the availability of nonmonetary remedies
such as injunctive relief or rescission. The Laser Power Certificate eliminates
the liability of the Laser Power Board to the fullest extent permissible under
the Delaware Law.
The California Law does not permit the elimination of monetary liability
where such liability is based on: (i) intentional misconduct or knowing and
culpable violation of law; (ii) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders, or that
involve the absence of good faith on the part of the director; (iii) receipt of
any improper personal benefit; (iv) acts or omissions that show reckless
disregard for the director's duty to the corporation or its shareholders, where
the director in the ordinary course of performing a director's duties should
have been aware of a risk of serious injury to the corporation or its
shareholders; (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders; (vi) interested transactions between the
corporation and a director, in which a director has a material financial
interest; or (vii) liability for improper distributions, loans or guarantees.
The EMI Articles eliminate the liability of the EMI Board to the fullest extent
permissible under California Law.
Indemnification. The Delaware Law generally permits indemnification of
expenses incurred in the defense or settlement of a derivative or third-party
action, provided there is a determination by a disinterested quorum of the
directors, by independent legal counsel or by the stockholders, that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to the California Law) not opposed to the best
interests of the corporation and, with respect to a criminal proceeding, which
such person had no reasonable cause to believe his or her conduct was unlawful.
Without court approval, however, no indemnification may be made in respect of
any derivative action in which such person is adjudged liable to the
corporation. The Delaware Law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise. The Laser Power Bylaws state that Laser Power shall indemnify the
Laser Power Board to the fullest extent provided for by the Delaware Law;
provided, however, that the corporation may modify the extent of such
indemnification by the individual contracts with its directors and executive
officers; and, provided further, that the corporation shall not be required to
indemnify any director or officer in connection with any proceeding initiated by
such person unless (i) such indemnification is expressly required to be made by
law, (ii) the proceeding was authorized by the Laser Power Board, (iii) such
indemnification is provided by Laser Power, in its sole discretion, pursuant to
the powers vested in Laser Power under the Delaware General Corporation Law, or
(iv) such indemnification is required to be made under other portions of the
Laser Power Bylaws.
The California Law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (i) no indemnification may be made when a person is adjudged liable to
the corporation in the performance of that person's duty to the corporation and
its shareholders, unless a court determines such person is entitled to indemnity
for expenses, and then such indemnification may be made only to the extent that
such court shall determine, and (ii) no indemnification may be made without
court approval in respect of amounts paid in settling or otherwise disposing of
an action or expenses incurred in defending an action which is settled or
otherwise disposed of without court approval.
Indemnification is permitted by the California Law only for acts taken by
the person seeking indemnification in good faith and believed to be in the best
interests of the corporation and its shareholders and with respect to a criminal
proceeding, which such person had no reasonable cause to believe his conduct was
unlawful, as determined by a majority vote of a quorum of disinterested
directors, independent legal
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counsel (if a quorum of disinterested directors is not obtainable), a majority
vote of a quorum of the shareholders (excluding shares owned by the indemnified
party), or the court handling the action. The California Law requires
indemnification when the individual has successfully defended the action on the
merits. California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements, bylaws
or other corporate actions beyond that specifically authorized by law. The EMI
Articles include a provision that provides EMI with the authority to indemnify
its agents to the fullest extent permitted by the California Law.
Stockholder Approval of Certain Business Combinations. Section 203 of the
Delaware Law prohibits a corporation from engaging in a "business combination"
with an "interested stockholder" for three years following the date that such
person becomes an interested stockholder. With certain exceptions, an interested
stockholder is a person or entity who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers of the corporation or a subsidiary with or caused by
the interested stockholder; sales or other dispositions of the interested
stockholder (except proportionately with the corporation's other stockholders)
of assets of the corporation or a subsidiary equal to 10% or more of the
aggregate market value of the corporation's consolidated assets or its
outstanding stock; the issuance or transfer by the corporation or a subsidiary
of stock of the corporation or such subsidiary to the interested stockholder
(except for certain transfers in a conversion or exchange or a pro rata
distribution or certain other transactions, none of which increase the
interested stockholder's proportionate ownership of any class or series of the
corporation's or such subsidiary's stock); or receipt by the interested
stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the number of shares
outstanding those shares owned by directors who are also officers of the target
corporation and shares held by employee stock plans which do not permit
employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) on or after the date such person becomes an interested
stockholder, the board approves the business combination and it is also approved
at a stockholder meeting by 66 2/3% of the voting stock not owned by the
interested stockholder. Section 203 does not apply if the business combination
is proposed prior to the consummation or abandonment of and subsequent to the
earlier of the public announcement or a 20-day notice required under Section 203
of the proposed transaction which (i) constitutes certain (a) mergers or
consolidations, (b) sales or other transfers of assets having an aggregate
market value equal to 50% or more of the aggregate market value of all of the
assets of the corporation determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the corporation, or (c) proposed
tender or exchange offers for 50% or more of the corporation's outstanding
voting stock; (ii) is with or by a person who was either not an interested
stockholder during the last three years or who became an interested stockholder
with the approval of the corporation's board of directors; and (iii) is approved
or not opposed by a majority of the board members elected prior to any person
becoming an interested stockholder during the previous three years (or their
chosen successors).
There is no equivalent provision to Section 203 in California. Under
Section 1203 of the California Corporations Code, certain business combinations
with certain interested shareholders are subject to specified conditions,
including a requirement that a fairness opinion must be obtained and delivered
to the corporation's shareholders. The California Law requires that holders of a
California corporation's common stock receive nonredeemable common stock in a
merger of the corporation with the holder (or an affiliate of the holder) of
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more than 50% but less than 90% of its common stock, unless all of the holders
of its common stock consent to the transaction.
Stockholder Voting on Mergers and Similar Transactions. The laws of both
California and Delaware generally require that a majority of the stockholders of
both acquiring and target corporations approve statutory mergers. The Delaware
Law does not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its certificate of incorporation)
if (a) the merger agreement does not amend the existing certificate of
incorporation, (b) each share of stock of the surviving corporation outstanding
before the merger is an identical outstanding or treasury share after the
merger, and (c) the number of shares to be issued by the surviving corporation
in the merger does not exceed 20% of the shares outstanding immediately prior to
the merger. The California Law contains a similar exception to its voting
requirements for reorganization where shareholders or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting of more than five-sixths of the
voting power (assuming the conversion of convertible equity securities) of the
surviving or acquiring corporation or its parent entity.
The laws of both California and Delaware also generally require that a sale
of all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.
With certain exceptions, the California Law also requires that mergers,
reorganizations, and similar transactions be approved by a majority vote of each
class of shares outstanding. In contrast, the Delaware Law generally does not
require class voting, except for amendments to the certificate of incorporation
that change the number of authorized shares or the par value of shares of a
specific class or that adversely affect such class of shares.
Loans to Directors, Officers and Employees. The Delaware Law and the Laser
Power Bylaws permit Laser Power to make loans to, guarantee the obligations of,
or otherwise assist its officers or other employees when such action, in the
judgment of the directors, may reasonably be expected to benefit Laser Power.
The Laser Power Bylaws also provide that such assistance may be with or without
interest and may be unsecured, or secured in such manner as the Laser Power
Board shall approve, including, without limitation, a pledge of shares of stock
of Laser Power.
Under the California Law, any loan to or guaranty for the benefit of a
director or officer, including pursuant to an employee benefit plan, of the
corporation requires approval of holders of a majority of the outstanding shares
of the corporation. However, the California Law provides that if EMI has 100 or
more shareholders of record and has adopted a bylaw allowing the EMI Board to do
so, the EMI Board alone may approve loans to or guaranties on behalf of an
officer (whether or not such officer is a director) or adopt an employee benefit
plan authorizing such loans or guarantees, by a vote sufficient without counting
the vote of any interested director or directors, if the EMI Board determines
that any such loan, guaranty or plan may reasonably be expected to benefit the
corporation.
Interested Director Transactions. Under the laws of both California and
Delaware, contracts or transactions between a corporation and one or more of its
directors or between a corporation and any other entity in which one or more of
its directors are directors or have a financial interest, are not void or
voidable because of such interest or because such director is present at a
meeting of the board which authorizes or approves the contract or transaction,
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under the California Law and the
Delaware Law. Under the California Law and the Delaware Law, either (i) the
shareholders or the board of directors must approve any such contract or
transaction in good faith after full disclosure of the material facts (and, in
the case of board approval other than for a common directorship, the California
Law requires that the contract or transaction must also be "just and reasonable"
to the corporation), or (ii) the contract or transaction must have been "fair"
(in Delaware) or, in the case of a common directorship (in California), "just
and reasonable" as to the corporation at the time it was approved. The
California Law explicitly places the burden of proof of the just and reasonable
nature of the contract or transaction on the interested director.
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Under the Delaware Law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors (even
though less than a majority of a quorum). Under the California Law, if
shareholder approval is sought, the interested director is not entitled to vote
his or her shares at a shareholder meeting with respect to any action regarding
such contract or transaction. If board approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum).
Stockholder Derivative Suit. Under the Delaware Law, a person may only
bring a derivative action on behalf of the corporation if the person was a
stockholder of the corporation at the time of the transaction in question or his
or her stock thereafter devolved upon him or her by operation of law. The
California Law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain criteria are met. The California
Law also provides that the corporation or the defendant in a derivative suit
may, under certain circumstances, make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
Dissolution. Under the Delaware Law, if the dissolution is initiated by the
board of directors it may be approved by the holders of a majority of the
corporation's shares. If the board of directors does not approve the proposal to
dissolve, it must be consented to in writing by all stockholders entitled to
vote thereon. Under the California Law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors. The board may cause the
corporation to dissolve if (i) an order for relief under Chapter 7 of the
federal bankruptcy law has been entered, (ii) no shares have been issued or
(iii) the corporation has disposed of all of its assets and has not conducted
any business for a period of five years preceding the adopting of a resolution
to dissolve.
EXPERTS
The Consolidated Financial Statements of Laser Power Corporation at August
31, 1996 and 1997 and for each of the three years in the period ended August 31,
1997 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, and are included herein in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
The Consolidated Financial Statements of EMI at December 31, 1995 and 1996
and for the years then ended appearing in this Prospectus and Registration
Statement have been audited by McGladrey & Pullen, LLP, independent auditors,
and are included herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the Merger Agreement will be
passed upon for Laser Power by its counsel, Cooley Godward LLP, San Diego,
California. Certain legal matters in connection with the Merger Agreement will
be passed upon for EMI by Dickinson Wright PLLC, Detroit, Michigan.
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INDEX TO FINANCIAL STATEMENTS
LASER POWER CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
EMI ACQUISITION CORP.
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-19
Consolidated Balance Sheets........................................................... F-20
Consolidated Statements of Operations................................................. F-21
Consolidated Statements of Cash Flows................................................. F-22
Consolidated Statements of Shareholders' Equity....................................... F-23
Notes to Consolidated Financial Statements............................................ F-24
</TABLE>
F-1
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Laser Power Corporation
We have audited the accompanying consolidated balance sheets of Laser Power
Corporation at August 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended August 31, 1997. These financial statements are the
responsibility of Laser Power's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Laser Power
Corporation at August 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 7, 1997
F-2
<PAGE> 99
LASER POWER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 298,160 $ 6,303,776
Accounts receivable, net........................................ 2,992,556 4,280,814
Inventories, net................................................ 2,729,865 3,612,220
Other current assets............................................ 166,445 334,254
----------- -----------
Total current assets.................................... 6,187,026 14,531,064
Property and equipment, net....................................... 4,187,387 5,719,665
Intangibles and other assets, net................................. 819,286 935,305
----------- -----------
Total assets............................................ $11,193,699 $21,186,034
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 1,339,596 $ 1,933,196
Accrued compensation and related expenses....................... 739,385 919,856
Other current liabilities....................................... 781,936 827,239
Current portion of long-term debt............................... 488,083 374,580
----------- -----------
Total current liabilities............................... 3,349,000 4,054,871
Deferred rent..................................................... 305,247 234,795
Long-term debt.................................................... 558,975 1,171,300
Subordinated convertible debentures............................... 1,660,000 1,660,000
Stockholders' equity:
Convertible preferred stock, $.125 par value in 1996, $.001 par
value in 1997:
Authorized -- 3,000,000 shares
Issued and outstanding 1,610,891 shares in 1996.............. 201,361 --
Common stock, par value $.001:
Authorized -- 15,000,000 shares
Issued and outstanding 3,000,106 shares in 1996 and 6,099,854
shares in 1997.............................................. 3,000 6,100
Additional paid-in capital...................................... 10,223,305 18,585,905
Foreign currency translation adjustment......................... 123,222 (50,576)
Accumulated deficit............................................. (5,230,411) (4,476,361)
----------- -----------
Total stockholders' equity.............................. 5,320,477 14,065,068
----------- -----------
Total liabilities and stockholders' equity.............. $11,193,699 $21,186,034
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 100
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales..................................... $11,858,713 $15,194,472 $17,197,346
Contract research and development................. 2,714,208 3,712,967 6,155,794
----------- ----------- -----------
Total revenues............................ 14,572,921 18,907,439 23,353,140
Costs and expenses:
Cost of product sales............................. 7,994,255 9,887,809 11,882,343
Contract research and development................. 2,058,873 2,941,947 4,849,183
Internal research and development................. 2,857,452 2,689,182 1,027,160
Selling, general and administrative............... 3,582,773 4,306,329 4,525,914
----------- ----------- -----------
Total costs and expenses.................. 16,493,353 19,825,267 22,284,600
----------- ----------- -----------
Income (loss) from operations....................... (1,920,432) (917,828) 1,068,540
Interest expense, net............................... 325,928 299,832 274,532
----------- ----------- -----------
Income (loss) before income taxes................... (2,246,360) (1,217,660) 794,008
Income taxes........................................ 22,523 13,281 39,958
----------- ----------- -----------
Net income (loss)................................... $(2,268,883) $(1,230,941) $ 754,050
=========== =========== ===========
Net income (loss) per share......................... $ (0.59) $ (0.29) $0.15
=========== =========== ===========
Shares used in per share computations............... 3,856,000 4,311,000 5,143,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 101
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
---------------------- ------------------ PAID IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT
---------- --------- --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994.............................. 382,172 $ 47,771 2,987,153 $2,988 $ 5,422,314 $ 44,257
Issuance of preferred stock........................... 761,024 95,128 -- -- 2,948,968 --
Issuance of common stock.............................. -- -- 13,322 13 39,955 --
Foreign currency translation adjustment............... -- -- -- -- -- 68,433
Net loss.............................................. -- -- -- -- -- --
-------
-
--------- --------- --------- ----------- --------
Balance at August 31, 1995.............................. 1,143,196 142,899 3,000,475 3,001 8,411,237 112,690
Issuance of preferred stock........................... 467,695 58,462 -- -- 1,812,318 --
Repurchase of common stock............................ -- -- (369) (1) (250) --
Foreign currency translation adjustment............... -- -- -- -- -- 10,532
Net loss............................................ -- -- -- -- -- --
-------
-
--------- --------- --------- ----------- --------
Balance at August 31, 1996.............................. 1,610,891 201,361 3,000,106 3,000 10,223,305 123,222
Issuance of common stock for services performed....... -- -- 8,996 9 40,564 --
Issuance of common stock in conjunction with the
initial public offering at $5.50 per share.......... -- -- 1,897,500 1,898 8,121,868 --
Conversion of preferred stock in conjunction with the
initial public offering............................. (1,610,891) (201,361) 1,193,252 1,193 200,168 --
Foreign currency translation adjustment............... -- -- -- -- -- (173,798)
Net income............................................ -- -- -- -- -- --
--------- --------- --------- ----- ----------- --------
Balance at August 31, 1997.............................. -- $ -- 6,099,854 $6,100 $18,585,905 $ (50,576)
========= ========= ========= ====== =========== ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
Balance at August 31, 1994.............................. $(1,730,587) $ 3,786,743
Issuance of preferred stock........................... -- 3,044,096
Issuance of common stock.............................. -- 39,968
Foreign currency translation adjustment............... -- 68,433
Net loss.............................................. (2,268,883) (2,268,883)
----------- -----------
Balance at August 31, 1995.............................. (3,999,470) 4,670,357
Issuance of preferred stock........................... -- 1,870,780
Repurchase of common stock............................ -- (251)
Foreign currency translation adjustment............... -- 10,532
Net loss............................................ (1,230,941) (1,230,941)
----------- -----------
Balance at August 31, 1996.............................. (5,230,411) 5,320,477
Issuance of common stock for services performed....... -- 40,573
Issuance of common stock in conjunction with the
initial public offering at $5.50 per share.......... -- 8,123,766
Conversion of preferred stock in conjunction with the
initial public offering............................. -- --
Foreign currency translation adjustment............... -- (173,798)
Net income............................................ 754,050 754,050
----------- -----------
Balance at August 31, 1997.............................. $(4,476,361) $14,065,068
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 102
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from operations................... $(2,268,883) $(1,230,941) $ 754,050
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization..................... 997,168 1,037,941 1,166,723
Loss on disposal of property and equipment........ -- 84,936 --
Deferred rent..................................... (70,452) (70,452) (70,452)
Provision for losses on accounts receivable....... 6,000 9,847 12,096
Changes in operating assets and liabilities:
Accounts receivable............................ (358,550) (548,800) (1,300,354)
Inventories.................................... (518,900) (581,244) (882,355)
Other current assets........................... (52,414) (14,578) (57,809)
Accounts payable............................... 294,144 69,720 592,854
Accrued compensation and related expenses...... 17,526 315,026 180,471
Other current liabilities...................... 135,445 214,994 45,303
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................... (1,818,916) (713,551) 440,527
INVESTING ACTIVITIES
Additions to property and equipment................. (917,125) (813,089) (2,785,561)
(Increase) decrease in intangibles and other
assets............................................ 11,648 (109,889) (313,257)
----------- ----------- -----------
Net cash used in investing activities.......... (905,477) (922,978) (3,098,818)
FINANCING ACTIVITIES
Proceeds from borrowings............................ -- 251,046 1,158,632
Payments on borrowings.............................. (496,622) (444,195) (659,064)
Net proceeds from issuance of stock in conjunction
with initial public offering...................... -- -- 8,123,766
Net proceeds from issuance and repurchase of
stock............................................. 3,084,064 1,870,529 40,573
----------- ----------- -----------
Net cash provided by financing activities...... 2,587,442 1,677,380 8,663,907
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (136,951) 40,851 6,005,616
Cash and cash equivalents at beginning of the
period............................................ 394,260 257,309 298,160
----------- ----------- -----------
Cash and cash equivalents at end of the period...... $ 257,309 $ 298,160 $ 6,303,776
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............ $ 305,000 $ 313,000 $ 267,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 103
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
Laser Power Corporation ("Laser Power" or the "Company") operates in one
business segment and designs, manufactures and markets high performance lasers
and laser optics for industrial, medical and military applications. Laser
Power's optics products are sold to laser system OEMs and end users as original
and replacement components in high power CO2 and other lasers. Such lasers are
used in a variety of industrial processing applications, such as sheet metal
cutting, automobile body welding, surface-hardening for engine cylinder walls,
scribing and drilling delicate ceramic circuits, and in certain therapeutic and
cosmetic procedures, including heart surgery and skin wrinkle removal. Laser
Power's proprietary miniature solid state lasers are designed for use in certain
medical, telecommunication, projection display and other applications. The
Company also conducts contract research in the development and applications of
advanced solid state lasers. Substantially all of Laser Power's product revenues
to date are attributable to the sale of laser optics products for the industrial
processing and medical industries.
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Laser Power and its
subsidiaries, Laser Power Optics de Mexico S.A. de C.V. ("Laser Power Mexico")
and Radius Engineering N.V. ("Radius"). The Company operates through three
divisions: Laser Power Optics, which manufactures and sells laser optics; Laser
Power Research, which performs funded contract research for commercial
applications and for various agencies and laboratories of the U.S. federal
government; and Laser Power Microlasers, which manufactures and markets the
Company's microlasers. Laser Power Mexico performs a portion of the
manufacturing of Laser Power Optics division and does not sell products to
unaffiliated customers. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Revenues
Product sales are recorded upon shipment. Revenues from contract research
and development involve both commercial and governmental contracts and are
recognized using the percentage-of-completion method based on the ratio of costs
incurred to date to total estimated costs. Total revenues from government
contracts were $2,254,000, $3,397,000, and $3,337,000 in 1995, 1996 and 1997,
respectively. Provisions are made to recognize any anticipated losses on
contracts when losses become evident.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Market is based upon estimated net realizable value.
Depreciation and Amortization
Machinery, equipment and office furniture are depreciated over their
estimated useful lives (3 to 15 years) on the straight-line method and leasehold
improvements are amortized over the useful life of the asset or the lease term,
whichever is less.
Intangible assets consist primarily of goodwill, patents and licenses.
Goodwill is amortized over 20 years and patents and licenses (which are
primarily related to microlaser technology) are amortized over the shorter
F-7
<PAGE> 104
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the estimated useful life or the legal life. Amortization of patents is
initiated when the related technology is ready for commercial release.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Laser Power primarily sells its products to commercial, military and
medical companies. Financial instruments that potentially subject Laser Power to
credit risk consist principally of cash equivalents and trade receivables. Laser
Power invests in a variety of financial instruments and limits exposure with any
one issuer. Laser Power performs periodic credit evaluations of its customers
and has not experienced significant losses with respect to its accounts
receivable. As of August 31, 1997, the cost of cash equivalents and trade
receivables approximated estimated fair value.
Impairment of Long-Lived Assets
Effective September 1, 1996, Laser Power adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The adoption of SFAS 121 did not have a
material effect on Laser Power's financial position or results of operations.
Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", effective for fiscal years
beginning after December 15, 1995. SFAS 123 established the fair value-based
method of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of the stock option at the
grant date and the number of options vested, and is recognized over the periods
in which the related services are rendered as allowed by SFAS 123. Laser Power
has elected to continue with the current intrinsic value-based method, under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common shares and common equivalent shares outstanding during the periods
presented. Common equivalent shares result from stock options and warrants. For
loss periods, common equivalent shares are excluded from the computation as
their effect would be antidilutive, except that the Securities and Exchange
Commission requires common and common share equivalents issued during the
twelve-month period prior to the initial filing of a proposed public offering,
to be included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering
price).
F-8
<PAGE> 105
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which supersedes APB Opinion 15. SFAS 128 replaces
the presentation of primary earnings per share (EPS) with "Basic EPS" which
includes no dilution and is based on weighted-average common shares outstanding
for the period. Companies with complex capital structures, including Laser
Power, will also be required to present "Diluted EPS" that reflects the
potential dilution of securities such as employee stock options and warrants to
purchase common stock. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. Basic EPS for each of the three years in
the period ended August 31, 1995, 1996 and 1997 would be $(0.76), $(0.41) and
$0.21, respectively. Diluted EPS is not expected to differ materially from
fully-diluted EPS.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, "Segment
Information" ("SFAS 131"). Both of these standards are effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustment, minimum
pension accrual, and unrealized gains and losses on investments shall be
reported, net of their related tax effect, to arrive at comprehensive income.
Laser Power intends to adopt SFAS 130 in fiscal 1999 and operating results of
prior periods will be reclassified.
Historically, Laser Power has operated in one business segment; however,
SFAS 131 redefines segments and in the future, Laser Power may also be required
to disclose certain financial information about operating segments, products and
services. Laser Power has not determined how operating segments will be defined
for disclosure purposes or which segments will meet the quantitative
requirements for disclosure. The adoption of the standard will have no impact on
Laser Power's future results of operations or financial position.
F-9
<PAGE> 106
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SELECTED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Accounts receivable:
Trade........................................... $ 2,895,292 $ 3,881,801
Revenue in excess of billings................... 326,654 640,499
----------- -----------
3,221,946 4,522,300
Reserves........................................ 229,390 241,486
----------- -----------
$ 2,992,556 $ 4,280,814
========== ==========
Inventories:
Raw materials................................... $ 909,563 $ 1,338,353
Work in progress................................ 1,148,439 1,594,513
Finished goods.................................. 671,863 679,354
----------- -----------
$ 2,729,865 $ 3,612,220
========== ==========
Property and equipment, at cost:
Machinery and equipment......................... $ 8,375,250 $10,493,445
Leasehold improvements.......................... 1,012,629 1,284,093
Office furniture and equipment.................. 861,952 923,926
----------- -----------
10,249,831 12,701,464
Less accumulated depreciation and amortization.... (6,062,444) (6,981,799)
----------- -----------
$ 4,187,387 $ 5,719,665
========== ==========
Intangible and other assets:
Goodwill in foreign subsidiary.................. $ 549,100 $ 549,100
Patents and licenses............................ 302,513 507,462
Other........................................... 274,048 272,356
----------- -----------
1,125,661 1,328,918
Less accumulated amortization................... (306,375) (393,613)
----------- -----------
$ 819,286 $ 935,305
========== ==========
Accrued compensation and related expenses:
Accrued bonuses................................. $ 240,000 $ 262,004
Other........................................... 499,385 657,852
----------- -----------
$ 739,385 $ 919,856
========== ==========
Other current liabilities:
Customer advances............................... $ 326,562 $ 46,344
Other........................................... 455,374 780,895
----------- -----------
$ 781,936 $ 827,239
========== ==========
</TABLE>
3. LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS
In January 1997, Laser Power renewed a line of credit with a bank, subject
to maximum advances of $2,000,000 and at an annual interest rate of 1% above the
bank's prime rate (9.5% at August 31, 1997). The
F-10
<PAGE> 107
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
line of credit expires on March 1, 1998, and there were no significant amounts
outstanding under the line of credit at August 31, 1997.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Promissory note..................... $ 90,203 $ 75,000
Term note payable to bank........... 277,779 1,319,626
Equipment line of credit from
bank.............................. 172,166 --
Equipment financing from Proxima.... 273,936 --
Other equipment financing........... 225,534 135,488
Other............................... 7,440 15,766
---------- ----------
1,047,058 1,545,880
Less current portion................ 488,083 374,580
---------- ----------
$ 558,975 $1,171,300
========== ==========
</TABLE>
The promissory note is payable in monthly installments of principal and
interest of $1,840 through September 2001. Borrowings under the promissory note
are secured by equipment and bear interest at 8.25% per annum.
In July 1997, Laser Power fully paid off the prior term note payable to the
bank using proceeds from the initial public offering. In August 1997, Laser
Power converted its equipment line draws to a five-year term note payable to the
bank.
The current term note payable to the bank is due in monthly principal
payments of $22,000 plus interest, with the final installment consisting of all
remaining unpaid principal due and payable in full no later than August 1, 2002.
The term note bears interest at 1.25% above the bank's prime rate (9.75% at
August 31, 1997.)
All bank borrowings are secured by accounts receivable, inventory,
intangibles, and property and equipment, and contain restrictive covenants.
Restrictive covenants include the maintenance of minimum tangible net worth,
debt to equity and cash flow ratios, as well as restrictions on capital and
lease expenditures, investment levels in Laser Power's Belgian subsidiary,
additional borrowings and payment of dividends.
Other equipment financing agreements are payable in monthly installments of
principal and interest through March 2001. Borrowings under these financing
agreements are secured by specific equipment, with interest at rates ranging
from 9.0% to 10.7% at August 31, 1997.
Laser Power entered into an equipment line of credit agreement with Proxima
Corporation on June 30, 1994, which provided for maximum borrowings of $500,000.
In May 1995, the outstanding borrowings were converted to a four-year term loan
bearing interest at 1.5% above the bank's prime rate. The loan was paid off in
full in July 1997 with proceeds from the initial public offering.
In November 1987, Laser Power obtained debt and equity financing from Union
Miniere ("Union"). Laser Power issued 483,333 shares of common stock for
$1,053,000 cash (net of stock issuance costs of $107,000) and subordinated
convertible debentures amounting to $1,340,000. In December 1988, Laser Power
issued an additional $320,000 of subordinated convertible debentures to Union
Miniere. In March 1997, the maturity date of the debentures was extended to
November 2, 2000 and the conversion rate for which the debentures are
convertible into common stock was set at $4.625 per share (358,918 shares). The
debentures are subordinated to all bank borrowings and interest is payable
semi-annually at an annual rate equal to 1% above a bank's prime rate (9.50% at
August 31, 1997) subject to a minimum rate of 5 -1/2% and
F-11
<PAGE> 108
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a maximum rate of the lesser of 11.5% or the maximum rate permitted by law. The
debentures provide for restrictive covenants similar to those of the bank
borrowings.
Principal maturities on the subordinated convertible debentures and
long-term debt for each of the years ending subsequent to August 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................... $ 375,000
1999........................................... 311,000
2000........................................... 301,000
2001........................................... 1,955,000
2002........................................... 264,000
Thereafter..................................... --
----------
$3,206,000
==========
</TABLE>
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of Laser
Power's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax basis operating loss and credit carryforwards....... $ 2,504,000 $ 2,303,000
Other................................................... 273,000 301,000
----------- -----------
Total deferred tax assets................................. 2,777,000 2,604,000
----------- -----------
Deferred tax liability:
Depreciation............................................ (535,000) (549,000)
Intangibles............................................. (110,000) (191,000)
----------- -----------
Total deferred tax liabilities............................ (645,000) (740,000)
----------- -----------
Net deferred tax assets................................... 2,132,000 1,864,000
Valuation allowance....................................... (2,132,000) (1,864,000)
----------- -----------
Net deferred tax accounts................................. $ -- $ --
=========== ===========
</TABLE>
For financial reporting purposes, income (loss) before income taxes
includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------
1995 1996 1997
----------- ----------- --------
<S> <C> <C> <C>
Pretax income (loss):
United States............................... $(2,050,894) $(1,323,591) $623,357
Foreign..................................... (195,466) 105,931 170,651
----------- ----------- --------
$(2,246,360) $(1,217,660) $794,008
=========== =========== ========
</TABLE>
F-12
<PAGE> 109
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ -- $18,000
Foreign............................................. -- -- 12,836
State............................................... 22,523 13,281 9,122
------- ------- -------
Total income tax provision.......................... $22,523 $13,281 $39,958
======= ======= =======
</TABLE>
A reconciliation of the effective tax rates and the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate................................... (35)% (35)% 35%
State income taxes, net of federal benefit................... 1.1 1.0 1.0
Higher effective income taxes of other....................... -- -- 1.0
countries
Change in valuation allowance................................ 33.7 32.3 (35.3)
Other, net................................................... 1.2 2.8 4.3
----- ---- ----
1.0% 1.1% 6.0%
===== ==== ====
</TABLE>
At August 31, 1997, Laser Power has net operating loss carryforwards for
federal and California income tax purposes of approximately $5,156,000 and
$1,348,000, respectively, which may be applied against future taxable income.
These carryforwards will begin to expire in 2001 and 1998, respectively, unless
previously utilized.
Laser Power also has investment tax credit, research and development
credit, targeted jobs tax credit, alternative minimum tax credit and California
manufacturers investment credit carryforwards at August 31, 1997 aggregating
approximately $483,000. These tax credit carryforwards will expire in 1998
through 2007 unless previously utilized.
Due to the Tax Reform Act of 1986, Laser Power's ability to use the net
operating loss and tax credit carryforwards could be limited in the event of a
cumulative change in ownership of more than 50% occurring within a three-year
period.
5. STOCKHOLDERS' EQUITY
Common Stock
On March 25, 1997, Laser Power's Board of Directors authorized a 1-for-1.5
reverse split of all outstanding common stock. In addition, the Board also
approved a change in the par value of the common stock from $0.125 to $0.001.
All share and per share amounts and stock option and warrants data have been
restated to retroactively reflect these changes in capitalization.
During 1997, Laser Power issued 1,897,500 shares of common stock at $5.50
per share in connection with its initial public offering.
Preferred Stock and Proxima Corporation
In January 1994, Laser Power executed a Stock Purchase Agreement with
Proxima. Under the terms of the agreement, Proxima could invest in Laser Power
through purchases of Series A Preferred Stock. Laser
F-13
<PAGE> 110
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Power and Proxima also entered into an agreement providing for technology
licenses and cooperative development of new technologies (see Note 9). During
1994, 1995 and 1996, Proxima purchased 382,172, 761,024 and 467,695, shares of
Series A Preferred Stock, respectively. In June 1997, all shares were converted
into 1,193,252 shares of common stock.
Common Stock Warrants
Periodically, Laser Power will issue warrants to purchase common stock to
outside directors and affiliates in lieu of stock options. During the three
years ended August 31, 1997, 69,996 warrants at exercise prices ranging from
$3.00 to $4.50 per share were issued to outside directors and affiliates which
are fully exercisable. Warrants to purchase 551,660 shares of common stock at
$3.00 to $7.15 per share are outstanding at August 31, 1997, including 165,000
warrants at $7.15 per share issued to representatives of the underwriters in
conjunction with the initial public offering. The outstanding warrants expire
from June 2002 to December 2006.
Stock Option Plans
Laser Power's 1981 Stock Option Plan was approved by the Board of Directors
and stockholders in 1981, as amended (the "1981 Plan"). Laser Power's 1993 Stock
Option Plan (the "1993 Plan") was approved by the Board of Directors and
stockholders in September 1993. The exercise price of options granted will be at
not less than fair market value of the stock on the date of grant and the
options granted vest over a five-year period commencing on the date of grant in
annual increments of twenty percent and are exercisable for a period of ten
years after the date of grant.
On March 25, 1997, Laser Power adopted the 1997 Equity Incentive Plan (the
"1997 Plan"). The 1997 Plan provides for incentive stock options and stock
appreciation rights appurtenant thereto for employees (including officers and
employee directors), and nonstatutory stock options, stock appreciation rights
appurtenant thereto, stock bonuses and rights to purchase restricted stock for
employees (including officers and employee directors) and non-employee directors
and consultants. The 1997 Plan is administered by the Board of Directors, or a
Committee appointed by the Board, which determines the option awards to be
granted, including exercise prices, number of shares subject to the awards and
the exercisability thereof, provided that such terms comply with the provisions
of the plan under which the option award is granted. Non-employee directors are
eligible only for nonstatutory grants. The term of stock options granted under
the 1997 Plan may not exceed 10 years. The options granted vest over a four-year
period commencing on the date of grant in increments of 25% after one year and
one-forty eighth per month thereafter. The exercise price of options granted
under the 1997 Plan is determined by the Board of Directors, but in the case of
an incentive stock option, cannot be less than 100% of the fair market value of
the common stock on the date of grant and in the case of a non- statutory stock
option, cannot be less than 85% of the fair market value of the common stock on
the date of grant. Options granted under the plans vest at the rate specified in
the option agreement. The Board has authorized and secured an aggregate of
1,000,000 shares of common stock for issuance under the Plan. The Board also
terminated the 1981 and 1993 Plans and no additional shares will be granted
thereunder, but outstanding options remain exercisable and continue to vest in
accordance with their terms until they terminate.
Laser Power has 541,329 non-qualified options issued to certain employees
and officers and outstanding as of August 31, 1997, of which 341,329 were issued
outside Laser Power's option plans. These options were issued at exercise prices
ranging from $3.00 to $4.50 per share and expire from December 2001 to March
2007.
F-14
<PAGE> 111
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option and warrant activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
NUMBER OF PRICE PER PER
SHARES SHARE SHARE
--------- ---------- --------
<S> <C> <C> <C>
Outstanding at August 31, 1994.................. 1,199,334 $3.00-6.00 $ 3.48
Granted....................................... 127,333 4.50 4.50
Exercised..................................... -- -- --
Canceled...................................... (148,358) 3.00-6.00 4.85
--------- ---------- -----
Outstanding at August 31, 1995.................. 1,178,309 3.00-4.50 3.40
Granted....................................... 131,325 4.50 4.50
Exercised..................................... (6) 4.50 4.50
Canceled...................................... (81,656) 3.00-4.50 3.46
--------- ---------- -----
Outstanding at August 31, 1996.................. 1,227,972 3.00-4.50 3.51
Granted....................................... 634,305 3.00-7.15 5.21
Exercised..................................... -- -- --
Canceled...................................... (11,997) 3.00-4.50 3.25
--------- ---------- -----
Outstanding at August 31, 1997.................. 1,850,280 $3.00-7.15 $ 4.09
========= ========== =====
</TABLE>
At August 31, 1997, the weighted-average exercise price of outstanding
stock options and warrants is $3.97 and $4.39, respectively, and 945,845
combined options and warrants are exercisable.
Adjusted pro forma information regarding net income (loss) is required by
SFAS 123, and has been determined as if Laser Power had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes method for option pricing with the following weighted-average
assumptions: volatility of 0.559; risk-free interest rate range from 5.4% to
6.2%; dividend yield of 0%; and a weighted average expected life of the options
of 6 years. Laser Power's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------
1996 1997
----------- --------
<S> <C> <C>
Adjusted pro forma net income(loss)....................... $(1,357,543) $255,686
Adjusted pro forma net income(loss) per share............. $ (0.31) $ 0.05
</TABLE>
The weighted average fair value of stock options granted during 1996 and
1997 was $4.50 and $4.51, respectively. The weighted average remaining life of
the options at August 31, 1997 is approximately 6.6 years.
Employee Stock Purchase Plan
On March 25, 1997 Laser Power adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code. Under the Purchase
Plan, the Board has authorized participation by eligible employees, including
officers, in periodic offerings following the commencement of the Purchase Plan.
The initial offering under the Purchase Plan commenced on the closing of Laser
Power's initial public offering and will terminate on February 28, 1998.
Sequential six-month offerings will occur thereafter. The Purchase Plan permits
the purchase of shares of common stock at the end of each offering period at 85%
of the lesser of the price of the common stock on the first day of the offering
period and the last day of the offering period.
F-15
<PAGE> 112
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance:
<TABLE>
<CAPTION>
AUGUST 31,
1997
----------
<S> <C>
Subordinated convertible debentures....................................... 358,918
Stock options:
Granted and outstanding................................................. 1,298,620
Reserved for future grants.............................................. 987,668
Warrants.................................................................. 551,660
Stock Purchase Plan....................................................... 250,000
---------
3,446,866
=========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Laser Power leases its operating, office and other facilities as well as
certain vehicles and equipment under noncancellable operating leases. The
operating and office facilities lease contains escalation clauses and an option
for renewal and extends through December 2001. The operating and office
facilities lease also provides for deferred payment terms; however, for
financial reporting purposes, rent expense is recorded evenly over the term of
the lease.
Deferred rent, as reflected in the accompanying consolidated balance sheet,
represents the difference between rent expense accrued and amounts paid under
the terms of the lease agreement. Future minimum rental payments (excluding
common area maintenance charges) required under the operating leases for each of
the remaining fiscal years ending subsequent to August 31, 1997 are as follows:
<TABLE>
<S> <C>
1998..................................................... $ 796,000
1999..................................................... 723,000
2000..................................................... 691,000
2001..................................................... 684,000
2002..................................................... 228,000
Thereafter............................................... --
----------
$3,122,000
==========
</TABLE>
Rent expense was $844,000, $914,000, and $1,062,523, for the years ended
August 31, 1995, 1996 and 1997, respectively.
Contingency
Laser Power has a license to certain technology used in its blue
microlaser. During 1996, Laser Power received a letter from a third party
claiming that Laser Power's license was granted improperly by the licensor.
While Laser Power believes that such license was properly granted, there can be
no assurance that Laser Power's license would not be voided if subjected to a
legal challenge. In such an event, there can be no assurance that Laser Power
would be able to obtain a replacement license on favorable terms, if at all.
Failure to obtain such a license could result in a material adverse effect to
Laser Power's business, financial condition and results of operations.
F-16
<PAGE> 113
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. GEOGRAPHIC INFORMATION
Laser Power operates in one business segment and designs, manufactures and
markets high performance lasers and laser optics for industrial, medical and
military applications. No one customer accounted for more than 10% of revenues
in 1995, 1996 or 1997. Export sales from U.S. operations to unaffiliated
customers located principally in Europe and the Asia Pacific region amounted to
32%, 32%, and 37% of total revenue in 1995, 1996 and 1997, respectively.
Information with respect to Laser Power's operations by significant
geographic area is set forth below. Transfers between geographic areas have been
shown at the agreed upon transfer price. All transactions denominated in foreign
currency have been translated at the average exchange rates during the period.
The identifiable assets located in the United States include assets located
in Mexico, which are not considered significant.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995
-----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $11,831,280 $2,741,641 $ -- $ 14,572,921
Transfers between geographic areas.... 813,461 -- (813,461) --
----------- ---------- ----------- -----------
Total revenue......................... $12,644,741 $2,741,641 $ (813,461) $ 14,572,921
=========== ========== =========== ===========
Income (loss) before income taxes..... $(2,062,437) $ (195,466) $ 11,543 $ (2,246,360)
=========== ========== =========== ===========
Identifiable assets................... $10,346,281 $1,822,831 $(1,961,672) $ 10,207,440
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996
-----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $15,462,416 $3,445,023 $ -- $ 18,907,439
Transfers between geographic areas.... 1,195,380 -- (1,195,380) --
----------- ---------- ----------- -----------
Total revenue......................... $16,657,796 $3,445,023 $(1,195,380) $(18,907,439)
=========== ========== =========== ===========
Income (loss) before income taxes..... $(1,282,844) $ 105,931 $ (40,747) $ (1,217,660)
=========== ========== =========== ===========
Identifiable assets................... $11,286,833 $1,994,440 $(2,087,574) $ 11,193,699
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
-----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $19,633,617 $3,719,523 -- $ 23,353,140
Transfers between geographic areas.... 1,391,125 -- (1,391,125) --
----------- ---------- ----------- -----------
Total revenue......................... $21,024,742 $3,719,523 $(1,391,125) $ 23,353,140
=========== ========== =========== ===========
Income before income taxes............ $ 609,738 $ 170,651 $ 13,619 $ 794,008
=========== ========== =========== ===========
Identifiable assets................... $20,831,368 $2,009,946 $(1,655,280) $ 21,186,034
=========== ========== =========== ===========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
Laser Power has a defined contribution plan (the "Plan") covering
substantially all employees that have been employed for at least 90 days and
meet certain age requirements. Employees may contribute up to 16% of their
compensation per year (subject to a maximum limit by federal tax law). Laser
Power is obligated to make matching contributions equal to 50% of the employee's
contribution up to a maximum of 6% of the
F-17
<PAGE> 114
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee's compensation. At the discretion of the Board of Directors, Laser
Power may make additional contributions. Laser Power's contributions charged to
operations were $57,000, $79,000, and $140,000 for the years ended August 31,
1995, 1996 and 1997, respectively.
9. AGREEMENT WITH PROXIMA CORPORATION
Laser Power and Proxima have entered into a Cooperative Development and
License Agreement (the "Agreement") which provides for licensing of existing
technology and technologies being developed under the terms of the agreement.
Included in internal research and development expenses in the accompanying
statements of operations are $2,107,000 and $1,630,000 spent in accordance with
the Agreement in 1995 and 1996, respectively. No amounts were spent during 1997.
10. SUBSEQUENT EVENT (UNAUDITED)
On October 29, 1997 Laser Power announced its intent to merge with EMI
Acquisition Corp. Laser Power plans to issue 2,004,676 shares of its common
stock and will account for the merger as a pooling-of-interests. Among other
things, consummation of the transaction is contingent upon approval of the
Company's stockholders.
On December 6, 1997 the Company's Board of Directors approved the change of
the Company's fiscal year end from August 31 to September 30.
F-18
<PAGE> 115
REPORT OF EMI ACQUISITION CORP.'S INDEPENDENT AUDITORS
To the Board of Directors
EMI Acquisition Corp.
Murrieta, California
We have audited the accompanying consolidated balance sheets of EMI
Acquisition Corp. and subsidiary as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of EMI Acquisition Corp.'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 EMI
Acquisition Corp. and subsidiary as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
November 14, 1997
F-19
<PAGE> 116
EMI ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash & cash equivalents............................. $ 577,010 $1,210,064 $ 1,948,724
Accounts receivable, less allowance of $2,500 in
1995, $6,700 in 1996 and $9,850 in 1997.......... 1,393,039 2,451,096 2,526,333
Inventories......................................... 1,460,642 1,444,368 1,862,472
Prepaid expenses.................................... 125,302 157,479 184,007
---------- --------- ---------
Total Current Assets........................ 3,555,993 5,263,007 6,521,536
Machinery & Equipment................................. 933,293 1,291,888 1,702,634
Less accumulated depreciation......................... (81,257) (208,566) (342,470)
---------- --------- ---------
Net Machinery & Equipment................... 852,036 1,083,322 1,360,164
Other Assets.......................................... 23,547 24,996 5,156
---------- --------- ---------
TOTAL ASSETS.......................................... $4,431,576 $6,371,325 $ 7,886,856
========== ========= =========
LIABILITIES, DEFERRED CREDIT AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................... $ 705,670 $ 975,028 $ 754,794
Accrued compensation................................ 233,988 480,552 795,847
Accrued income taxes................................ -- 9,000 134,700
Other accrued liabilities........................... 96,765 109,152 454,128
Current portion of long-term liabilities............ 116,053 109,815 71,720
---------- --------- ---------
Total Current Liabilities................... 1,152,476 1,683,547 2,211,189
Long-Term Liabilities, less current portion........... 2,120,719 2,081,242 2,058,864
---------- --------- ---------
Total Liabilities........................... 3,273,195 3,764,789 4,270,053
Deferred Credit....................................... 20,155 5,035 --
Temporary Shareholders' Equity:
Redeemable common stock, 1,006,457 shares in 1995,
1,100,675 shares in 1996 and 1,063,332 shares in
1997............................................. 437,978 1,813,655 2,580,713
Redeemable common stock options..................... 6,940 31,780 92,760
---------- --------- ---------
Total Temporary Shareholders' Equity........ 444,918 1,845,435 2,673,473
Other Shareholders' Equity:
Common stock, no stated value, 3,000,000 shares
authorized, issued and outstanding -- 3,000
shares........................................... 10 10 10
Retained earnings................................... 693,298 756,056 943,320
---------- --------- ---------
Total Other Shareholders' Equity............ 693,308 756,066 943,330
---------- --------- ---------
TOTAL LIABILITIES, DEFERRED CREDIT AND SHAREHOLDERS'
EQUITY.............................................. $4,431,576 $6,371,325 $ 7,886,856
========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE> 117
EMI ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1996 1997
---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales................................ $7,281,007 $10,594,912 $7,472,547 $9,076,001
Cost of Goods Sold....................... 5,450,054 7,588,119 5,267,965 5,753,238
---------- ----------- ---------- ----------
GROSS PROFIT............................. 1,830,953 3,006,793 2,204,582 3,322,763
Operating Expenses (Income):
Engineering, research and
development......................... 237,890 170,545 116,450 267,077
Selling, general and administrative.... 1,062,164 1,266,979 972,172 1,371,743
Provision for bonus.................... -- 135,310 103,243 314,059
Amortization of intangibles and
deferred credit, net................ (14,506) (14,506) (10,880) (4,383)
---------- ----------- ---------- ----------
Total Operating Expenses............... 1,285,548 1,558,328 1,180,985 1,948,496
---------- ----------- ---------- ----------
EARNINGS FROM OPERATIONS................. 545,405 1,448,465 1,023,597 1,374,267
Other Income (Expense):
Interest and other income.............. 86,601 35,612 26,040 53,382
Interest expense....................... (199,949) (189,080) (142,705) (149,748)
---------- ----------- ---------- ----------
EARNINGS BEFORE INCOME TAXES............. 432,057 1,294,997 906,932 1,277,901
Provision for Income Taxes............... -- (9,000) (5,200) (141,000)
---------- ----------- ---------- ----------
EARNINGS BEFORE EXTRAORDINARY ITEM....... 432,057 1,285,997 901,732 1,136,901
Gain on Early Extinguishment of
Liability.............................. -- 118,679 118,679 --
---------- ----------- ---------- ----------
NET EARNINGS............................. $ 432,057 $ 1,404,676 $1,020,411 $1,136,901
========== =========== ========== ==========
PER SHARE DATA:
Net earnings............................. $ 432,057 $ 1,404,676 $1,020,411 $1,136,901
Less net earnings allocated to increase
in temporary shareholders equity....... 343,518 1,341,918 929,124 949,637
---------- ----------- ---------- ----------
Net earnings applicable to nonredeemable
common and common equivalent shares.... $ 88,539 $ 62,758 $ 91,287 $ 187,264
========== =========== ========== ==========
Average common and common equivalent
shares outstanding..................... 1,057,808 1,125,727 1,119,140 1,134,962
Less average redeemable common and common
equivalent shares outstanding.......... 991,540 1,072,678 1,060,069 1,118,302
---------- ----------- ---------- ----------
Average nonredeemable common and common
equivalent shares outstanding.......... 66,268 53,049 59,071 16,660
========== =========== ========== ==========
Per nonredeemable common and common
equivalent share:
Earnings (Loss) Before Extraordinary
Item................................ $1.34 $(1.06) $(.46) $11.24
Extraordinary item..................... -- 2.24 2.01 --
---- ----- ----- -----
Net Earnings........................... $1.34 $ 1.18 $ 1.55 $11.24
==== ===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE> 118
EMI ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1995 1996 1996 1997
--------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net earnings............................... $ 432,057 $ 1,404,676 $ 1,020,411 $1,136,901
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Gain on early extinguishment of
liability............................. -- (118,679) (118,679) --
Depreciation............................. 77,304 127,309 90,936 133,904
Accretion and amortization of
intangibles........................... (14,506) (14,506) (10,880) (4,383)
Changes in operating assets and
liabilities:
Accounts receivable................... (103,556) (1,058,057) (1,082,403) (75,237)
Inventories........................... (408,452) 16,274 (63,560) (418,104)
Prepaid expenses...................... (8,219) (32,177) (58,249) (26,528)
Accounts payable...................... 33,752 269,358 3,102 (220,234)
Accrued compensation.................. 18,633 111,560 204,404 315,295
Accrued income taxes.................. -- 9,000 5,200 125,700
Other accrued liabilities............. (38,653) 147,391 263,927 344,976
Other adjustments........................ -- (2,063) 7,800 19,188
--------- ----------- ----------- ----------
Net Cash Provided by (Used In) Operating
Activities............................... (11,640) 860,086 262,009 1,331,478
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery & equipment.......... (320,755) (262,805) (86,567) (410,746)
--------- ----------- ----------- ----------
Net Cash (Used In) Investing Activities.... (320,755) (262,805) (86,567) (410,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock......... 20,708 66,606 54,896 65,217
Purchase of common stock................... (2,660) (8,007) (7,993) (186,816)
Proceeds from issuance of indebtedness..... 179,850 151,408 -- 44,796
Payments on long-term indebtedness......... (72,118) (174,234) (119,120) (105,269)
--------- ----------- ----------- ----------
Net Cash Provided By (Used In) Financing
Activities............................... 125,780 35,773 (72,217) (182,072)
--------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH & CASH
EQUIVALENTS.............................. (206,615) 633,054 103,225 738,660
Cash & cash equivalents at January 1....... 783,625 577,010 577,010 1,210,064
--------- ----------- ----------- ----------
CASH & CASH EQUIVALENTS AT END OF PERIOD... $ 577,010 $ 1,210,064 $ 680,235 $1,948,724
========= =========== =========== ==========
Supplemental Disclosures:
Cash interest paid....................... $ 199,949 $ 174,185 $ 9,331 $ 120,052
Cash income taxes paid................... -- -- -- 15,300
Equipment acquired under capital lease... -- 95,790 95,790 --
</TABLE>
See Notes to Consolidated Financial Statements
F-22
<PAGE> 119
EMI ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER
TEMPORARY SHAREHOLDERS' EQUITY SHAREHOLDERS'
------------------------------------------------------------ EQUITY
---------------
REDEEMABLE REDEEMABLE
COMMON STOCK STOCK OPTIONS COMMON STOCK
----------------------- ------------------- ---------------
SHARES VALUE OPTIONS VALUE TOTAL SHARES VALUE
--------- ---------- ------- -------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995................... 968,334 $ 83,148 5,623 $ 204 $ 83,352 3,000 $10
Issuances of:
Common stock for cash....................... 35,600 14,609 14,609
Vested stock options........................ 23,599 -- --
Common stock upon exercise of vested
options................................... 35,425 8,567 (35,425) (2,468) 6,099
Purchase and retirement of common stock for
cash........................................ (32,902) (2,660) (2,660)
Unvested stock options becoming vested........ 28,360 2,929 2,929
Cancellation of vested options................ (7,057) (717) (717)
Increase in redemption value of temporary
shareholder's equity........................ 334,314 6,992 341,306
Net earnings.................................. --
------
----
--------- ---------- ------- -------- ---------- ---- -
Balances at December 31, 1995................. 1,006,457 437,978 15,100 6,940 444,918 3,000 10
Issuances of:
Common stock for cash....................... 37,299 39,739 39,739
Vested stock options........................ 23,538 -- --
Common stock upon exercise of vested
options................................... 96,134 101,322 (96,134) (74,455) 26,867
Purchase and retirement of common stock for
cash........................................ (39,215) (8,007) (8,007)
Unvested stock options becoming vested........ 84,606 85,386 85,386
Cancellation of vested options................ (1,669) (374) (374)
Increase in redemption value of temporary
shareholders equity......................... 1,242,623 14,283 1,256,906
Net earnings.................................. --
------
----
--------- ---------- ------- -------- ---------- ---- -
Balances at December 31, 1996................. 1,100,675 1,813,655 25,441 31,780 1,845,435 3,000 10
Issuances of:
Common stock for cash....................... 28,142 58,865 58,865
Vested stock options........................ 14,480 -- --
Common stock upon exercise of vested
options................................... 8,060 16,655 (8,060) (10,303) 6,352
Purchase and retirement of common stock for
cash........................................ (73,545) (186,816) (186,816)
Unvested stock options becoming vested........ 22,486 35,054 35,054
Cancellation of vested options................ (710) (425) (425)
Increase in redemption value of temporary
shareholders equity......................... 878,354 36,654 915,008
Net earnings.................................. --
------
----
--------- ---------- ------- -------- ---------- ---- -
Balances at September 30, 1997................ 1,063,332 $2,580,713 53,637 $ 92,760 $2,673,473 3,000 $10
========= ========== ======= ======== ========== ========== =====
<CAPTION>
RETAINED
EARNINGS TOTAL
----------- -----------
<S> <<C> <C>
Balances at January 1, 1995................... $ 604,759 $ 604,769
Issuances of:
Common stock for cash....................... --
Vested stock options........................ --
Common stock upon exercise of vested
options................................... --
Purchase and retirement of common stock for
cash........................................ --
Unvested stock options becoming vested........ (2,929) (2,929)
Cancellation of vested options................ 717 717
Increase in redemption value of temporary
shareholder's equity........................ (341,306) (341,306)
Net earnings.................................. 432,057 432,057
--- -----------
Balances at December 31, 1995................. 693,298 693,308
Issuances of:
Common stock for cash....................... --
Vested stock options........................ --
Common stock upon exercise of vested
options................................... --
Purchase and retirement of common stock for
cash........................................ --
Unvested stock options becoming vested........ (85,386) (85,386)
Cancellation of vested options................ 374 374
Increase in redemption value of temporary
shareholders equity......................... (1,256,906) (1,256,906)
Net earnings.................................. 1,404,676 1,404,676
--- -----------
Balances at December 31, 1996................. 756,056 756,066
Issuances of:
Common stock for cash....................... --
Vested stock options........................ --
Common stock upon exercise of vested
options................................... --
Purchase and retirement of common stock for
cash........................................ --
Unvested stock options becoming vested........ (35,054) (35,054)
Cancellation of vested options................ 425 425
Increase in redemption value of temporary
shareholders equity......................... (915,008) (915,008)
Net earnings.................................. 1,136,901 1,136,901
--- -----------
Balances at September 30, 1997................ $ 943,320 $ 943,330
=== ===========
</TABLE>
See Notes to Consolidated Financial Statements. Information pertaining to the
nine-month period ending September 30, 1997 is unaudited.
F-23
<PAGE> 120
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business: EMI Acquisition Corp. ("EMI"), through its
subsidiary Exotic Materials, Inc. (doing business as Exotic
Electro-Optics -- "Exotic"), manufactures current and advanced technology based
electro-optical products principally for the aerospace and defense markets in
the United States.
Interim Financial Information (Unaudited): The financial statements at
September 30, 1997 and for the nine month periods ended September 30, 1996 and
1997 include all adjustments (consisting of normal recurring adjustments) which
management considers necessary for a fair statement of the financial position at
such dates and the operating results and cash flows for those periods. Such
information does not include all disclosures required by generally accepted
accounting principles. Results for interim periods are not necessarily
indicative of results for the entire year or any future periods.
Principles of Consolidation: The financial statements include the accounts
of EMI and its wholly-owned subsidiaries Exotic and, effective May 6, 1997, EMI
International, Inc. Upon consolidation all significant intercompany accounts and
transactions are eliminated.
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 & Cash Equivalents: Cash and cash equivalents consists of demand
deposits, investments in money market accounts, commercial paper and short-term
U.S. government and agency securities which are held to maturity. Such
investments are stated at cost plus accrued interest which approximates market
value. For purposes of the accompanying Consolidated Statements of Cash Flows,
EMI considers all highly liquid investments of three months or less to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method for raw materials and
purchased parts. Work-in-process and parts awaiting shipment are stated at
standard costs which approximates FIFO.
Machinery & Equipment: Properties are stated at cost and include
expenditures for additions and major improvements. Expenditures for repairs and
maintenance are charged to operations as incurred. Depreciation and amortization
are computed by the straight line method over the estimated useful lives of the
respective assets. The fair market value of the Exotic assets acquired, less the
assumed liabilities, exceeded the consideration paid by EMI in 1993. Pursuant to
the requirements of Accounting Principles Board Opinion No. 16, the excess of
fair market value over cost was used to reduce the recorded value of Exotic's
property, plant and equipment and other noncurrent assets to zero value.
Accordingly, the consolidated financial statements of EMI exclude all property,
plant and equipment of Exotic as of June 9, 1993, and all related depreciation
expense on such assets.
Intangible Assets and Deferred Credit: Intangible assets consist of
organization costs which are being amortized by the straight line method over a
60 month period. The deferred credit represents the balance of the excess of the
fair market value of Exotic's net assets acquired after reducing the recorded
value of Exotic's property, plant and equipment and other noncurrent assets to
zero value. The deferred credit is being amortized to operations using the
straight line method over a 60 month period.
Revenue Recognition: Revenue on long-term (generally spanning more than
twelve months) fixed price contracts is recognized utilizing the
units-of-delivery method of accounting. Under such method, revenues are
recognized as units are shipped. The costs attributable to units shipped are
based upon the estimated cost of all
F-24
<PAGE> 121
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
units expected to be produced under the contracts. Adjustments to cost estimates
are made periodically, and losses expected to be incurred on long-term contracts
in progress are charged to operations when identified.
Revenues for contracts which are not long-term fixed price are recognized
at the time of delivery of the goods or performance of services. Any unfavorable
manufacturing variances experienced in the production of such contracts are
expensed as incurred.
Income Taxes: Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
difference between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of Management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment of such change.
The difference between the federal income tax basis and the basis recorded
for financial statement purposes of the Exotic net assets acquired on June 9,
1993, approximated $4.9 million. To the extent that such amounts are currently
deductible for income tax purposes, they are utilized to reduce the federal
income and state franchise taxes otherwise payable for financial reporting and
income tax purposes.
Concentrations of Credit Risk: Financial instruments that potentially
subject EMI to significant concentrations of credit risk consists principally of
cash & cash equivalents and accounts receivable.
All of EMI's cash and cash equivalents were on deposit with major
commercial banks, invested in the highest-rated commercial paper or invested in
short-term U.S. government and agency securities.
EMI sells a significant portion of its products to a limited number of
customers, the largest of which represented 62% and 54% of total accounts
receivable at December 31, 1995 and 1996, respectively. If the financial
condition and operations of this or any other significant customer deteriorated
substantially, EMI's operating results could be adversely affected.
Certain materials and services used in the manufacture of EMI's products
are currently obtained from single or limited source suppliers. EMI has
long-term supply contracts covering usage of the more significant of these
materials or services. The interruption or cessation of supply from these
vendors would adversely affect the Company's operating results.
Fair Value of Financial Instruments: Financial Accounting Standards Board
("FASB") Statement No. 107, Disclosure about Fair Value of Financial
Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Where market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of EMI.
The method and assumptions used to estimate the fair value of long-term
debt, which approximates the carrying value, is based on interest rates that are
currently available to EMI for issuance of debt with similar terms and remaining
maturities. The fair value of trade accounts receivable and accounts payable
approximate carrying value.
Accounting for Stock-Based Compensation: Effective January 1, 1996, EMI
adopted FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement No. 123 established financial accounting and
F-25
<PAGE> 122
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reporting standards for stock-based employee compensation plans, such as stock
purchase or option plans. The statement generally suggests, but does not
require, stock-based compensation transactions with employees to be accounted
for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Companies
that do not elect to change their accounting for stock-based compensation are
required to disclose the effect on net income as if the provisions of Statement
No. 123 were followed. EMI has decided not to adopt the accounting provisions of
this Statement as it relates to the employee-based stock compensation.
Earnings Per Share: Earnings per share is computed using the weighted
average number of common shares and common equivalent shares outstanding during
the periods presented using the two-class method whereby earnings allocated to
temporary shareholders' equity is subtracted from net earnings in order to
arrive at earnings allocated to other shareholders' equity. Common equivalent
shares result from outstanding unvested stock options.
The FASB has issued Statement No. 128, Earnings Per Share, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts. All other entities are required to
present basic and diluted per-share amounts. Diluted per-share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per-share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted.
Because EMI has outstanding unvested stock options to employees, as
discussed in Note G, EMI will be required to present basic and diluted earnings
per share. If EMI had applied Statement No. 128 in the accompanying consolidated
financial statements, the following per-share amounts would have been reported.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -----------------
1995 1996 1996 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
Basic Earnings Per Nonredeemable Common Share:
Earnings (Loss) Before Extraordinary Item.... $29.51 $(18.64) $(9.13) $62.42
Extraordinary Item........................... -- 39.56 39.56 --
------ ------- ------ ------
Net Earnings................................. $29.51 $ 20.92 $30.43 $62.42
====== ======= ====== ======
</TABLE>
For diluted earnings per share there is no change from the per-share
amounts currently reported in the accompanying consolidated financial
statements.
F-26
<PAGE> 123
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
At December 31, 1995 and 1996 and September 30, 1997 inventories, accrued
compensation, and other accrued liabilities consisted of the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- --------------
<S> <C> <C> <C>
Inventories:
Raw materials and purchased parts........... $1,012,543 $1,296,452 $ 671,348
Work-in-process............................. 822,724 984,708 1,651,627
---------- ---------- ----------
Gross inventories........................... 1,835,267 2,281,160 2,322,975
Less progress billings...................... (374,625) (836,792) (460,503)
---------- ---------- ----------
Net Inventories............................. $1,460,642 $1,444,368 $1,862,472
========== ========== ==========
Accrued Compensation:
Accrued payroll............................. $ 99,516 $ 113,485 $ 57,942
Accrued bonuses............................. -- 106,514 384,219
Accrued vacation pay........................ 134,472 138,862 178,085
Accrued retirement plan contribution........ -- 115,000 129,430
Other....................................... -- 6,691 46,171
---------- ---------- ----------
Total Accrued Compensation.................. $ 233,988 $ 480,552 $ 795,847
========== ========== ==========
Other Accrued Liabilities:
Customer advances........................... $ -- $ -- $ 133,750
Other....................................... 96,765 109,152 320,378
---------- ---------- ----------
Total Other Accrued Liabilities............. $ 96,765 $ 109,152 $ 454,128
========== ========== ==========
</TABLE>
NOTE C -- LINE OF CREDIT
At December 31, 1996, Exotic has a revolving line of credit with a
commercial bank. The credit facility provides for borrowings of up to $400,000
on a demand repayment basis. Interest is payable at the rate of the bank's prime
rate plus 1.5% (2% prior to April 1, 1997) and requires an annual facility fee
of 1.5%. The facility is secured by a lien on Exotic's accounts receivable and
is guaranteed by EMI. Among other things, the facility requires the maintenance
of certain financial ratios with respect to financial leverage and maintenance
of tangible net worth. The facility is subject to annual renewal each April 1.
During 1995, 1996 and 1997 there were no borrowings under this facility.
F-27
<PAGE> 124
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- LONG-TERM LIABILITIES
The components of long-term liabilities at December 31, 1995 and 1996, are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
9% unsecured note payable, due 1998......................... $1,919,000 $ --
9% unsecured installment note, due 2005..................... -- 1,919,000
10% unsecured installment note, due 1997.................... 131,038 40,478
10.5% secured equipment loan, due 2001...................... -- 145,011
9.75% capitalized equipment lease, due 2001................. -- 86,568
Capitalized land lease obligation........................... 186,734 --
---------- ----------
Total Long-Term Liabilities................................. 2,236,772 2,191,057
Less amount included in current liabilities................. (116,053) (109,815)
---------- ----------
Amount classified as long-term liabilities.................. $2,120,719 $2,081,242
========== ==========
</TABLE>
In conjunction with the acquisition of Exotic by EMI, Exotic issued a
$2,000,000 unsecured note payable to Vitec Group, plc ("Vitec") in satisfaction
of all indebtedness of Exotic to Vitec or any of its affiliates existing on June
9, 1993. The note carried interest at 9% per annum, payable semi-annually on
April 30 and October 31 and matured on April 30, 1998. The note required
mandatory prepayment of principal on each April 30 in an amount equal to 75% of
Exotic's net earnings for the prior calendar year.
Among other things, the note prohibited the payment of cash dividends, the
incurrence of liens (except in certain specific situations), and the merger of
Exotic unless Exotic is the surviving corporation. In the event of any
substantial disposition of assets or sale of the common stock of Exotic, Vitec
has the right, within 30 days of receiving the notice of proposed disposition or
sale, to acquire the assets or stock, as the case maybe, on the same terms and
conditions. The note also requires that Exotic provide Vitec with quarterly and
annual financial statements. By its terms, the note is expressly subordinate to
any working capital facility of up to $1 million, and, to the extent that such
facility is a secured facility, permits the placing of a lien on Exotic's assets
to secure the facility.
As of October 1, 1996, Exotic retired the outstanding balance of the 9%
unsecured note payable, due 1998 (the "Old Note") by issuing a new 9% unsecured
installment note, due 2005 (the "New Note"). The New Note requires the payment
of principal and interest on April 30 of each year from 1997 to 2005 in
increasing installments as follows:
<TABLE>
<CAPTION>
YEAR INTEREST PRINCIPAL TOTAL PAYMENT
------------------------------------------------ -------- --------- -------------
<S> <C> <C> <C>
1997............................................ $ 99,841 $ 28,459 $ 128,300
1998............................................ 170,149 19,851 190,000
1999............................................ 168,362 61,638 230,000
2000............................................ 162,815 107,185 270,000
2001............................................ 153,168 156,832 310,000
2002............................................ 139,053 210,947 350,000
2003............................................ 120,068 269,932 390,000
2004............................................ 95,774 334,226 430,000
2005............................................ 65,694 729,930 795,624
</TABLE>
Except for the change in the payment terms and final maturity, all other
terms of the New Note are identical to the terms of the Old Note. No gain or
loss was recognized on the exchange.
F-28
<PAGE> 125
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 10% unsecured installment note, due 1997 requires monthly payments of
$8,299. The note was used to finance a portion of a 1995 machine purchase.
The 10.5% secured equipment loan, due 2001 requires monthly payments of
$3,198. The note is secured by the machine that the proceeds were used to
purchase.
The 9.75% capitalized equipment lease requires monthly payments of $2,023
and it matures in August 2001. EMI has the option to purchase the equipment at
the end of the lease term for $1. The equipment, which was originally
capitalized at $96,140, has a net book value of $93,137 at December 31, 1996.
EMI leased (at a monthly rental of $3,400) a parcel of land adjacent to its
principle manufacturing facility. The lease, which was scheduled to expire in
2001, was originally entered into to provide for any future facility expansion
requirements of EMI. EMI subsequently determined that such expansion
requirements would not be needed in the foreseeable future. Accordingly, as of
June 9, 1993, the remaining lease obligation, discounted at 9%, was recorded as
a long-term land lease obligation. Effective as of March 1, 1996, EMI negotiated
an early termination of this obligation in exchange for cash payments totaling
$61,895. The resulting gain from this early extinguishment has been recorded as
an extraordinary item in the consolidated results of operations.
Aggregate minimum maturities of long-term liabilities for the five years
subsequent to December 31, 1996, are as follows: 1997 -- $110,000;
1998 -- $65,000; 1999 -- $112,000; 2000 -- $163,000; 2001 -- $197,000;
thereafter -- $1,545,000.
NOTE E -- INCOME TAXES
Income tax expense for the years ended December 31, 1995 and 1996 and for
the nine months ended September 30, 1997 is lower than expected due to a
decrease in the deferred tax asset valuation allowance of $125,000, $525,000 and
$250,000, respectively.
The differences between the U.S. federal statutory income tax rate and
EMI's effective tax rate for 1995 and 1996 and for the nine months ended
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
----- ----- --------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate............ 35.0% 35.0% 35.0%
Decrease in deferred tax asset valuation
allowance....................................... (28.9) (40.5) (19.6)
All other, net.................................... (6.1) 6.1 (4.4)
---- ---- ----
Company's effective tax rate...................... -- .6% 11.0%
==== ==== ====
</TABLE>
F-29
<PAGE> 126
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1996 and September 30, 1997 deferred income taxes
consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- -------- -------------
<S> <C> <C> <C>
Deferred income tax assets:
Depreciation................................. $ 625,000 $476,000 $ 388,000
Tax basis operating loss and credit
carryforwards............................. 487,000 213,000 --
Asset valuation reserves..................... 135,000 136,000 149,000
Other........................................ 128,000 25,000 63,000
---------- ------- -------
Total deferred income tax assets............. 1,375,000 850,000 600,000
Less valuation allowance....................... 1,375,000 850,000 600,000
---------- ------- -------
Net deferred income taxes...................... $ -- $ -- $ --
========== ======= =======
</TABLE>
Deductible temporary differences giving rise to deferred income tax assets
principally relate to the write-down of property, plant & equipment upon the
purchase of Exotic (see Note A) and net operating loss carryforwards for income
tax purposes. At December 31, 1995 and 1996 and September 30, 1997, EMI has
recorded a valuation allowance to reduce the deferred tax asset to an amount
Management believes is more likely than not to be realized. Realization of
deferred tax assets is dependent upon EMI generating sufficient future taxable
income during the periods that the deductible temporary differences and
carryforwards are expected to be available to reduce taxable income and to the
extent that these carryforwards are not otherwise limited by applicable income
tax laws.
At September 30, 1997, EMI had utilized all of its available net operating
loss carryforwards.
NOTE F -- EMPLOYEE BENEFIT PLANS
EMI has a bonus plan which covers all employees of EMI. The bonus is equal
to 25% of the operating earnings of Exotic computed using the pre-acquisition
historical asset basis. The principal variance in the operating earnings used in
the bonus calculation and the reported consolidated operating earning of EMI is
the deduction of depreciation expense computed on a historical cost basis and
the exclusion of the deferred credit amortization. Pursuant to the plan, no
provision was recorded for 1995 and a provision of approximately $135,000 was
recorded for 1996.
EMI also sponsors a combined 401(k) and profit sharing plan which covers
all employees of EMI. EMI matches employee contributions to the plan at the rate
of 1/4% ( 1/2% subsequent to May 8, 1997) for each 1% of employee contributions
to a maximum of 1% (2% subsequent to May 8, 1997) of the employee's
compensation. The plan also provides for a discretionary annual Company profit
sharing contribution. The amount, if any, is determined annually by the Board of
Directors after the completion of the calendar year. In 1996, a provision of
$115,000 was recorded for the discretionary contribution and none was recorded
for 1995.
NOTE G -- SHAREHOLDERS' EQUITY
In 1993, EMI adopted the EMI Acquisition Corp. Stock Distribution Plan
("Stock Plan"). Pursuant to the Stock Plan, EMI sold 997,000 shares of common
stock to its employees for an aggregate purchase price of $997 in February 1994.
The stock purchased by the employees under the plan vests at the rate of 20% on
each December 31st (commencing in 1993) that they remain an employee of EMI. If
the employee leaves EMI prior to the complete vesting of the shares purchased,
EMI has the right to repurchase from the employee the unvested shares at the
original purchase price of $.001 per share. Pursuant to such provisions, EMI
repurchased 25,440 shares in 1995 and 29,893 shares in 1996.
F-30
<PAGE> 127
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995 EMI adopted a stock purchase plan ("Purchase Plan"), which permits
employees to purchase, through payroll deductions, common stock at the market
value at the date of purchase. The Board of Directors annually establishes the
maximum number of shares that any employee may purchase during the calendar year
under the plan. In 1996, the maximum number of shares was set at 1,000 per
employee (800 in 1995). In 1996, 37,299 shares (35,600 in 1995) were issued for
an aggregate consideration of $39,739 ($14,609 in 1995). At December 31, 1996,
227,101 shares have been reserved for the possible future issuance under the
Purchase Plan.
EMI has a stock option plan ("Option Plan") which provides that options may
be granted to officers and employees to purchase common stock. The option
exercise price is set at a price equal to the fair market value, as determined
by the Board of Directors, on the date that the option is granted. Stock options
expire five years from the date of grant and generally vest one-third each year
subsequent to the grant date. A summary of the transactions occurring under the
Option Plan is as follows:
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1.................... 110,814 $.11 119,811 $.18
Granted..................................... 70,809 .31 70,630 1.28
Canceled.................................... (26,387) .24 (6,694) 1.17
Exercised................................... (35,425) .17 (96,134) .28
------- ---- ------- ----
Outstanding at December 31.................. 119,811 $.18 87,613 $.89
======= ==== ======= ====
At December 31:
Reserved for future grant................. 116,328 52,392
======= =======
Exercisable options....................... 15,098 25,441
======= =======
</TABLE>
Additional information concerning the weighted-average remaining
contractual life and weighted-average exercise price for stock options
outstanding at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- -------------------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------------------ ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$.10 to $.40........................ 34,670 3.09 $ .23 15,160 $ .14
$1.03 to $1.32...................... 39,951 4.27 1.14 6,612 1.25
$1.81 to $1.93...................... 12,992 4.70 1.86 3,669 1.87
------ ---- ----- ------ -----
Total............................... 87,613 3.87 $ .89 25,441 $ .68
====== ==== ===== ====== =====
</TABLE>
The weighted average fair value per option granted during the year ended
December 31, 1996 was $.09 per option ($.02 per option in 1995). The fair value
of each option award is estimated at the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions for grants
in 1996 and 1995: risk-free interest rates of 5.65% and 6.23%, respectively;
expected lives of 1.25 years for both years; and no dividends for both years. As
permitted under generally accepted accounting principles, grants under the
Option Plan are accounted for following the provisions of APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under the Option Plan. Had compensation cost for all stock-based
compensation plans been determined based on the grant date fair values of awards
(the method described in FASB Statement No. 123), reported net earnings would
have been decreased by $1,600 and $6,000 for the years ended December 31, 1995
and 1996, respectively. Earnings per share would not have changed from the
reported amounts.
F-31
<PAGE> 128
EMI ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any shares of common stock issued under the Stock Plan, Purchase Plan and
Option Plan, may not be sold by the shareholder unless the shares are first
offered to EMI. Upon receiving a notice of intent to sell, EMI is required to
offer to purchase such shares at the then current fair market value as
determined by the Board of Directors. The offering shareholder may then elect to
either sell the shares to EMI or they may elect to sell the shares to any other
qualified purchaser provided that the price the shares are sold at exceeds the
price offered by EMI. Pursuant to such provisions, EMI repurchased 7,462 shares
in 1995 and 9,322 shares in 1996. Due to the existence of the requirement for
EMI to repurchase all shares offered to it, the redemption value of all shares
and vested stock options issued pursuant to such plans have been classified as
temporary shareholders' equity at the redemption value at each period end.
Increases in the redemption value are reclassified from retained earnings to
temporary shareholders' equity. Current fair value established by the Board of
Directors was $2.86 per share on September 30, 1997.
NOTE H -- LEASES AND COMMITMENTS
EMI leases its principle office and manufacturing facility under a lease
agreement which provides for a basic term expiring in June 2007. In addition to
the basic lease term, the lease provides for two additional five-year terms
which are exercisable at EMI's option. Monthly rent expense under the lease is
approximately $28,800, which is adjusted bi-annually by changes in the Consumer
Price Index. Under the terms of the lease, EMI has an option to purchase the
facility at its fair market value at the time the option is exercised. It is
EMI's present intention to exercise such option with a closing expected to occur
in the first quarter of 1998.
EMI leases other property (principally transportation and storage
equipment) under short-term operating leases. Total rent expense was $358,000 in
1995 and $368,000 in 1996.
Future minimum lease commitments (principally related to the building
lease) for each of the next five years and thereafter is as follows:
1997 -- $359,000; 1998 -- $353,000; 1999 -- $346,000; 2000 -- $346,000;
2001 -- $346,000; thereafter -- $1,903,000; total -- $3,653,000.
NOTE I -- MAJOR CUSTOMERS AND FOREIGN SALES
For each of the two years ended December 31, 1996, EMI had net sales to
Lockheed Martin Corporation that individually exceeded 10% of consolidated net
sales. Net sales to this customer were $4.01 million in 1995 and $6.00 million
in 1996. Accounts receivable from this customer were $858,000 and $1,326,000 at
December 31, 1995 and 1996, respectively.
Sales to foreign customers approximated $150,000 or 2.1% of consolidated
net sales in 1995, approximated $1,642,000 or 15.5% of consolidated net sales in
1996 and approximated 1,271,000 or 23.9% of consolidated net sales in 1997.
NOTE J -- SUBSEQUENT EVENT (UNAUDITED)
On December 4, 1997, the Board of Directors of EMI approved the agreement
and plan of reorganization between EMI and Laser Power Corporation ("LPC"),
under which EMI will merge with a wholly-owned subsidiary of LPC in exchange for
common stock of LPC. Each share of EMI common stock outstanding at the date of
merger will be converted into 1.8511 shares of LPC common stock.
Among other things, the merger is subject to a number of closing conditions
including completion of due diligence review, registration of the shares of LPC
common stock to be issued in the merger and the affirmative vote of both EMI's
and LPC's shareholders.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
December 23, 1997 by and among LASER POWER CORPORATION, a Delaware corporation
("Acquiror"), LPC ACQUISITION SUBSIDIARY, INC., a California corporation
("Acquiror Sub"), EMI ACQUISITION CORP., a California corporation ("Target"),
Dick Sharman, Robert P. Perkins and Robert N. Haro (each a "Principal
Shareholder" and collectively the "Principal Shareholders").
RECITALS
A. Acquiror has formed Acquiror Sub as a wholly owned subsidiary to effect
the merger of Acquiror Sub with and into Target (the "Merger") in accordance
with the laws of the State of California and the State of Delaware and in
accordance with this Agreement, so that upon consummation of the Merger,
Acquiror Sub will cease to exist and Target will become a wholly owned
subsidiary of Acquiror.
B. This Agreement has been approved by the Boards of Directors of Acquiror,
Acquiror Sub and Target and by Acquiror in its capacity as the sole shareholder
of Acquiror Sub and will be submitted for approval by the stockholders of
Acquiror and the shareholders of Target; and
C. The Merger is intended to qualify as a reorganization within the meaning
of the provisions of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code") and to be accounted for as a pooling-of-interests.
AGREEMENT
NOW, THEREFORE, in consideration of their mutual covenants, promises and
obligations contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be bound hereby, agree as follows:
ARTICLE 1
DESCRIPTION OF TRANSACTION
1.1 MERGER OF ACQUIROR SUB INTO TARGET. Subject to the terms and conditions
of this Agreement, on the Closing Date Acquiror Sub shall be merged with and
into Target and the separate existence of Acquiror Sub shall cease. Target shall
be the surviving corporation in the Merger under the corporate name it possesses
immediately prior to the Merger, and Acquiror shall own all of the issued and
outstanding shares of capital stock of Target. Target, in its capacity as the
corporation surviving the Merger, is sometimes referred to herein as the
"Surviving Corporation."
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
the California Corporations Code (the "California Law"). Without limiting the
generality of the foregoing, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises of a public as well as a private
nature, and be subject to all the restrictions, disabilities and duties, of each
of Acquiror Sub and Target (collectively, the "Constituent Corporations"). The
Surviving Corporation shall be vested with the rights, privileges, powers and
franchises, all property (real, personal, and mixed) and all debts due on
whatever account and all other things in action or belonging to, and all and
every other interest of, each of the Constituent Corporations. All debts,
liabilities and duties of each of the Constituent Corporations shall attach to
the Surviving Corporation and may be enforced against it to the same extent as
if such debts, liabilities and duties had been incurred or contracted by it.
1.3 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Cooley Godward LLP,
4365 Executive Drive, San Diego, California 92121 at such time and date as
Acquiror and Target may mutually select (the "Closing Date"), which shall be as
soon as
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practicable following satisfaction or waiver of the closing conditions contained
in Articles 6 and 7 hereof, but in any event not later than February 27, 1998.
At the Closing, Acquiror Sub and Target will each carry out the procedures
specified under the applicable provisions of the California Law, including duly
executing and filing an Agreement of Merger, together with the required related
certificates, with the California Secretary of State (the "California Agreement
of Merger") to the end that the Merger shall become effective. The Merger shall
become effective at the time the California Agreement of Merger is duly filed
with the California Secretary of State or such later time as may be specified in
the California Agreement of Merger (the "Effective Time").
1.4 SURVIVING CORPORATION ARTICLES OF INCORPORATION AND BYLAWS; DIRECTORS
AND OFFICERS; EXECUTIVE OFFICES. The Articles of Incorporation of Acquiror Sub
shall be the Articles of Incorporation of the Surviving Corporation immediately
after the Effective Time. The Bylaws of Acquiror Sub shall be the Bylaws of the
Surviving Corporation immediately after the Effective Time. The directors and
officers of the Surviving Corporation immediately after the Effective Time will
be those persons listed on Schedule 1.4 attached hereto. The executive offices
of Target shall be the executive offices of the Surviving Corporation
immediately after the Effective Time.
1.5 EXCHANGE OF TARGET STOCK; SUBSTITUTION OF TARGET OPTIONS.
(a) At the Effective Time, each then outstanding share of common stock,
without par value, of Target (collectively, the "Target Common Shares"), other
than Target Common Shares to be canceled pursuant to Section 1.5(b) and
Dissenting Shares (as defined in Section 1.15), shall cease to be an existing
and issued Target Common Share and shall become and be converted into, by virtue
of the Merger and without any action on the part of Acquiror, Acquiror Sub,
Target or the holder thereof, into 1.8511 duly authorized, validly issued, fully
paid and nonassessable shares (the "Common Exchange Ratio") of common stock,
$.001 par value per share, of Acquiror (the "Acquiror Common Stock").
(b) Each Target Common Share issued and outstanding immediately prior to
the Effective Time owned by Acquiror, Acquiror Sub or any subsidiary thereof
shall automatically be canceled at the Effective Time, and no conversion shall
be made in respect thereof.
(c) At the Effective Time, all rights with respect to options to purchase
Target Common Stock (each a "Target Option") then outstanding shall be converted
into and become rights with respect to Acquiror Common Stock, and Acquiror shall
substitute an option to purchase Acquiror Common Stock (the "Substitute Option")
for each such Target Option in accordance with the terms (as in effect as of the
date of this Agreement) of Target's Amended and Restated Stock Option Plan, the
stock option agreement by which it is evidenced and this Section 1.5(c). From
and after the Effective Time, (i) each Target Option shall be substituted by a
Substitute Option that may be exercised solely for shares of Acquiror Common
Stock, (ii) the number of shares of Acquiror Common Stock subject to each such
Substitute Option shall be equal to the number of shares of Target Common Stock
subject to such Target Option immediately prior to the Effective Time multiplied
by the Common Exchange Ratio, rounding down to the nearest whole share, (iii)
the per share exercise price under each such Substitute Option shall be equal to
the per share exercise price of such Target Option immediately prior to the
Effective Time divided by the Common Exchange Ratio and rounding up to the
nearest cent and (iv) any restriction on the exercise of such Target Option
shall continue in full force and effect in such Substitute Option and the term,
exercisability and vesting schedule of such Target Option shall otherwise remain
unchanged in the Substitute Option. Target and Acquiror shall take all action
that may be necessary (under Target's Amended and Restated Stock Option Plan and
otherwise) to effectuate the provisions of this Section 1.5(c). Following the
Closing and upon surrender of the option agreement representing the Target
Option, Acquiror will send to each holder of a Target Option a new option
agreement setting forth (i) the number of shares of Acquiror Common Stock
subject to such Substitute Option and (ii) the exercise price per share of
Acquiror Common Stock issuable upon exercise of such Substitute Option. Acquiror
shall file with the Securities and Exchange Commission (the "SEC"), within 30
days after the Closing Date, a registration statement on Form S-8 registering
the exercise of the Substitute Options.
1.6 CONVERSION OF ACQUIROR SUB COMMON STOCK. Each share of Acquiror Sub's
common stock issued and outstanding immediately prior to the Effective Time
shall automatically be converted into and become
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one validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation and the aggregate of such shares issuable upon such
conversion shall constitute the only outstanding capital shares of the Surviving
Corporation.
1.7 CLOSING OF TARGET TRANSFER BOOKS. At and after the Effective Time,
holders of certificates representing Target Common Shares shall cease to have
any rights as shareholders of Target (except rights, if any, under Chapter 13 of
the California Law) and the share transfer books of Target shall be closed with
respect to Target Common Shares issued and outstanding immediately prior to the
Effective Time, and no further transfer of such shares shall thereafter be made
on such share transfer books. If, after the Effective Time, valid certificates
previously representing such shares ("Target Stock Certificates") are presented
to the Surviving Corporation they shall be exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES. At or as soon as practicable after the
Effective Time, Acquiror or its transfer agent will send to the holders of
Target Stock Certificates (a) a letter of transmittal in customary form and
containing such provisions as Acquiror may reasonably specify, and (b)
instructions for use in effecting the surrender of Target Stock Certificates in
exchange for certificates representing Acquiror Common Stock. Upon surrender of
a Target Stock Certificate to Acquiror for exchange, together with a duly
executed letter of transmittal and such other documents as may be reasonably
required by Acquiror, the holder of such Target Stock Certificate shall be
entitled to receive in exchange therefor a certificate representing the number
of whole shares of Acquiror Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.5(a) (less the number of such
shares to be retained in escrow as security for the indemnification obligations
of the Shareholders contained herein, as set forth in Section 8.7 below), and
the Target Stock Certificate so surrendered shall be canceled. Until surrendered
as contemplated by this Section 1.8, each Target Stock Certificate shall be
deemed, from and after the Effective Time, to represent only the right to
receive upon such surrender a certificate representing shares of Acquiror Common
Stock (and cash in lieu of any fractional share of Acquiror Common Stock) or to
perfect the holder's right to receive payment for such shares pursuant to
Chapter 13 of the California Law and Section 1.15 hereof. If any Target Stock
Certificate shall have been lost, stolen or destroyed, Acquiror may, in its
discretion and as a condition precedent to the issuance of any certificate
representing Acquiror Common Stock, require the owner of such lost, stolen or
destroyed Target Stock Certificate to provide an appropriate affidavit as
indemnity against any claim that may be made against Acquiror of the Surviving
Corporation with respect to such Target Stock Certificate. No dividends or other
distributions declared or made with respect to Acquiror's Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Target Stock Certificate with respect to the shares of Acquiror
Common Stock represented thereby, and no cash payment in lieu of any fractional
share shall be paid to any such holder, until such holder surrenders such Target
Stock Certificate in accordance with this Section 1.8 (at which time such holder
shall be entitled to receive all such dividends and distributions and such cash
payment).
1.9 NO FRACTIONAL SHARES. No fractional shares of Acquiror Common Stock
will be issued in connection with the Merger and no certificate therefor will be
issued. In lieu of such fractional shares, any holder of Target Common Shares
who would otherwise receive a fractional share of Acquiror Common Stock shall,
upon surrender of his certificate or certificates representing Target Common
Shares, be paid an amount in cash (without interest) determined by multiplying
such fraction by the closing price of Acquiror Common Stock as reported on the
Nasdaq National Market on the last trading date immediately preceding the
Closing Date. Acquiror will, subject to any applicable statute of limitation or
abandoned property or similar law, pay to such holders, upon surrender of their
Target Stock Certificates, the cash value of such fractions so determined,
without interest.
1.10 ADJUSTMENT OF COMMON EXCHANGE RATIO. If, between the date of this
Agreement and the Effective Time, the outstanding Acquiror Common Stock shall
have been changed into a greater or lesser number of shares of Acquiror Common
Stock or into a different security by reason of a reclassification, stock split,
stock combination, stock dividend or other recapitalization or similar
transaction, the Common Exchange Ratio shall be correspondingly adjusted.
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1.11 ACCOUNTING TREATMENT. The parties intend that the Merger will be
treated as a pooling-of-interests for accounting purposes.
1.12 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section
368(a)(2)(E) of the Code.
1.13 STOCK SUBJECT TO CONDITIONS OF FORFEITURE. Subject to the provisions
of Section 6.26, all shares of Acquiror Common Stock which are received in the
Merger in exchange for Target Common Shares which, under applicable stock
purchase or restriction agreements, as amended, with Target, are unvested or
subject to a repurchase option or other condition of forfeiture which by its
terms does not terminate due to the Merger, will also be unvested or subject to
the same repurchase option or other condition, as the case may be, and the
certificates evidencing such shares will be marked with appropriate legends;
provided, however, that this Section 1.13 shall not preclude modification of the
existing agreements between Target and its shareholders consistent with
pooling-of-interests accounting.
1.14 FURTHER ACTION. If at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement or
to vest the Surviving Corporation with the full right, title and possession to
all assets, property, rights, privileges, immunities, powers and franchises of
either or both of the Constituent Corporations, the officers and directors of
the Surviving Corporation are fully authorized in the name of either or both of
the Constituent Corporations or otherwise to take all such action at Acquiror's
expense.
1.15 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, Target Common Shares that are issued and outstanding immediately prior
to the Effective Time and that are held by shareholders who have not voted such
shares in favor of the Merger and who have delivered a written notice of
intention to demand payment for such shares in the manner provided in Section
1301 of the California Law ("Dissenting Shares") shall not be canceled and
converted into shares of Acquiror Common Stock in accordance with the provisions
of Section 1.5(a) unless and until such holder shall have failed to perfect, or
shall have effectively withdrawn or lost, such holder's right to payment under
the California Law. If such holder shall have so failed to perfect, or shall
have effectively withdrawn or lost such right, such holder's Target Common
Shares shall thereupon be deemed to have been canceled and converted as
described in Section 1.5 at the Effective Time, and each such share shall
represent solely the right to receive shares of Acquiror Common Stock in
accordance with the provisions of Section 1.5(a). Target shall give Acquiror
prompt notice of any demands received by Target for purchase of its shares, and,
prior to the Effective Time, Acquiror shall have the right to participate in all
negotiations and proceedings with respect to such demands. Prior to the
Effective Time, Target shall not, except with the prior written consent of
Acquiror, make any payment with respect to, or settle or offer to settle, any
such demands. From and after the Effective Time, no shareholder who has
exercised dissenters' rights as provided in Chapter 13 of the California Law
shall be entitled to vote such holder's shares for any purpose or to receive
payment of dividends or other distributions with respect to such holder's shares
(except dividends and other distributions payable to shareholders of record at a
date which is prior to the Effective Time).
1.16 SHAREHOLDERS' AGREEMENTS.
(a) Concurrently with the execution of this Agreement, each of the persons
listed on Schedule 1.16 shall enter into a Shareholder Agreement with Acquiror
in substantially the form attached hereto as Exhibit 1.16(a).
(b) Prior to the Closing, each Principal Shareholder shall execute and
deliver to Acquiror, and Target and each of the Principal Shareholders will use
its or his reasonable best efforts to cause each other person set forth on
Schedule 2.1(c) under the heading Shareholders (the "Shareholders") to execute
and deliver to Acquiror a Continuity-of-Interest Certificate in substantially
the form attached hereto as Exhibit 1.16(b) (a "Continuity-of-Interest
Certificate").
(c) Each Principal Shareholder shall execute and deliver to Acquiror, and
Target and each of the Principal Shareholders will use its or his best efforts
to cause each other "affiliate" of Target for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "Securities Act"), to execute and
deliver to
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Acquiror, as promptly as practicable after execution of this Agreement, an
Affiliate Agreement in substantially the form attached hereto as Exhibit 1.16(c)
(an "Affiliate Agreement").
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror and Acquiror Sub as of the date
of this Agreement as follows:
2.1 ORGANIZATION.
(a) Each of Target and Exotic Materials, Inc., ("Exotic") is a corporation
duly organized, validly existing and in good standing, under the laws of the
State of California, and EMI International, Inc., ("EMII" and together with
Exotic, the "Target Subs") is a corporation duly and validly existing and in
good standing under the laws of the U.S. Virgin Islands. Each of Target and the
Target Subs has all necessary power and authority under applicable corporate law
and its charter and Bylaws to own or lease its properties and to carry on its
business as presently conducted. Target has provided Acquiror with true and
correct copies of the charter and Bylaws of each of Target and the Target Subs.
Except for the Target Subs, Target has no subsidiaries, and, except as set forth
on Schedule 2.1(a), Target does not own or hold, directly or indirectly, any
debt or equity securities of, nor has any other interest in, any corporation,
partnership, joint venture or other entity.
(b) Each of Target and the Target Subs is qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification and
where the failure to so qualify would have a "Material Adverse Effect." For the
purposes of this Agreement, "Material Adverse Effect" as it applies to Target or
Acquiror means an adverse effect on the business, operations, condition
(financial or otherwise), assets or present prospects of Target and the Target
Subs, taken as a whole, or Acquiror and its subsidiaries, taken as a whole,
respectively, which is material. For purposes of this Agreement, documents,
objects, effects, conditions, events or occurrences shall be deemed "material"
as they relate to Target or the Target Subs if they involve amounts, or result
in Damages (as hereinafter defined), in excess of $100,000. For purposes of this
Agreement, documents, objects, effects, conditions, events or occurrences shall
be deemed "material" as they relate to Acquiror if they involve amounts in
excess of $500,000.
(c) The authorized capital stock of Target consists, and on the Closing
Date will consist, of 3,000,000 shares of common stock, without par value, of
which 1,082,965 shares are issued and outstanding. Target has reserved (i)
408,170 shares of common stock for issuance under its Amended and Restated Stock
Option Plan, of which options to purchase 53,760 Target Common Shares are issued
and outstanding and (ii) 198,688 Target Common Shares for issuance under its
Stock Purchase Plan. The authorized capital stock of Exotic consists, and on the
Closing Date will consist, of 3,000,000 shares of common stock, without par
value, of which 235,680 shares are issued and outstanding. The authorized
capital stock of EMII consists, and on the Closing Date will consist of, 1,000
shares of common stock, without par value, of which 1,000 shares are issued and
outstanding. All of the issued and outstanding shares of Target and the Target
Subs are validly issued, fully paid and nonassessable and the issuance of such
issued and outstanding shares were not subject to any preemptive rights which
have not been effectively waived. Schedule 2.1(c) sets forth a list of the
holders of all outstanding shares of capital stock of Target, and the Target
Subs including their names and addresses and the number of Target Common Shares
that they hold. Schedule 2.1(c) accurately sets forth, with respect to each
Target Option that is outstanding as of the date of this Agreement: (i) the name
of the holder of such Target Option; (ii) the total number of Target Common
Shares that are subject to such Target Option and the number of Target Common
Shares with respect to which such Target Option is immediately exercisable;
(iii) the date on which such Target Option was granted and the terms of such
Target Option; (iv) the vesting schedule for such Target Option; (v) the
exercise price per Target Common Share purchasable under such Target Option; and
(vi) whether such Target Option has been designated an "incentive stock option"
as defined in Section 422 of the Code. Except as set forth on Schedule 2.1(c),
no holder of Target Common Shares possesses shares that are subject to vesting.
Except as set forth above and on Schedule 2.1(c), there
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are not as of the date hereof, and on the Closing Date there will not be, any
shares of capital stock of Target or either of the Target Subs authorized,
issued or outstanding or any authorized or outstanding subscriptions, options,
warrants, stock appreciation rights, calls, rights, convertible securities or
other agreements or commitments of any character relating to issued or unissued
shares of capital stock or other securities of Target or either of the Target
Subs, or otherwise obligating Target or either of the Target Subs to issue,
transfer or sell any shares of capital stock of Target or either of the Target
Subs, or other securities convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of capital stock of Target or either of the
Target Subs. Except as set forth above or on Schedule 2.1(c), following the
Closing, none of Target or the Target Subs will have any obligation to issue,
transfer or sell any of its capital shares or other securities of Target or the
Target Subs, as the case may be, pursuant to any currently existing employee
benefit plan or otherwise. Except as set forth on Schedule 2.1(c), none of
Target or the Target Subs has any liability to any current or former shareholder
of Target or the Target Subs, as the case may be, arising from or relating to
the offer and sale of any of its securities, whether under federal or state
securities law, or otherwise.
(d) Target has full corporate power and authority to execute, deliver and
perform this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Target, and no other corporate
proceedings on the part of Target are necessary for Target to authorize this
Agreement or to consummate the transactions contemplated hereby other than
approval by the Shareholders. This Agreement has been duly executed and
delivered by duly authorized officers of Target. This Agreement constitutes a
legal, valid and binding obligation of Target enforceable against it in
accordance with its terms (except to the extent that enforcement is affected by
laws pertaining to bankruptcy, reorganization, insolvency and creditors' rights
and by the availability of injunctive relief, specific performance and other
equitable remedies).
(e) Except as may be required by the Securities Act, state securities laws
or the California Law, there is no requirement applicable to Target or either of
the Target Subs to make any filing with, or to obtain any permit, authorization,
consent or approval of, any governmental or regulatory authority as a condition
to the lawful consummation by Target of the transactions contemplated by this
Agreement. Target does not know of any reason why any required permit,
authorization, consent or approval will not be obtained. Except as set forth on
Schedule 2.1(e), neither the execution and delivery of this Agreement by Target
nor the consummation by Target of the transactions contemplated by this
Agreement will (i) conflict with or result in any breach of any provision of the
charter or bylaws of Target or either of the Target Subs, (ii) result in a
material default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture or other evidence of indebtedness of Target or either
of the Target Subs or any license agreement, lease or other contract, instrument
or obligation to which Target or either of the Target Subs is a party or by
which Target or either of the Target Subs or any of their assets may be bound,
(iii) violate any statute, rule, regulation, order, writ, injunction, decree or
arbitration award applicable to Target or either of the Target Subs or any of
their assets, which violation would have a Material Adverse Effect on Target or
either of the Target Subs, or (iv) result in the creation of any material
(individually or in the aggregate) liens, charges or encumbrances on any of the
assets of Target or the Target Subs.
(f) Target has delivered to Acquiror complete and accurate copies of the
minutes of all its directors and shareholders meetings, and all actions by
written consent of the directors and shareholders, of Target and EMII since
inception and of Exotic since January 1, 1990, and will deliver to Acquiror at
or prior to the Closing complete and accurate copies of all minutes of such
meetings and such actions that occur between the date hereof and the Closing
Date.
2.2 FINANCIAL.
(a) The audited consolidated balance sheet of Target as of December 31,
1996 and the audited consolidated statement of operations, consolidated
statement of cash flows and consolidated statement of changes in shareholders'
equity of Target for the fiscal years ended December 31, 1995 and 1996, together
with the notes thereto and the unqualified report of McGladrey & Pullen LLP, and
the unaudited consolidated balance sheet of Target as of September 30, 1997 (the
"September 30, 1997 Balance Sheet") and the
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unaudited consolidated statement of operations and consolidated statement of
cash flows of Target for the nine-month period ending September 30, 1997, copies
of which have been provided to Acquiror, have been prepared in accordance with
the books and records of Target, which books and records are complete,
maintained on a consistent basis, and present fairly the financial position of
Target as of the date of said balance sheets and the results of operations of
Target for the periods covered by said statements of operations, in accordance
with generally accepted accounting principles ("GAAP") consistently applied,
except as otherwise disclosed therein and except, in the case of unaudited
statements, for normally recurring year-end adjustments, which adjustments will
not be material either individually or in the aggregate, and the absence of
notes required by GAAP. The financial statements described in this Section
2.2(a) are referred to in this Agreement as the "Financial Statements."
(b) None of Target or the Target Subs has any material Liability, except
for any Liability which (i) is accrued or fully reserved against in the
September 30, 1997 Balance Sheet or disclosed in the notes included in the
Financial Statements; or (ii) is of a normally recurring nature and was incurred
after September 30, 1997 in the ordinary course of business consistent with past
practice. As used herein, "Liability" shall mean any liability or obligation of
any kind or nature, secured or unsecured (whether absolute, accrued, contingent
or otherwise, and whether due or to become due).
(c) The accounts receivable of each of Target and the Target Subs on
September 30, 1997, and those existing on the Closing Date:
(i) have arisen and will have arisen out of sales in the ordinary
course of business and represent bona fide indebtedness of the applicable
account debtor;
(ii) are and will be collectible in full, net of the reserves therefor
set forth on the books of Target, which reserves were calculated consistent
with past practices and with GAAP applied consistently with the Financial
Statements; and
(iii) are and will be subject to no claim of offset, counterclaim,
recoupment or setoff and, to the best knowledge of Target, there are no
facts or circumstances (whether asserted or unasserted) that could give
rise to such a claim.
Schedule 2.2(c) sets forth complete and accurate accounts receivable aging
report as of September 30, 1997.
(d) The inventories of each of Target and the Target Subs on September 30,
1997 and those existing on the Closing Date are and will be usable in all
material respects in the ordinary course of business at a value which is not
less than the value at which such inventory is carried on the books of Target or
either of the Target Subs, respectively. The inventory is adequate for the
conduct of the business of Target and inventory levels are not in excess of the
normal operating requirements of Target and the Target Subs. Schedule 2.2(d)
sets forth all inventories as of the date hereof that Target in good faith
believes to be in excess of the reasonable requirements of each of Target and
the Target Subs for the next three months, except for germanium, and for other
materials, the cost of which is recoverable under existing purchase orders in
the event such purchase orders are canceled.
2.3 TAX MATTERS. With respect to Taxes (as defined below):
(a) Target and each of the Target Subs have filed or will file or cause to
be filed, within the time and in the manner prescribed by law, all returns,
declarations, reports, estimates, information returns and statements, schedules,
notices, forms or other documents, including information returns and reports
("Returns") required to be filed under federal, state, local or any foreign laws
by Target or either of the Target Subs relating to the determination,
assessment, collection or payment of Taxes for all taxable periods ending on or
prior to the Closing Date; all Returns so filed complied in all material
respects with the laws, rules and regulations applicable to such Returns.
(b) Each of Target and the Target Subs have within the time and in the
manner prescribed by law, paid (and until the Closing will, within the time and
in the manner prescribed by law, pay) all Taxes that are due and payable prior
to the Closing, and any difference between the amount of the book basis and the
tax basis of assets (net of liabilities) are either accounted for in the
Financial Statements or fully disclosed in the notes
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thereto (and, except for changes set forth on Schedule 2.3(b), until the Closing
there shall not be any material change in any such difference).
(c) All Taxes payable by Target or either of the Target Subs as of
September 30, 1997 or which will become payable as a result of activities of
Target or either of the Target Subs on or before September 30, 1997 are
reflected on the September 30, 1997 Balance Sheet as accrued liabilities in
accordance with GAAP. No Taxes will become payable by Target or either of the
Target Subs as a result of activities of Target or either of the Target Subs
between September 30, 1997 and the Closing Date other than Taxes of a normally
recurring nature incurred by Target or the Target Subs after September 30, 1997
in the ordinary course of business consistent with past practice.
(d) Target has established (and until the Closing will establish) on its
books and records reserves that are adequate for the payment of all Taxes
whether or not yet due and payable.
(e) There are no liens for unpaid Taxes filed against the assets of Target,
or either of the Target Subs except liens for Taxes not yet due.
(f) None of Target or the Target Subs has filed (nor will file prior to the
Closing Date) any consent agreement under Section 341(f) of the Code nor agreed
to have Section 341(f)(2) of the Code apply to any disposition of the subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by
Target or the Target Subs.
(g) No deficiency or adjustment for any Taxes has been proposed or asserted
or assessed against Target or either of the Target Subs and, to the best
knowledge of Target, no foreign, federal, state or local audits, examination or
other administrative proceedings or court proceedings are presently pending with
regard to any Taxes, and no waiver or consent extending any statute of
limitations for the assessment or collection of any Taxes, which waiver or
consent remains in effect, has been executed by (or on behalf of) Target or
either of the Target Subs nor are any requests for such waiver or consent
pending.
(h) None of Target or the Target Subs is a party to any tax-sharing or
allocation agreement, nor does Target or either of the Target Subs owe any
amount under any tax-sharing or allocation agreement.
(i) The acquisition of Target by Acquiror will not result in the payment of
any "excess parachute payment" within the meaning of Section 280G of the Code,
and there is no agreement, plan or arrangement covering any employee or
independent contractor of Target or either of the Target Subs that would give
rise to any payment that would not be deductible pursuant to Section 280G or
Section 162 of the Code.
(j) None of Target or the Target Subs has made any election under Section
338(g) of the Code with respect to any acquisition, and no outstanding debt
obligation of Target or the Target Subs is "corporate acquisition indebtedness"
within the meaning of Section 279(b) of the Code.
(k) None of Target or the Target Subs is a United States Real Property
Holding Corporation as defined under Section 897(c)(2) of the Code.
(l) There have been no audits of Taxes based on income of Target or either
of the Target Subs since December 31, 1991.
(m) For purposes of this Agreement, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, customs duties, fees, assessments or
charges of any kind whatsoever (together with any interest and any penalties,
additions to tax or additional amounts) imposed by any taxing authority
(domestic or foreign) upon or payable by Target or Target Sub.
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2.4 CONDUCT OF BUSINESS. Except as set forth in Schedule 2.4, since
September 30, 1997, none of Target or the Target Subs has:
(a) sold, leased, optioned or transferred any material portion of the
assets of Target or either of the Target Subs or any material portion of the
interests in such portion, except for sales of inventory in the ordinary course
of business;
(b) suffered any material loss, or material interruption in use, of any
material asset or property (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;
(c) made any material change in the conduct or nature of its business or
operations;
(d) waived any material rights arising out of the conduct of, or with
respect to, its business or operations;
(e) made or committed to make any capital expenditures in an amount in
excess of $100,000 in the aggregate;
(f) declared or paid any dividend or other distribution with respect to its
capital shares or redeemed, repurchased or otherwise acquired any of its own
capital shares;
(g) made any material increase in the rate or terms of compensation payable
by Target or either of the Target Subs to, or any increase in the rate or terms
of any bonus, insurance, pension or other employee benefit plan on behalf of any
director, officer or key employee of Target or either of the Target Subs;
(h) made any change in accounting methods, principles or practices except
as required by GAAP;
(i) suffered any creation, occurrence or assumption of any material
indebtedness for money borrowed other than in the form of accounts payable for
goods and services in the ordinary course of business;
(j) assumed, guaranteed, or incurred any liability for the obligations of
any other person or suffered the subjecting of any property or assets of Target
or either of the Target Subs to mortgage, lien, pledge or other encumbrance
other than purchase money security interests or liens for taxes not yet due and
payable in the ordinary course of business;
(k) suffered any termination or, to the best knowledge of Target,
threatened termination, or substantial adverse modification, of the relationship
of Target or either of the Target Subs with a customer or supplier or the
occurrence of any event affecting any product or process used by any of Target
or the Target Subs having, in any such case or in the aggregate, a Material
Adverse Effect;
(l) without limitation by the enumeration of any of the foregoing, entered
into any material transaction (including any borrowing, leasing or capital
financing or any lease of real property) other than in the ordinary course of
business;
(m) incurred any material Liability other than in the ordinary course of
business;
(n) suffered or, to the best knowledge of Target, been threatened with any
adverse change which has had or could have a Material Adverse Effect; or
(o) agreed to do any of the foregoing.
2.5 CONTRACTS.
(a) Except as set forth in Schedule 2.5(a), none of Target or the Target
Subs is a party to, or bound by, any undischarged written or oral:
(i) contract for the employment for any period of time whatsoever, or
restricting the employment, of any employee;
(ii) consulting agreement;
(iii) collective bargaining agreement;
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(iv) contract or agreement restricting in any manner the right of
Target or either of the Target Subs to compete with any other person or
restricting the right of Target or either of the Target Subs to sell to or
purchase from any other person;
(v) agreement with any affiliate of Target or either of the Target
Subs or person controlled by an affiliate of Target or either of the Target
Subs for or with respect to the purchase or sale of goods or the
performance of services;
(vi) contract for the payment or receipt of license fees or royalties
to or from any person, firm or corporation;
(vii) contract of agency, representation, distribution or franchise
which cannot be canceled without payment or penalty upon notice of 30 days
or less;
(viii) service contract in an annual amount in excess of $100,000;
(ix) guaranty, performance, bid or completion bond, or surety or
indemnification agreement;
(x) contract relating to the purchase, sale, ownership, use or license
of technology except licenses for third party software generally available
to the public;
(xi) lease or sublease, either as lessee or sublessee, lessor or
sublessor, of real or personal property or intangibles;
(xii) contracts relating to the purchase, sale or margining of
securities;
(xiii) warranty or product service contracts;
(xiv) joint venture, partnership or other contracts involving a
sharing of profits, losses, costs or liabilities; or
(xv) any other contract that provides for the receipt or expenditure
by Target or either of the Target Subs of more than $100,000.
All contracts, leases, subleases and other instruments of the type referred to
in this Section 2.5(a) and described in Schedule 2.5(a) (collectively,
"Contracts") are in full force and effect and are binding upon Target or one or
more of Target Subs, as the case may be, and, to the best knowledge of Target,
are binding on the other parties thereto. Except as set forth on Schedule
2.5(a), no material default by Target or either of the Target Subs, as the case
may be, has occurred thereunder and, to the best knowledge of Target, no
material default by the other contracting parties has occurred thereunder, and
no event has occurred which with the giving of notice or the lapse of time, or
both, would constitute a material default by Target or either of the Target
Subs, as the case may be. Target has delivered to Acquiror true and complete
copies of each contract, lease, sublease, or other instrument described in
Schedule 2.5(a).
(b) Except as set forth in Schedule 2.5(b), none of Target or the Target
Subs is a party to, or bound by, any unexpired, undischarged or unsatisfied
written or oral contract, agreement, indenture, mortgage, debenture, note or
other instrument under the terms of which performance by Target or the Target
Subs according to the terms of this Agreement will be a default or an event of
acceleration, or would otherwise require consent or whereby timely performance
by Target, according to the terms of this Agreement, may be prohibited,
prevented or delayed.
(c) Except as set forth in Schedule 2.5(c), none of Target or the Target
Subs is a party to, or bound by, any contract, agreement, indenture, mortgage,
debenture, note or other instrument requiring Target or either of the Target
Subs to perform design or engineering services, which services have not been
fully performed, delivered and unconditionally accepted by the party contracting
for such services or any third party beneficiary thereof.
(d) Schedules 2.5(d) and 2.8(b) contains a list of every material license,
permit or governmental approval, order, directive and agreement applied for,
pending, issued, rejected or given to Target or either of the Target Subs with
respect to the conduct of its business or operations. Each of Target and the
Target Subs
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possesses all licenses, permits, and governmental approvals and authorizations
which are required to operate its business as presently conducted, and each of
Target and the Target Subs is in compliance with all such licenses, permits,
approvals and authorizations.
(e) Schedule 2.5(e) contains a list of all pending or, to the best of
Target's knowledge, threatened claims against Target or either of the Target
Subs under each Contract (including, without limitation, claims for back
charges, rebates, price reductions, breaches of product or service warranties or
for product or service liability for products manufactured or sold), excluding
requests for service in the ordinary course of business which Target or either
of the Target Subs is required to perform pursuant to the terms of standard
warranties and which are covered by warranty reserves, to the extent such
claims, individually or in the aggregate, could have a Material Adverse Effect.
2.6 EMPLOYEES.
(a) With respect to the employees of Target and the Target Subs:
(i) Schedule 2.6(a) contains a true and complete list of each bonus,
deferred compensation, incentive compensation, stock purchase, stock
option, severance or termination pay, hospitalization or other medical,
life or other insurance, supplemental unemployment benefits,
profit-sharing, pension, or retirement plan, program, agreement or
arrangement (collectively, the "Plans") currently sponsored, maintained or
contributed to or required to be contributed to by Target or either of the
Target Subs for the benefit of any employee of any of Target or the Target
Subs (an "Employee" and collectively, the "Employees").
(ii) Except as set forth on Schedule 2.6(a), none of Target or the
Target Subs has now or since January 1994 maintained, sponsored or
contributed to any employee pension benefit plan (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), whether or not excluded from coverage under specific Titles or
Subtitles of ERISA) for the benefit of Employees or former Employees (a
"Pension Plan").
(iii) Except as set forth on Schedule 2.6(a), none of Target or the
Target Subs maintains, sponsors or contributes to any welfare benefit plan
(as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA) for the benefit of Employees
or former Employees (the "Welfare Plans").
(iv) With respect to each of the Plans, Target has heretofore
delivered to Acquiror true and complete copies of each of the following
documents:
(1) a copy of each such Plan (including all amendments thereto);
(2) a copy of the annual report, if required under ERISA, with
respect to each such Plan for the last two years;
(3) a copy of the most recent summary plan description, together
with each summary of material modifications, if required under ERISA,
with respect to each such Plan, and all material employee communications
relating to such Plan since December 1, 1993;
(4) if such Plan is funded through a trust or any third party
funding vehicle, a copy of the trust or other funding agreement
(including all amendments thereto) and the latest financial statements
thereof;
(5) all current contracts relating to the Plans, including, without
limitation, service provider agreements, insurance contracts, investment
management agreements, subscription and participation agreements and
recordkeeping agreements; and
(6) the most recent determination letter received from the Internal
Revenue Service (the "IRS") with respect to each such Plan that is
intended to be qualified under Section 401 of the Code.
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(v) None of Target or the Target Subs has, is or has ever been
required to be treated as a single employer with any other person under
Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code.
None of Target or the Target Subs has ever been a member of an "affiliated
service group" within the meaning of Section 414(m) of the Code. None of
Target or the Target Subs has ever made a complete or partial withdrawal
from a multiemployer plan, as such term is defined in Section 3(37) of
ERISA, resulting in "withdrawal liability," as such term is defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of
such liability under either Section 4207 or 4208 of ERISA), and no Plan is
a multiemployer plan.
(vi) None of Target or the Target Subs has any plan or commitment,
whether legally binding or not, to create any Welfare Plan or Pension Plan,
or any plan or commitment to modify or change any existing Welfare Plan or
Pension Plan, other than changes to comply with applicable law, that would
affect any Employee.
(vii) No Plan provides death, medical or health benefits (whether or
not insured) with respect to current or former Employees after any such
Employee's retirement or other termination of service (other than (A)
benefit coverage mandated by applicable law, including, without limitation,
coverage provided pursuant to Section 4980B of the Code, (B) deferred
compensation benefits accrued as liabilities on the books of Target or the
Target Subs, or (C) benefits the full cost of which is borne by the current
or former Employee (or the Employee's beneficiary)).
(viii) With respect to any Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects. Schedule 2.6(a)(viii) describes all obligations of Target or the
Target Subs as of the date of this Agreement under COBRA.
(ix) Each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not
limited to ERISA and the Code.
(x) Each of the Plans intended to be qualified under Section 401 of
the Code has received a favorable determination from the IRS, and nothing
has occurred since each such determination to adversely affect it.
(xi) Neither the execution of this Agreement nor the consummation of
the transactions contemplated hereby will result in any payment (including,
without limitation, any bonus, golden parachute or severance payment) to
any director of Target or the Target Subs or Employee under any Plan, or
materially increase the benefits payable under any Plan, or result in the
acceleration of the time of payment or vesting of such benefits.
(b) Schedule 2.6(b) contains a list of all Employees. Said list correctly
reflects, in all material respects, their salaries, other compensation including
compensation payable pursuant to bonus, deferred compensation or commission
arrangements, dates of employment, positions, social security numbers and birth
dates.
(c) Each of Target and the Target Subs has complied and is currently
complying with all applicable laws relating to employment and employment
practices, including, without limitation, wages, workplace safety, equal
employment opportunity and nondiscrimination, employee compensation and worker
compensation ("Labor Laws"). Other than as set forth on Schedule 2.6(c), none of
Target or the Target Subs has received any notice of noncompliance or violation
of any Labor Law that is pending or unresolved; no action is pending or, to the
best knowledge of Target, threatened before the National Labor Relations Board,
the Equal Employment Opportunity Commission, the U.S. Department of Labor, the
IRS or any other foreign, federal, state or local governmental authority or
court relating to employment matters or any Labor Law; and there is no pending
or, to the best knowledge of Target, threatened arbitration, suit, litigation or
proceeding, against Target or the Target Subs or any current or former director,
major shareholder, officer or supervisory employee of Target and the Target
Subs, alleging wrongful termination, racial, religious, sexual or age
discrimination, improper post-termination conduct, or breach of contract or
covenant of employment.
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(d) Schedule 2.6(d) identifies all Employees who are not available fully to
perform work because of disability, layoff, leave or similar status and sets
forth the basis of such leave and the anticipated date of return to full
service.
(e) To the best knowledge of Target, all individuals who are performing or
have performed services for Target or the Target Subs within the last two years
and are or were classified as "independent contractors" for tax purposes qualify
for such classification.
(f) None of Target or the Target Subs is subject to any collective
bargaining agreement with respect to any of its employees, has any current labor
problems or disputes, or, to the best knowledge of Target, has been subject to
any effort to organize any of its employees during the last 24 months.
2.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except for litigation or proceedings relating to the environment (which
are exclusively provided for in Section 2.8 below), there is no arbitration,
suit, litigation or proceeding, in law or in equity, pending, or, to the best
knowledge of Target, threatened before any court, tribunal, master or
governmental agency, authority or body in which Target or the Target Subs is a
party or to which its business or property is subject. To the best knowledge of
Target there are no preliminary proceedings or governmental investigations
before any commission or other administrative authority pending or threatened
against Target or the Target Subs, and, to the best of Target's knowledge, no
event has occurred or circumstance exists that (with or without notice or lapse
of time) may serve as the basis for or give rise to any such arbitration, suit,
litigation or proceeding.
(b) Except for wage garnishment orders relating to employees of Target or
Target Subs, none of Target or the Target Subs is a party to any decree, order
or arbitration award (or agreement entered into in any administrative, judicial
or arbitration proceeding with any governmental authority) with respect to its
properties, assets, personnel or business activities.
(c) Except as disclosed in Schedule 2.6(c) and except for laws, rules and
regulations relating to the environment (which are exclusively provided for in
Section 2.8 below), none of Target or the Target Subs is in violation of, or
delinquent in respect to, any decree, order or arbitration award or law,
statute, or regulation of, or agreement with, or any license or permit from, any
federal, state, local and foreign governmental authority to which its
properties, assets, personnel or business activities are subject or to which
Target or the Target Subs is subject, including, without limitation, laws, rules
and regulations relating to occupational health and safety, equal employment
opportunities, fair employment practices, and sex, race, religious and age
discrimination.
2.8 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 2.8:
(i) "Environmental Claim" means any material claim, action, cause of
action, investigation or notice (written or oral) by any person or entity
alleging potential liability (including, without limitation, potential
liability for investigatory costs, cleanup costs, governmental response
costs, natural resources damages, property damages, personal injuries, or
penalties) arising out of, based on or resulting from (A) the presence, or
release into the environment, of any Material of Environmental Concern at
any location, whether or not owned or operated by Target or either of the
Target Subs, or (B) circumstances forming the basis for any violation, or
alleged violation, of any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state, local
and foreign laws and regulations relating to pollution or protection of
human health or the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata),
including, without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
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(iii) "Materials of Environmental Concern" means chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum and petroleum
products or any other substance now regulated by Environmental Laws or that
is otherwise a danger to health, reproduction or the environment.
(b) Each of Target and the Target Subs is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by Target and each of the Target Subs of all
material permits and other governmental authorizations required under applicable
Environmental Laws, and material compliance with the terms and conditions
thereof. None of Target or the Target Subs has received any communication
(written or oral), whether from a governmental authority, citizens group,
employee or otherwise, that alleges that it is not in such full compliance, and,
to the best knowledge of Target, there are no circumstances that may prevent or
interfere with such material compliance in the future. To the best knowledge of
Target, no current or prior owner of any property owned or leased by Target or
either of the Target Subs has received any communication (written or oral),
whether from a government authority, citizens group, employee or otherwise, that
alleges that it, or Target or the Target Subs, is not in such full compliance.
All permits and other governmental authorizations currently held by Target or
either of the Target Subs pursuant to the Environmental Laws are identified in
Schedule 2.8(b).
(c) There is no Environmental Claim pending or, to the best knowledge of
Target, threatened against Target or the Target Subs or against any person or
entity whose liability for any either of Environmental Claim, Target or either
of the Target Subs has or may have retained or assumed either contractually or
by operation of law.
(d) Except as disclosed in Schedule 2.8(b), there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could form a reasonable basis for
any Environmental Claim against Target or either of the Target Subs or, to the
best knowledge of Target, against any person or entity whose liability for any
Environmental Claim Target or either of the Target Subs has or may have retained
or assumed either contractually or by operation of law.
(e) Without in any way limiting the generality of the foregoing, (i) all
on-site and off-site locations where Target or either of the Target Subs has
stored, disposed of or arranged for the disposal of, Materials of Environmental
Concern are identified in Schedule 2.8(e), (ii) to the best knowledge of Target,
all underground storage tanks (whether or not in use by Target or the Target
Subs), and the capacity and contents of such tanks, located on property owned or
leased by Target or either of the Target Subs, are identified in Schedule
2.8(e), (iii) to the best knowledge of Target, there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned or leased by Target or either of the Target Subs, and (iv) to the best
knowledge of Target, no polychlorinated biphenyls (PCBs) are used or stored at
any property owned or leased by Target or either of the Target Subs.
2.9 PROPERTIES.
(a) Target has previously delivered to Acquiror true and correct copies of
all leases pursuant to which Target or either of the Target Subs leases real or
personal property (the "Leases"). Each of the Leases is valid, binding and
enforceable against Target or the Target Subs and, to the best knowledge of
Target, against each of the lessors thereunder in accordance with its terms and
is in full force and effect. Except as described in Schedule 2.9(a), none of
Target or the Target Subs is in default under any term of any Lease nor, to the
best knowledge of Target, is any other party thereto in default thereunder, and
no event has occurred which (whether with or without notice, lapse of time or
both) would constitute a default by Target or the Target Subs. The transactions
contemplated by this Agreement will not constitute a breach of any Lease. The
properties subject to the Leases and the conditions of the Leases are suitable
in all material respects for the business currently being conducted thereon by
Target or the Target Subs, as the case may be. There are no condemnation
proceedings pending or, to the best knowledge of Target, threatened with respect
to any portion of the property subject to the Leases.
(b) Except as set forth on Schedule 2.9(b), each of Target and the Target
Subs has good and valid title to its assets reflected as owned in the September
30, 1997 Balance Sheet (as well as all of its properties and
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assets which have been fully depreciated and are not reflected therein) or
acquired after September 30, 1997. Except as set forth in Schedule 2.9(b), as of
September 30, 1997 and as of the Closing, each of Target and the Target Subs
shall have good and valid title to its assets, free and clear of any mortgages,
pledges, liens, security interests, conditional and installment sale agreements,
encumbrances or charges of any kind (collectively, "Liens"), other than (i)
Liens shown on the September 30, 1997 Balance Sheet as securing specified
liabilities (with respect to which no default exists), (ii) Liens for current
taxes not yet due, (iii) purchase money security interests and (iv) all minor
imperfections of title and encumbrances, if any, which do not impair the
operations of Target and either of the Target Subs in any material respect. All
of the assets of Target and the Target Subs are in all material respects fit for
the purposes for which intended and in good operating condition and repair,
except for ordinary wear and tear, are currently used by Target and the Target
Subs in the ordinary course of its business, and are sufficient for the
operation of Target's or the Target Subs' business, as the case may be. As of
the Closing, the assets of Target and the Target Subs shall constitute all of
the properties, rights and assets (other than insurance policies) necessary for
the conduct of the business of Target and the Target Subs as currently conducted
and as conducted at Closing. Except as set forth in Schedule 2.9(b), all
material tangible assets of Target and the Target Subs are located in Murrieta,
California. Except as set forth on Schedule 2.9(b), no tangible personal
property has been loaned or otherwise made available to Target or either of the
Target Subs for development or other purposes.
(c) Each of Target and the Target Subs has fire and casualty insurance
policies, with extended coverage (subject to reasonable deductibles and policy
exclusions), sufficient to allow it to replace any of its material properties
that might be damaged or destroyed, and has liability insurance reasonably
adequate to protect it and its financial condition against the risks involved in
the business conducted by it. Schedule 2.9(c) lists all such policies. Target
and the Target Subs have paid all premiums when due and have not done anything
by way of action or inaction which could be reasonably likely to invalidate any
of such policies, in whole or in part. There are no outstanding requirements or
recommendations of any insurance company that has issued a policy to Target or
either of the Target Subs which require or recommend any changes to the conduct
of the business of Target and the Target Subs, or any repair or other work with
respect to any of its properties, and no insurance company providing coverage to
Target or either of the Target Subs has refused to cover any claim or given any
notice of defense subject to reservation of rights or provided any notice of
cancellation of any coverage.
(d) Each of Target and the Target Subs has good, marketable and insurable
title to each piece of real property owned by it (collectively, "Property"),
free and clear of all material liens, encumbrances, covenants, conditions,
restrictions, rights of way, easements and other matters affecting title. True
and complete copies of any title report relating to the Property have been
delivered to Acquiror.
(e) To the best knowledge of Target, (i) no action, suit, proceeding or
investigation is pending or threatened (including without limitation
environmental litigation and eminent domain, condemnation or similar
proceedings) materially affecting the Property or against Target or either of
the Target Subs and relating to or arising from its interest in any tangible
asset owned by Target or either of the Target Subs, and (ii) none of Target or
the Target Subs has received any notice of or has any knowledge that any such
proceedings are contemplated. To the best knowledge of Target, (A) the uses
presently being made of the Property conform to existing zoning laws, (B) except
as set forth on Schedule 2.9(e), all material permits and licenses necessary for
the use, occupancy and operation of the Property have been obtained, (C) each of
Target and the Target Subs have complied in all material respects with all laws,
ordinances, rules and regulations of any governmental agency or body having or
asserting jurisdiction over the Property, and (D) the Property complies in all
material respects with all building, fire and life safety codes and
requirements.
(f) None of Target or the Target Subs is a "foreign person" as that term is
defined in the Code and in applicable regulations.
2.10 INTELLECTUAL PROPERTY.
(a) Schedule 2.10(a) lists all domestic and foreign patents and patent
applications owned or licensed by Target or either of the Target Subs (the
"Patents") and all material agreements relating thereto. Except where such
Patents are indicated to be licensed, Target (or one of the Target Subs, as the
case may be) owns
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the Patents and all related patent rights free and clear of all liens, claims or
encumbrances and may assign or license them free and clear of any liens, claims
or encumbrances. There are no proceedings, and to the best knowledge of Target,
there are no claims, threats or other communications, which challenge the
validity of any claim of any Patent. All such Patents are currently in
compliance with formal legal requirements (including payment of filing,
examination and maintenance fees and proofs of working or use), and Target has
no reason to believe that any of the Patents is not, or upon issuance will not
be, valid and enforceable. No Patent has been or is now involved in any
interference proceeding or has been challenged in any way, and Target is not
aware of any interfering patent or patent application. Target is not aware of
any relevant information that is material to the examination of an application
for any Patent that has not been disclosed to the U.S. Patent and Trademark
Office pursuant to the disclosure requirements of 37 C.F.R. 1.56. Target has
delivered to Acquiror copies of all opinions and memoranda of counsel received
by it or either of the Target Subs relating to (i) the validity and
patentability of the Patents, (ii) infringement by third parties of the Patents
and (iii) Target's and the Target Subs' freedom to operate. Schedule 2.10(a)
lists all existing agreements, including licenses, relating to the Patents
granted to third parties by Target or either of the Target Subs. Subject to any
right of Target (or one of the Target Subs, as the case may be) to conduct an
audit of its licensees, all royalties and other payments due under said
agreements have been paid, and no party to those agreements is in material
default in any manner respecting its obligations under those agreements. Except
for the agreements listed in Schedule 2.10(a) and except for any license implied
by the sale of a product, no other license, covenant or agreement has been
granted or entered into by Target or the Target Subs with respect to the
Patents.
(b) Schedule 2.10(b) lists all domestic and foreign registered copyrights,
trademarks and trademark applications owned by Target or either of the Target
Subs and/or licensed by Target or either of the Target Subs from (other than
pursuant to standard end-user licenses) or to third parties (the "Trademarks"
and "Copyrights"), indicating in each case whether the Trademark or Copyright is
owned or licensed, and a listing and summary description of all agreements
relating to the Trademarks and Copyrights. Other than as set forth on Schedule
2.10(b), each of Target and the Target Subs owns free and clear of all liens,
claims or encumbrances the Trademarks and Copyrights which are so designated as
owned by it, and all agreements with respect to Trademarks and Copyrights are
valid and binding, are in full force and effect, and neither Target nor, to the
best knowledge of Target, any other party thereto is in material default, or
with the giving of notice or lapse of time or both, would be in material default
under the terms of such agreement. All registered Trademarks and Copyrights are
in compliance with all formal legal requirements (including, in the case of
Trademarks, the timely post registration filing of affidavits of use and
incontestability and of renewal applications), are valid and enforceable, and
are not subject to any maintenance fees or taxes or actions falling due within
180 days after the Closing Date. There are no interference, opposition or
cancellation proceedings or infringement suits pending or, to the best knowledge
of Target, threatened with respect to any of the Trademarks or Copyrights.
Target has not been advised or has no reason to believe that Target or either of
the Target Subs is infringing a trademark or copyright held by another person.
(c) Each of Target and the Target Subs owns or has in its possession
certain information, know-how and show-how (including, without limitation, data,
documents, drawings, designs, software, procedures, customer lists and other
proprietary materials) relating to, without limitation, the specification,
examination, simulation, design, implementation, manufacture, procurement of
materials and the like from suppliers or subcontractors, quality control and
testing, use and delivery of its products ("Trade Secrets"). Each of Target and
the Target Subs has taken reasonable precautions to maintain its Trade Secrets
in confidence and to prevent their disclosure to unauthorized persons, including
having each of its employees execute and deliver its standard proprietary
information protection and assignment agreement (a copy of which has been
delivered to Acquiror). To the best knowledge of Target, Target (or one of the
Target Subs, as the case may be) has good title and an absolute right to use all
of its Trade Secrets, and the use of its Trade Secrets does not infringe the
rights of any third party. Schedule 2.10(c) sets forth a list of all agreements
relating to the Trade Secrets of Target and the Target Subs. To the extent that
any Trade Secrets of Target and the Target Subs are not available in documentary
or fixed form, disclosure shall be made to Acquiror prior to Closing to permit
Acquiror to make full use of the Trade Secrets to operate the business of Target
and the Target Subs.
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(d) All personnel, including Employees, agents, consultants and
contractors, who have contributed to or participated in the conception and
development of the design and manufacture processes, technical documentation or
other intellectual property of Target or either of the Target Subs either (i)
have been party to a "work-for-hire" arrangement or agreement with Target or one
of the Target Subs, as applicable, in accordance with applicable federal and
state law, that has accorded Target (or one of the Target Subs, as applicable)
full, effective, exclusive and original ownership of all tangible and intangible
property thereby arising, or (ii) have executed appropriate instruments of
assignment in favor of Target (or one of the Target Subs, as the case may be) as
assignee that have conveyed to Target (or one of the Target Subs, as the case
may be) full, effective and exclusive ownership of all tangible and intangible
property thereby arising.
(e) To the best knowledge of Target, no person is infringing upon any
Patent, Trademark or Copyright or is misappropriating any Trade Secret. To the
best knowledge of Target, none of the products sold by, nor any processes or
know-how used by, Target or either of the Target Subs, infringes any patent,
trademark or copyright of any third party. To the best knowledge of Target,
there is no intellectual property, in any form, whether patent, trademark,
tradename, trade secret, copyright or otherwise, necessary for the operation of
Target's and the Target Subs' businesses as conducted which Target (or one of
the Target Subs, as the case may be) does not currently own or license on
commercially reasonable terms.
2.11 DISCLOSURE.
(a) The copies of all documents furnished by Target pursuant to the terms
of this Agreement are complete and accurate.
(b) For purposes of this Agreement and the transactions contemplated
hereby, none of (i) the representations and warranties made by Target in this
Agreement, (ii) the disclosure schedules delivered to Acquiror pursuant hereto
(the "Target Disclosure Schedules") or (iii) any statement by Target or, to the
best knowledge of Target, any other person, contained in any document,
certificate or other writing furnished by Target to Acquiror in connection with
this Agreement, the Merger or the transactions contemplated hereby (when read
together), contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact necessary to make the statements
made herein or therein, in light of the circumstances in which they were made,
not misleading.
2.12 FINDERS. None of Target or the Target Subs has dealt with any person,
firm or corporation who is or may be entitled to a broker's commission, finder's
fee, investment banker's fee or similar payment from Target or either of the
Target Subs for arranging the transaction contemplated hereby or introducing the
parties to each other.
2.13 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every material transaction between Target and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
other than Acquiror, which is currently in effect or was consummated in the last
three years, is set forth on Schedule 2.13.
2.14 NO CONTEMPLATED TRANSACTIONS INCONSISTENT WITH POOLING-OF-INTERESTS
ACCOUNTING. Neither Target nor, to the best of Target's knowledge, any
Shareholder is contemplating any transaction that would result in the Merger not
qualifying for pooling-of-interests accounting.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUIROR SUB
Acquiror and Acquiror Sub represent and warrant to Target as of the date of
this Agreement and as of the Closing Date as follows:
3.1 ORGANIZATION.
(a) Acquiror is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Acquiror Sub is a corporation
duly organized, existing and in good standing under the laws of the State of
California. Each of Acquiror and Acquiror Sub has all necessary power and
authority under
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applicable corporate law and its organizational documents to own or lease its
properties and to carry on its business as presently conducted.
(b) Each of Acquiror and Acquiror Sub is qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification and
where the failure to so qualify would have a Material Adverse Effect.
(c) The authorized capital stock of Acquiror consists of 15,000,000 shares
of common stock, par value $.001 per share, of which, as of August 31, 1997,
6,099,854 shares were issued and outstanding, and 3,000,000 shares of preferred
stock, par value $.001 per share, of which, as of the date hereof, no shares
were issued and outstanding. All the issued and outstanding shares of Acquiror
are validly issued, fully paid and nonassessable and free of preemptive rights.
As of August 31, 1997, Acquiror has outstanding options to purchase 1,298,620
shares of Acquiror Common Stock and an aggregate of 1,217,668 additional shares
of Acquiror Common Stock reserved for issuance under its 1993 Stock Option Plan,
1997 Equity Incentive Plan and Employee Stock Purchase Plan. As of August 31,
1997, Acquiror has outstanding (i) warrants to purchase 551,660 shares of
Acquiror Common Stock and (ii) debentures convertible into 358,918 shares of
Acquiror Common Stock. Except as set forth above or pursuant to the exercise of
the foregoing options, there are not as of the date hereof any shares of capital
stock of Acquiror authorized, issued or outstanding or any outstanding
subscriptions, options, warrants, stock appreciation rights, calls, rights,
convertible securities or other agreements or commitments of any character
relating to unissued shares of capital stock of Acquiror, or otherwise
obligating Acquiror to issue, transfer or sell any shares of capital stock of
Acquiror, or other securities convertible into, exchangeable for, or evidencing
the right to subscribe for, any shares of the capital stock of Acquiror. The
authorized capital of Acquiror Sub consists of 100 shares of Common Stock,
without par value, all of which are issued and outstanding.
(d) Each of Acquiror and Acquiror Sub has full corporate power and
authority to execute, deliver and perform this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the Boards of Directors of each
of Acquiror and Acquiror Sub, and no other corporate proceedings on the part of
Acquiror or Acquiror Sub are necessary for Acquiror and Acquiror Sub to
authorize this Agreement or to consummate the transactions contemplated hereby
other than approval by the stockholders of Acquiror. This Agreement has been
duly executed and delivered by duly authorized officers of Acquiror and Acquiror
Sub. This Agreement constitutes a legal, valid and binding obligation of
Acquiror and Acquiror Sub, enforceable against each of them in accordance with
its terms (except to the extent that enforcement is affected by laws pertaining
to bankruptcy, insolvency, reorganization and creditors' rights and by the
availability of injunctive relief, specific performance and other equitable
remedies).
(e) Except as may be required by the Securities Act, state securities laws,
the California Law or the Delaware General Corporation Law (the "DGCL"), there
is no requirement applicable to Acquiror or Acquiror Sub to make any filing
with, or to obtain any permit, authorization, consent or approval of, any
governmental or regulatory authority as a condition to the lawful consummation
by Acquiror and Acquiror Sub of the transactions contemplated by this Agreement.
Neither Acquiror nor Acquiror Sub knows of any reason why any required permit,
authorization, consent or approval will not be obtained. Neither the execution
and delivery of this Agreement by Acquiror and Acquiror Sub nor the consummation
by Acquiror and Acquiror Sub of the transactions contemplated by this Agreement
will (i) conflict with or result in any breach of any provision of the
Certificate of Incorporation or Bylaws of Acquiror or the Articles of
Incorporation or Bylaws of Acquiror Sub, (ii) result in a material default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture or
other evidence of indebtedness of Acquiror or Acquiror Sub or any license
agreement, lease or other contract, instrument or obligation to which Acquiror
or Acquiror Sub is a party or by which Acquiror or Acquiror Sub or any of their
respective assets may be bound, (iii) violate any statute, rule, regulation,
order, writ, injunction, decree or arbitration award applicable to Acquiror or
Acquiror Sub or any of their respective assets which violation would have a
Material Adverse Effect on Acquiror or (iv) result in the creation of any
material (individually or in the aggregate) liens, charges or encumbrances on
any of the assets of Acquiror or Acquiror Sub.
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(f) Acquiror has delivered to Target complete and accurate copies of
Acquiror's Certificate of Incorporation and Bylaws, and Acquiror Sub's Articles
of Incorporation and Bylaws, each as amended.
3.2 COMMON STOCK TO BE ISSUED. The Acquiror Common Stock to be issued to
the Shareholders hereunder, when issued by Acquiror to the Shareholders pursuant
to the terms of this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable, will be issued in compliance with applicable federal
and state securities laws, will have the rights and preferences set forth in the
Certificate of Incorporation of Acquiror previously delivered to Target, and
will be free and clear of all liens, encumbrances and adverse claims; provided
that the Acquiror Common Stock to be issued to the Shareholders may be subject
to restrictions on transfer under federal securities laws as set forth in this
Agreement.
3.3 FINANCIAL. The audited consolidated balance sheet of Acquiror as of
August 31, 1997 and the audited consolidated statement of operations and
statement of cash flows of Acquiror for the fiscal year ended August 31, 1997,
each certified by Ernst & Young LLP, independent certified public accountants,
whose report thereon is included therein, have been prepared in accordance with
the books and records of Acquiror, which books and records are complete,
maintained on a consistent basis, and present fairly the financial position of
Acquiror as of the date of said balance sheets and the results of operations of
Acquiror for the periods covered by said statements of operations, in accordance
with GAAP consistently applied, except as otherwise disclosed therein. The
financial statements described in this Section 3.3 are referred to in this
Agreement as the "Acquiror Financial Statements."
3.4 CONDUCT OF BUSINESS. Except as previously disclosed to Target, since
August 31, 1997, Acquiror has not suffered or, to the best of the Acquiror's
knowledge, been threatened with any adverse change that has had or could have a
Material Adverse Effect.
3.5 DISCLOSURE.
(a) Acquiror has previously delivered to Target copies of Acquiror's
Prospectus dated June 19, 1997, Quarterly Report on Form 10-Q for the
periods ended May 31, 1997, Annual Report on Form 10-K for the year ended
August 31, 1997 and Current Report on Form 8-K dated December 6, 1997.
(b) The copies of all documents furnished by Acquiror pursuant to the
terms of this Agreement are complete and accurate.
(c) For purposes of this Agreement and the transactions contemplated
thereby, none of (i) the representations and warranties made by Acquiror or
Acquiror Sub in this Agreement or (ii) any statement by Acquiror or, to the
best of Acquiror's knowledge, any other person, contained in any document,
certificate or other writing furnished by Acquiror to Target in connection
with this Agreement, the Merger or the transactions contemplated hereby
(when read together), contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary to
make the statements made herein or therein, in light of the circumstances
in which they were made, not misleading.
3.6 FINDERS. Acquiror has not dealt with any person, firm or corporation
who is or may be entitled to a broker's commission, finder's fee, investment
banker's fee or similar payment for arranging the transaction contemplated
hereby or introducing the parties to each other.
ARTICLE 4
COVENANTS OF TARGET AND THE PRINCIPAL SHAREHOLDERS
Target and each of the Principal Shareholders hereby jointly and severally
covenant and agree as follows:
4.1 NEGATIVE COVENANTS. Between the date of this Agreement and the
Effective Time, unless Acquiror shall otherwise consent in writing, except as
provided hereunder, Target will not do, or commit to do, and will not take any
action, or omit to take any action to cause either of the Target Subs to do, and
none of the
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Principal Shareholders shall take any action, or omit to take any action, to
cause Target or either of the Target Subs to do or commit to do, any of the
following:
(a) make any purchase, sale or disposition of any asset or property, other
than in the ordinary course of business consistent with past practices or the
disposition of immaterial assets, or mortgage, pledge, subject to a lien or
otherwise encumber any of the properties or assets of Target (or of either of
the Target Subs, as the case may be);
(b) incur any material contingent liability as a guarantor or otherwise
with respect to the obligations of any person or entity;
(c) take any action, or permit any action within the control of Target,
either of the Target Subs or any of the Principal Shareholders, which would
prevent the Merger from qualifying as a tax-free reorganization under Section
368 of the Code or from being eligible for pooling-of-interests accounting
treatment in accordance with GAAP and all rules, regulations and policies of the
SEC, and Target and the Principal Shareholders will use their respective
reasonable best efforts to prevent any of the Shareholders or any of the
officers or directors of Target or the Target Subs from taking or permitting any
such action;
(d) amend any charter documents as previously delivered to Acquiror;
(e) issue any of its capital shares or grant any options, warrants or
rights to acquire any capital shares other than upon exercise of currently
outstanding vested options, or, except as set forth in Section 6.26, modify the
terms or waive any rights under any options, warrants or other securities
currently outstanding or accelerate vesting with respect to any unvested options
or capital shares; or declare, set aside or pay any dividend or make any other
distribution in respect of its capital shares, or make any direct or indirect
redemption, purchase or other acquisition of its capital shares other than
pursuant to the exercise of Target's rights under any existing repurchase option
or similar right with respect to currently outstanding Target Common Shares;
(f) make any material change in the compensation payable or to become
payable to any of its officers or employees or enter into, amend or terminate
any employment or consulting agreements or waive any rights thereunder other
than enter into an employment agreement with Thomas J. Brawley in accordance
with the terms previously disclosed to Acquiror;
(g) engage in transactions with any shareholder, officer, director or
Employee of Target or either of the Target Subs other than in the ordinary
course of business;
(h) enter into, amend, renew, extend, modify or terminate (prior to its
scheduled termination date) any sales, agency or distribution agreement, any
management or employment or consulting agreement, any lease, license or royalty
agreement, or any other material agreement or Contract or waive any material
rights thereunder;
(i) undertake any stock split, recapitalization or reorganization;
(j) release any person from any standstill or confidentiality agreement;
(k) solicit, encourage, negotiate, provide information for, or otherwise
cooperate in any way with, assist, or facilitate and use its reasonable best
efforts to prevent any of its officers and directors, employees, representatives
and agents from soliciting, encouraging or negotiating or providing information
for or otherwise cooperating in any way with, assisting or facilitating any of
the following (an "Acquisition Proposal"):
(i) any merger or consolidation of Target or either of the Target Subs
with any person other than Acquiror or Acquiror Sub,
(ii) any sale of assets of Target or either of the Target Subs to any
person other than Acquiror or Acquiror Sub (other than sales of inventory
in the ordinary course of business);
(iii) any equity or debt investment (other than on terms approved by
Acquiror) in Target either of or the Target Subs by any person; or
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(iv) any purchase of outstanding securities of Target or either of the
Target Subs by any person;
(l) undertake a course of action inconsistent with this Agreement or which,
would cause any representation or warranty in this Agreement to become untrue in
any material respect or which would prevent any condition precedent to Target's
obligations under this Agreement from being satisfied at or prior to the
Effective Time;
(m) provide or publish to Target's shareholders any material which might
constitute an unauthorized "prospectus" within the meaning of the Securities
Act, or any impermissible solicitation under the applicable state law;
(n) incur any material obligation other than in the ordinary course of
business;
(o) borrow money or incur new or additional indebtedness (other than
accounts payable or trade payables incurred in the ordinary course of business)
or loan money to any person (other than to either of the Target Subs or for
travel and similar advances to Employees in the ordinary course of business);
(p) incur liabilities in connection with the leasing of property or assets;
(q) issue any press release or public disclosure, either written or oral,
of the transactions contemplated by this Agreement without the prior knowledge
and written consent of Acquiror, provided that, if such disclosure is required
by law, such written consent shall not be required;
(r) make any investment in any other business or entity through purchase of
stock or securities, contribution to capital, property transfer, purchase of
property or assets or otherwise;
(s) alter the manner of keeping its books and accounts or its accounting
practices and procedures other than as required by GAAP;
(t) revalue any of its assets, including without limitation writing down
the value of inventory or accounts receivable other than in the ordinary course
of business consistent with past practice;
(u) make any material tax election except in the ordinary course of
business consistent with past practice, change any material tax election already
made, adopt any tax accounting method except in the ordinary course of business
consistent with past practice, change any tax accounting method, enter into any
closing agreement, settle any tax claim or assessment or consent to any tax
claim or assessment or any waiver of the statute of limitations for any such
claim or assessment;
(v) commence any lawsuit except for routine collection of bills or for a
breach of this Agreement;
(w) impair any of its Patents, Copyrights, Trademarks or other intellectual
property rights; or
(x) fail to maintain its qualifications to do business in any state in
which Target or either of the Target Subs is qualified, or fail to maintain any
other permit, license, authorization or approval material to the operations of
its business;
provided, however, that notwithstanding any other provisions of this Section
4.1, Target may purchase its facility in Murrieta, California (and finance such
purchase) in accordance with the terms previously disclosed to Acquiror without
Acquiror's consent.
4.2 AFFIRMATIVE COVENANTS. Prior to the Effective Time, Target will do, and
Target and each of the Principal Shareholders will take such action as is
necessary or appropriate to cause Target and each of the Target Subs to do, each
of the following:
(a) use its reasonable best efforts to perform and fulfill all conditions
and obligations on its part to be performed and fulfilled under this Agreement,
to the end that the transactions contemplated by this Agreement shall be fully
carried out, provided, however, that in no event shall this covenant be deemed
to impose any obligations on Target to waive any of the conditions set forth in
Article 7;
(b) subject to Section 4.1, use its reasonable best efforts to obtain all
authorizations, consents and permits of others required to permit the
consummation by Target of the transactions contemplated by this
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Agreement and the continuation of Target's and the Target Subs' business after
the consummation of the Merger, including without limitation, using its
reasonable best efforts to obtain the approval of the Shareholders of the
Merger;
(c) promptly advise Acquiror in writing of (i) any change that has or had a
Material Adverse Effect on Target or the Target Subs taken as a whole; (ii) the
occurrence of any event which causes the representations and warranties made by
Target in this Agreement or the information included in the Target Disclosure
Schedules to be incomplete or inaccurate in any material respect; and (iii) the
receipt of a legitimate inquiry relating to an Acquisition Proposal from a third
party, including the identity of the third party and, if written, a copy of the
inquiry;
(d) cooperate with Acquiror to the best of Target's ability in the
preparation of (i) the Proxy Statement (as defined in Section 5.2(k) below) and
(ii) the Registration Statement (as defined in Section 5.2(k) below). In this
regard, Target from time to time will furnish to Acquiror, and be responsible
for, all information regarding Target and the Target Subs required for the
proper preparation of the Proxy Statement and Registration Statement. None of
the information relating to Target and the Target Subs (or, to the best of
Target's knowledge, any other person, contained in any document, certificate or
other writing furnished or to be furnished by Target or the Target Subs)
included in (x) the Proxy Statement at the time the Proxy Statement is mailed
and, at the time of the meeting of the Shareholders to vote on the Merger or at
the Effective Time, as then amended or supplemented, or (y) the Registration
Statement at the time the Registration Statement becomes effective or at the
Effective Time, as then amended or supplemented, will contain any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or necessary to correct
any statement which has become false or misleading in any earlier communication
with respect to the solicitation of proxies for the Target shareholder and
Acquiror stockholder meetings. To that end, Target shall promptly furnish
Acquiror with information with respect to any event as a result of which the
Registration Statement, if such information were not disclosed therein, would
include an untrue statement of a material fact relating to Target or the Target
Subs or omit a material fact required to be included therein or necessary to
make the statements therein relating to Target and the Target Subs not
misleading; and will not at any time make any filing with the SEC which shall
not have been previously submitted to Acquiror a reasonable time prior to the
filing or as to which Acquiror shall reasonably object or which is not in
compliance with the Securities Act and the rules and regulations thereunder. The
Proxy Statement as it relates to Target and the Target Subs will comply as to
form in all material respects with the requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations
thereunder in effect at the time the Proxy Statement is mailed;
(e) conduct its business only in the ordinary course and refrain from
changing or introducing any method of management or operations except in the
ordinary course of business and consistent with prior practices;
(f) use reasonable best efforts to keep intact Target's and each of the
Target Subs' business organizations, to keep available Target's and each of the
Target Subs' present officers and key employees and to preserve the goodwill of
all suppliers, customers and others having business relations with Target or
either of the Target Subs;
(g) permit Acquiror and its authorized representatives to have full access
during normal business hours to all of Target's and the Target Subs' properties,
assets, records, tax returns, contracts and documents and furnish to Acquiror
and its authorized representatives such financial and other information with
respect to Target's and the Target Subs' business and properties of Target and
the Target Subs as Acquiror may from time to time reasonably request for
purposes of making a review of the business of Target and the Target Subs;
provided, however, that such access shall be subject to the terms of Target's
contract with Defense Investigation Services;
(h) as promptly as reasonably practicable after the date of this Agreement,
file with any governmental agencies or departments all notices, reports and
other documents required by law with respect to this Agreement and the Merger
and promptly submit any additional information or documentary material properly
requested by any such governmental agency or department;
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(i) in the event that between the date hereof and the Effective Time, any
federal, state, local or foreign governmental authority shall commence any
examination, review, investigation, action, suit or proceeding against Target
with respect to the Merger, give prompt notice thereof to Acquiror, keep
Acquiror informed as to the status thereof, and (except as may be prohibited by
such governmental authority or by any court order or decree in an action or suit
instituted by a person other than Target or an affiliate of Target) permit
Acquiror to observe and be present at each meeting, conference or other
proceeding and have access to and be consulted in connection with any document
filed or provided to such governmental authority in connection with such
examination, review, investigation, action, suit or proceeding;
(j) use its reasonable best efforts to deliver to Acquiror a
Continuity-of-Interest Certificate executed by each Shareholder;
(k) deliver to Acquiror at the Closing the resignations of the Chief
Financial Officer and the Secretary of Target, and of the directors of each of
Target and the Target Subs;
(l) promptly provide Acquiror with (i) copies of all written materials and
written communications furnished by Target to its shareholders after the date of
this Agreement, and (ii) copies of all notices, reports or other documents filed
with any government agency or department pursuant to Section 4.2(h) hereof;
(m) promptly provide Acquiror copies of all material operating and
financial reports prepared by Target, including copies of Target's consolidated
balance sheet and related consolidated statements of operations and consolidated
statements of cash flows for each month commencing October 1997 through the
Closing Date; such monthly financial statements shall be prepared in conformity
with GAAP applied on a consistent basis and shall fairly present (subject to
immaterial year-end audit adjustments) the financial condition, results of
operations and cash flows of Target as of the dates and for the periods covered
by such statements and shall be delivered promptly after preparation, but in no
event later than 30 days after the end of the month; provided, however, that
such statements for the month of October 1997 shall be delivered no later than
the date of this Agreement;
(n) use its reasonable best efforts to deliver to Acquiror, or to cause its
counsel to deliver to Acquiror, the closing documents referred to in this
Agreement;
(o) with respect to the Notification letter described in Section 6.16,
provide the notification to the IRS required pursuant to Treasury Regulations
Section 1.897-2(h)(2);
(p) provide to Acquiror, and use its reasonable best efforts to cause
McGladrey & Pullen LLP to provide to Acquiror, such financial statements and
information and such accountant's consents as may be required to be provided by
Acquiror in any filing required by the Securities Act, the Exchange Act, or any
state securities law;
(q) deliver to Acquiror an Affiliate Agreement executed by each person who
could reasonably be deemed to be an "affiliate" of Target for purposes of Rule
145(c) under the Securities Act;
(r) provide to tax counsel for both Acquiror and Target appropriate
representation certificates as described in Sections 6.17 and 7.9;
(s) take all steps necessary in accordance with its Articles of
Incorporation and Bylaws to call, give notice of, convene and hold a meeting of
its shareholders (the "Target Shareholder Meeting") as soon as practicable after
the effectiveness of the Registration Statement, for the purpose of approving
this Agreement, the California Agreement of Merger, the Merger and for such
other purposes as may be necessary. Unless this Agreement shall have been
validly terminated as provided herein, the Board of Directors of Target will (i)
recommend to its shareholders the approval of this Agreement, the transactions
contemplated hereby and any other matters to be submitted to its shareholders in
connection therewith, to the extent that such approval is required by applicable
law in order to consummate the Merger, and (ii) use its reasonable, good faith
efforts to obtain the approval by its shareholders of this Agreement, the
California Agreement of Merger, the Merger and the transactions contemplated
hereby, provided, however, that nothing in this Section 4.2(s) shall prevent the
Board of Directors of Target from withdrawing, amending or modifying its
recommendation in favor of this Agreement and the Merger at any time prior to
the approval of this Agreement by the required Shareholder
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vote if (i) an unsolicited, bona fide written offer made by a third party to
purchase more than 50% of outstanding Target Common Stock on terms that the
Board of Directors of Target determines in its reasonable judgment, based upon
the written advice of its financial advisor, to be more favorable to the
Shareholders than the terms of the Merger (a "Superior Offer"), provided, that
any such offer shall not be deemed to be a "Superior Offer" if (A) any financing
required to consummate the transaction contemplated by such offer is not
committed and is not reasonably capable of being obtained by such third party
within a reasonable period of time, or (B) such offer is withdrawn; (ii) neither
Target nor either of the Target Subs or any of their respective officers,
directors, employees, shareholders, agents, attorney, accountants, auditors,
advisors or representatives shall have violated any of the restrictions set
forth in Section 4.1(k), and (iii) the Board of Directors of Target concludes in
good faith, based upon the advice of its outside counsel, that, in light of such
Superior Offer, the withdrawal, amendment or modification of such recommendation
is required in order for the Board of Directors of Target to comply with its
fiduciary obligations to Target's shareholders under applicable law. Nothing
contained in this Section 4.2(s) shall limit Target's obligation to call, give
notice of, convene and hold the Target Shareholder Meeting (regardless of
whether the recommendation of the Board of Directors of Target shall have been
withdrawn, amended or modified). In the event that (I) the Board of Directors of
Target withdraws, amends or modifies its recommendation in favor of this
Agreement and the Merger prior to the approval of this Agreement by the required
Shareholder vote in accordance with subsections (i)-(iii) of the proviso to this
Section 4.2(s) and (II) this Agreement is not approved by the required
Shareholder vote, then Target shall pay to Acquiror an amount equal to $400,000.
(t) shall deliver to Acquiror a comfort letter, dated a date not more than
two business days before the date upon which the Registration Statement becomes
effective, from McGladrey & Pullen LLP, in form and substance reasonably
satisfactory to Acquiror and Acquiror's counsel and accountants, covering such
matters as are normally covered in a comfort letter delivered in connection with
a Registration Statement on Form S-4 covering transactions of the type
contemplated by this Agreement.
(u) prior to the record date for determining those Shareholders entitled to
vote at the Target Shareholder Meeting, distribute all Target Common Shares held
of record by the EMI Acquisition Corp. Employee Stock Purchase Plan to the
beneficial owners of such Target Common Shares and register such distribution in
the stock books of Target such that the beneficial owners of such Target Common
Shares shall be entitled to vote those Target Common Shares at the Target
Shareholder Meeting.
(v) use its reasonable best efforts and cooperate with Acquiror to have
each Employee execute Acquiror's standard form proprietary information and
inventions agreement.
ARTICLE 5
COVENANTS OF ACQUIROR AND ACQUIROR SUB
Acquiror and Acquiror Sub covenant and agree as follows:
5.1 NEGATIVE COVENANTS. From the date of this Agreement until the Effective
Time, Acquiror and Acquiror Sub will not, unless Target shall otherwise consent
in writing:
(a) undertake a course of action inconsistent with this Agreement or which
would cause any representation or warranty of Acquiror in this Agreement to
become untrue in any material respect or which would prevent any condition
precedent to its obligations under this Agreement from being satisfied at or
prior to the Effective Time;
(b) take or permit any action which would prevent the Merger from
qualifying as a reorganization under Section 368 of the Code or from being
eligible for pooling-of-interests accounting treatment in accordance with GAAP
and all rules, regulations and policies of the SEC, and Acquiror will use its
reasonable best efforts to prevent any of its officers or directors from taking
or permitting any such action;
(c) amend its Certificate of Incorporation in any manner which would
adversely affect the Merger;
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(d) issue any of its capital shares or grant any options, warrants or
rights to acquire any capital shares other than (i) upon exercise of currently
outstanding options (ii) issuances pursuant to Acquiror's Employee Stock
Purchase Plan and (iii) option grants under Acquiror's 1997 Equity Incentive
Plan consistent with Acquiror's past practice, or modify the terms or waive any
rights under any options, warrants or other securities currently outstanding or
accelerate vesting with respect to any unvested options or capital shares; or
declare, set aside or pay any dividend or make any other distribution in respect
of its capital shares, or make any direct or indirect redemption, purchase or
other acquisition of its capital shares;
(e) change the number of votes to which each share of Acquiror's capital
stock is entitled; or
(f) undertake any stock split, recapitalization or reorganization.
5.2 AFFIRMATIVE COVENANTS. Prior to the Effective Time, Acquiror and/or
Acquiror Sub will do the following:
(a) use its reasonable best efforts to perform and fulfill all conditions
and obligations on its part to be performed and fulfilled under this Agreement,
to the end that the transactions contemplated by this Agreement shall be fully
carried out, provided, however, that in no event shall this covenant be deemed
to impose any obligation on Acquiror or Acquiror Sub to waive any of the
conditions set forth in Article 6;
(b) use its reasonable best efforts to obtain all authorizations, consents
and permits of others required to permit the consummation by Acquiror and
Acquiror Sub of the transactions contemplated by this Agreement;
(c) use its reasonable best efforts to qualify the Acquiror Common Stock to
be issued pursuant to the Merger under the securities laws of every jurisdiction
of the United States in which a Shareholder has an address on Target's stock
records on the record date for determining the Target shareholders entitled to
notice of and to vote on the Merger, except any such jurisdiction with respect
to which counsel for Acquiror has determined that such qualification is not
required under the securities laws of such jurisdiction;
(d) as promptly as reasonably practicable after the date of this Agreement,
file with any governmental agencies or departments of all notices, reports and
other documents required by law with respect to this Agreement and the Merger
and promptly submit any additional information or documentary material properly
requested by any such governmental agency or department;
(e) use its reasonable best efforts to cause the Acquiror Common Stock to
be issued pursuant to the Merger to be listed on the Nasdaq National Market,
free of restrictions on transfer other than (i) restrictions pursuant to Rule
144 and Rule 145 promulgated under the Securities Act and (ii) restrictions
related to the Continuity-of-Interest Certificate referred to in Section 4.2(j);
(f) cause Acquiror Sub to perform all of its agreements contained herein;
(g) promptly advise Target in writing of (i) any change that has or had a
Material Adverse Effect on Acquiror; and (ii) the occurrence of any event which
causes the representations or warranties made by Acquiror or Acquiror Sub in
this Agreement to be incomplete or inaccurate in any material respect;
(h) in the event that between the date hereof and the Effective Time, any
federal, state, local or foreign governmental authority shall commence any
examination, review, investigation, action, suit or proceeding against Acquiror
with respect to the Merger, give prompt notice thereof to Target, keep Target
informed as to the status thereof, and (except as may be prohibited by such
governmental authority or by any court order or decree in an action or suit
instituted by a person other than Acquiror or an affiliate of Acquiror) permit
Target to observe and be present at each meeting, conference or other proceeding
and have access to and be consulted in connection with any document filed or
provided to such governmental authority in connection with such examination,
review, investigation, action, suit or proceeding;
(i) provide to tax counsel for both Acquiror and Target appropriate
representation certificates as described in Sections 6.17 and 7.9;
(j) take all steps necessary in accordance with its Certificate of
Incorporation and Bylaws to call, give notice of, convene and hold a meeting of
stockholders (the "Acquiror Stockholder Meeting" and, together
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with the Target Shareholder Meeting, the "Meetings") as soon as practicable
after the effectiveness of the Registration Statement, for the purpose of
approving this Agreement, the California Agreement of Merger, the Merger and for
such other purposes as may be necessary. Unless this Agreement shall have been
validly terminated as provided herein, the Board of Directors of Acquiror
(subject to any fiduciary duties it may have under applicable law to do
otherwise) will (i) recommend to its stockholders the approval of this
Agreement, the transactions contemplated hereby and any other matters to be
submitted to its stockholders in connection therewith, to the extent that such
approval is required by applicable law in order to consummate the Merger, and
(ii) use its efforts to obtain the approval by its stockholders of this
Agreement, the California Agreement of Merger, the Merger and the transactions
contemplated hereby;
(k) prepare and file with the SEC and any other applicable regulatory
bodies, as soon as reasonably practicable, a Registration Statement on Form S-4
with respect to the shares of Acquiror Common Stock to be issued in the Merger
(the "Registration Statement"), and will otherwise proceed promptly to satisfy
the requirements of the Securities Act, including Rule 145 thereunder. Such
Registration Statement shall contain a joint proxy statement of Acquiror and
Target containing the information required by the Exchange Act (the "Proxy
Statement"). Acquiror shall take all reasonable steps to cause the Registration
Statement to be declared effective and to maintain such effectiveness until all
of the shares covered thereby have been distributed. Acquiror shall promptly
amend or supplement the Registration Statement to the extent necessary in order
to make the statements therein not misleading. Acquiror shall use its
reasonable, good faith efforts to have the Proxy Statement approved by the SEC
under the provisions of the Exchange Act. Acquiror shall provide Target with
copies of all filings made pursuant to this Section 5.2(k) and shall consult
with Target on responses to any comments made by the Staff of the SEC with
respect thereto; and
(l) the information relating to Acquiror or Acquiror Sub (or, to the best
of Acquiror's knowledge, any other person, contained in any document,
certificate or other writing furnished or to be furnished by Acquiror or
Acquiror Sub) for inclusion in the Registration Statement shall not, at the time
the Registration Statement is declared effective, at the time the Proxy
Statement is first mailed to holders of Target Common Shares and holders of
Acquiror Common Stock, at the time of the Meetings and the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, not misleading. The information specifically designated as being
supplied by Acquiror (or to the best of Acquiror's knowledge, any other person,
contained in document, certificate or other writing furnished or to be furnished
by Acquiror or Acquiror Sub) for inclusion in the Proxy Statement to be sent to
the holders of Target Common Shares in connection with the Target Shareholder
Meeting and to the holders of Acquiror Common Stock in connection with the
Acquiror Stockholder Meeting shall not, at the date the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to holders of Target
Common Shares and holders of Acquiror Common Stock, at the time of the Meetings
or the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. If at any time prior to the
Effective Time any event or circumstance relating to Acquiror or its officers of
directors, should be discovered by Acquiror which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
Acquiror shall promptly inform Target and shall promptly file such amendment to
the Registration Statement. All documents that Acquiror is responsible for
filing with the SEC in connection with the transactions contemplated herein will
comply as to form and substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations thereunder and
the Exchange Act and the rules and regulations thereunder.
ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIROR AND ACQUIROR SUB
The obligations of Acquiror and Acquiror Sub to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, prior to or upon
the Closing, of the following conditions precedent:
6.1 SATISFACTORY COMPLETION OF PRE-MERGER REVIEW. Acquiror shall have
satisfactorily completed its pre-merger investigation and review of Target's and
the Target Subs' business, condition, assets, liabilities,
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operations, financial performance, net income and present prospects and shall be
satisfied with the results of that investigation and review; provided, that,
unless Acquiror notifies Target in writing of Acquiror's dissatisfaction with
such investigation and review, no later than the date on which Acquiror
distributes the Proxy Statement to its stockholders, the conditions contained in
this Section 6.1 shall be deemed to be satisfied.
6.2 COMPLIANCE WITH COVENANTS; REPRESENTATIONS AND WARRANTIES
CORRECT. Target and the Principal Shareholders shall have complied with and
performed in all material respects each covenant contained in this Agreement to
be performed by it or them at or prior to the Closing Date; the representations
and warranties of Target contained in this Agreement shall be true and correct
in all material respects as of the Closing Date with the same effect as though
made on the Closing Date except to the extent that information in Target
Disclosure Schedules as of the date hereof changes as of the Closing Date (and
such changes are contained in the certificate referred to below in this Section
6.2) and each such change does not violate Section 4.1 or 4.2 hereof or any
other provision in this Article 6; and Target shall have delivered to Acquiror a
certificate of the Chief Executive Officer and the Chief Financial Officer of
Target evidencing compliance with the conditions set forth in this Section 6.2.
6.3 NO MATERIAL ADVERSE CHANGE. After the date hereof, there shall have
been no change that had a Material Adverse Effect on the business, operations,
condition (financial or otherwise), assets or prospects of Target and the Target
Subs, taken as a whole.
6.4 CONSENTS OF OTHERS. The consent to the Merger of each third party whose
consent is required for Target to consummate the transactions completed hereby
shall have been received except for consents which, if not obtained, in the
aggregate would not have a Material Adverse Effect on Target.
6.5 LEGAL OPINION. Acquiror shall have received an opinion of Dickinson
Wright PLLC, counsel to Target, dated the Closing Date, substantially to the
effect of Exhibit 6.5 hereto.
6.6 DISSENTERS' RIGHTS. Holders of no more than 5% of the outstanding
Target Common Shares shall be, or shall have the right to become, entitled to
dissenters rights pursuant to Chapter 13 of the California Law.
6.7 CONTINUITY OF INTEREST CERTIFICATES AND AFFILIATE AGREEMENTS. Acquiror
shall have received prior to the Closing Date executed copies of the
Continuity-of-Interest Certificate and Affiliate Agreement as provided in
Sections 4.2(j) and 4.2(q), respectively.
6.8 ABSENCE OF RESTRAINT. No action shall be pending or threatened before
any court or administrative body to restrain, enjoin or otherwise prevent the
consummation of, or which questions the validity or legality of, this Agreement
or the transactions contemplated hereby, and no order, statute, rule,
regulation, executive order, decree, judgment, injunction or court order shall
have been enacted, entered, issued or promulgated by any court or governmental
authority which prohibits or materially restricts the consummation of this
Agreement and the transactions contemplated hereby, and no such action shall be
threatened.
6.9 NO LITIGATION. No litigation shall have commenced against Target or
either of the Target Subs which would, if adversely determined, have a Material
Adverse Effect on the business, operations, condition (financial or otherwise),
assets or present prospects of Target and the Target Subs, taken as a whole.
6.10 REQUIRED APPROVALS. Acquiror, Acquiror Sub and Target shall have
received all such governmental approvals, consents, authorizations or
modifications as may be required to permit the performance by Acquiror, Acquiror
Sub and Target, of their respective obligations under this Agreement and the
consummation of the transactions herein contemplated.
6.11 STATE SECURITIES LAW REQUIREMENTS. The shares of Acquiror Common Stock
to be issued in connection with the Merger shall have been issued in
transactions qualified or exempt from registration under the securities laws of
every jurisdiction required under Section 5.2(c) hereof.
6.12 TARGET SHAREHOLDERS' APPROVAL. The approval and adoption of this
Agreement by the requisite vote of the outstanding Target Common Shares entitled
to vote, in accordance with Section 4.2(s) hereof and the applicable provisions
of the California Law, shall have occurred and remain in full force and effect.
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6.13 ACQUIROR STOCKHOLDERS' APPROVAL. The approval and adoption of this
Agreement by the requisite vote of the outstanding shares of Acquiror Common
Stock entitled to vote, in accordance with Section 5.2(j) hereof and the
applicable provisions of the DGCL, shall have occurred and remain in full force
and effect.
6.14 NONCOMPETITION AGREEMENTS. Each of Dick Sharman and Robert N. Haro
shall have executed a noncompetition agreement substantially in the form
attached hereto as Exhibit 6.14.
6.15 RESIGNATIONS. Acquiror shall have received the written resignation,
effective as of the Closing, of each of the officers and directors of Target,
each of the directors of each of the Target Subs (except for the resident
director of EMII), and the Chief Financial Officer and Secretary of each of the
Target Subs.
6.16 FIRPTA. Acquiror, as agent for the Shareholders, shall have received a
properly executed "FIRPTA" Notification Letter, in form and substance reasonably
acceptable to Acquiror, which states that shares of Target do not constitute
"United States Real Property Interests" under Section 897(c) of the Code for
purposes of satisfying Acquiror's obligations under Treasury Regulations Section
1.1445-2(c)(3).
6.17 TAX OPINION. Each of Acquiror and Target shall have received a written
opinion from its respective counsel, dated the Closing Date, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a)(2)(E) of the Code, which opinions will be substantially identical in form
and substance. Such counsel shall, in rendering such opinions, be entitled to
rely on, and to the extent reasonably required the parties shall make,
reasonable representations related thereto.
6.18 POOLING-OF-INTEREST LETTERS. Acquiror shall have received, if it so
requests, a reaffirmation from its independent public accountants and from
Target's independent public accountants, dated the Closing Date, of letters in
form and substance satisfactory to Acquiror, to the effect that the Merger will
qualify for pooling-of-interests accounting treatment in accordance with GAAP
and all rules, regulations and policies of the SEC.
6.19 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
shall have been declared effective and no stop order with respect to the
Registration Statement shall be in effect.
6.20 FAIRNESS OPINION. The Board of Directors of Acquiror shall have
received the written opinion of Fredericks, Shields & Co., LLC, financial
advisor to Acquiror, to the effect that the consideration to be received by the
Shareholders is fair to the stockholders of Acquiror from a financial point of
view, which fairness opinion shall be in customary form, without any unusual
limitations or qualifications.
6.21 COMFORT LETTER. Acquiror shall have received the comfort letter
required under Section 4.2(t) and, in addition, a bring-down letter, in form and
substance reasonably satisfactory to Acquiror, dated the Closing Date.
6.22 ESCROW AGREEMENT. Acquiror shall have received a full executed copy of
the Escrow Agreement, as contemplated by Section 8.7.
6.23 STOCK PRICE. The closing per share price of Acquiror Common Stock as
reported on the Nasdaq National Market on the last trading date immediately
preceding the Closing Date, shall be less than $9.00.
6.24 LANDLORD CONSENT. In the event that the proposed purchase by Target of
its facility in Murrieta, California is not consummated prior to the Closing,
Target shall have received the consent required by that certain Lease Agreement
dated October 25, 1991, between Exotic and Reisung Enterprises, Inc., as amended
by that certain First Amendment to Lease and Consent to Assignment of Lease
dated October 3, 1994, between Exotic and Reisung Enterprises, Inc. and by that
certain Assignment and Assumption of Lease dated October 3, 1994 between Target
and Exotic.
6.25 TERMINATION OF PUT RIGHTS. Target shall have entered into with each
Shareholder an amendment terminating the rights of such Shareholder to put his
Target Common Shares to Target in form and substance satisfactory to Acquiror
and its counsel.
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ARTICLE 7
CONDITIONS PRECEDENT TO TARGET'S OBLIGATIONS
The obligation of Target to consummate the transactions contemplated herein
is subject to the fulfillment, prior to or upon the Closing, of the following
conditions precedent:
7.1 COMPLIANCE WITH COVENANTS; REPRESENTATIONS AND WARRANTIES
CORRECT. Acquiror and Acquiror Sub shall have complied with and performed in all
material respects each covenant contained in this Agreement to be performed by
them at or prior to the Closing Date; the representations and warranties of
Acquiror and Acquiror Sub contained in this Agreement shall be true and correct
in all material respects as of the Closing Date with the same effect as though
made on the Closing Date; and Acquiror shall have delivered to Target a
certificate of the Chief Executive Officer and Chief Financial Officer of
Acquiror evidencing compliance with the conditions set forth in this Section
7.1.
7.2 NO MATERIAL ADVERSE CHANGE. After the date hereof, there shall have
been no change that had a Material Adverse Effect on Acquiror.
7.3 LEGAL OPINION. Target shall have received an opinion of Cooley Godward
LLP, dated the Closing Date, substantially to the effect of Exhibit 7.3 hereto.
7.4 REQUIRED APPROVALS. Acquiror, Acquiror Sub and Target shall have
received all such governmental approvals, consents, authorizations or
modifications as may be required to permit the performance by Acquiror, Acquiror
Sub and Target, of their respective obligations under this Agreement and the
consummation of the transactions herein and therein contemplated.
7.5 SECURITIES LAW REQUIREMENTS. All permits, licenses, consents and
approvals necessary under any laws relating to the issuance and sale of the
Acquiror Common Stock to the Shareholders shall have been issued or given, and
no such permit, license, consent or approval, shall have been revoked, canceled,
terminated, suspended or made the subject of any stop order or proceeding
therefor.
7.6 TARGET SHAREHOLDERS' APPROVAL. The approval and adoption of this
Agreement by the requisite vote of the outstanding Target Common Shares entitled
to vote, as required by and in accordance with 4.2(s) hereof the applicable
provisions of the California Law, shall have occurred and remain in full force
and effect.
7.7 ACQUIROR STOCKHOLDERS' APPROVAL. The approval and adoption of this
Agreement by the requisite vote of the outstanding shares of Acquiror Common
Stock entitled to vote, in accordance with Section 5.2(j) hereof and the
applicable provisions of the DGCL, shall have occurred and remain in full force
and effect.
7.8 ABSENCE OF RESTRAINT. No action shall be pending or threatened before
any court or administrative body to restrain, enjoin or otherwise prevent the
consummation of, or which questions the validity or legality of, this Agreement
or the transactions contemplated hereby, and no order, statute, rule,
regulation, executive order, decree, judgment, injunction or court order shall
have been enacted, entered, issued or promulgated by any court or governmental
authority which prohibits or materially restricts the consummation of this
Agreement and the transactions contemplated hereby, and no such action shall be
threatened.
7.9 TAX OPINION. Each of Acquiror and Target shall have received a written
opinion from its respective counsel, dated the Closing Date, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a)(2)(E) of the Code, which opinions will be substantially identical in form
and substance. Such counsel shall, in rendering such opinions, be entitled to
rely on, and to the extent reasonably required the parties shall make,
reasonable representations related thereto.
7.10 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
shall have been declared effective and no stop order with respect to the
Registration Statement shall be in effect.
7.11 BOARD OF DIRECTORS. Dick Sharman shall have been elected to serve on
Acquiror's Board of Directors.
7.12 ESCROW AGREEMENT. Target shall have received the Escrow Agreement, as
contemplated by Section 8.7, executed by Acquiror.
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7.13 STOCK PRICE. The per share closing price of Acquiror Common Stock as
reported on the Nasdaq National Market on the last trading date preceding the
Closing Date, shall be greater than $6.00.
7.14 SATISFACTORY COMPLETION OF PRE-ACQUISITION REVIEW. Target shall have
satisfactorily completed its pre-acquisition investigation and review of
Acquiror's business, condition, assets, liabilities, operations, financial
performance, net income and present prospects and shall be satisfied with the
results of that investigation and review, provided, that, unless Target notifies
Acquiror in writing of Target's dissatisfaction with such investigation and
review no later than the date on which Acquiror distributes the Proxy Statement
to its stockholders, the conditions contained in this Section 7.14 shall be
deemed to be satisfied.
7.15 CONSENTS OF OTHERS. The consent to the Merger of each third party
whose consent is required for Acquiror to consummate the transactions completed
hereby shall have been received except for consents which, if not obtained, in
the aggregate would not have a Material Adverse Effect on Acquiror.
7.16 NO LITIGATION. No litigation shall have commenced against Acquiror or
Acquiror Sub which would, if adversely determined, have a Material Adverse
Effect on the business, operations, condition (financial or otherwise), assets
or present prospects of Acquiror or Acquiror Sub, taken as a whole.
ARTICLE 8
INDEMNITY BY SHAREHOLDERS
8.1 INDEMNITY. From and after the Effective Time, in connection with the
Merger, each Shareholder shall, on a pro rata basis based on the number of
Target Common Shares (other than Dissenting Shares) owned by each Shareholder
immediately prior to the Effective Time, indemnify Acquiror, Surviving
Corporation and their respective officers, directors, employees and agents
(collectively, the "Indemnitees") against any loss, expense, liability, or other
damages, including the reasonable costs of investigation, interest, penalties
and attorney's and accountant's fees ("Damages"), incurred in connection with or
arising from or attributable to any breach or inaccuracy of any representation
or warranty made by Target, herein or any breach or failure to perform any
agreement or covenant of Target or the Principal Shareholders herein.
8.2 LIMITS ON INDEMNIFICATION. The Shareholders shall not be required to
make any indemnification payment pursuant to Section 8.1 for any Damages until
such time as the total amount of all Damages that have been directly or
indirectly suffered or incurred by any one or more of the Indemnitees, or to
which any one or more of the Indemnitees has or have otherwise become subject
exceeds $250,000 in the aggregate (the "Basket"). At such time as the total
amount of such Damages exceeds $250,000 in the aggregate, Indemnitees shall be
entitled to be indemnified only for the amount of such Damages in excess of the
Basket. In addition, the maximum liability of each Shareholder under Section 8.1
shall be limited to 10% of the aggregate number of shares of Acquiror Common
Stock to be received by each Shareholder pursuant to the provisions of Section
1.5 above, which shares shall be subject to the terms and provisions of the
Escrow Agreement (as that term is defined below).
8.3 EXPIRATION OF INDEMNITY. Indemnitees may make no claim for
indemnification for Damages after October 15, 1998 (the "Claim Deadline"). The
expiration of the period within which claims may be made shall not affect any
rights of Indemnitees with respect to claims made prior to the Claim Deadline.
8.4 FRAUD. Notwithstanding any provision in this Agreement to the contrary,
the liability of a Shareholder for fraud shall be subject only to applicable
statutes of limitations, and any claim against any Shareholder alleging fraud
need not be presented by the Claim Deadline.
8.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Other than disclosures set
forth in the Schedules hereto or in the compliance certificate to be delivered
at the Closing pursuant to Section 6.2 hereof, no disclosure by Target nor any
investigation by or on behalf of Acquiror or Acquiror Sub with respect to Target
or the Target Subs shall be deemed to affect Acquiror's or Acquiror Sub's
reliance on the representations, warranties, covenants or agreements contained
herein or to waive any Indemnitees' rights to indemnity as provided herein for
the breach or inaccuracy or failure to perform or comply with any
representation, warranty, covenant or agreement of Target or the Principal
Shareholders. The indemnity obligations of the Shareholders
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under this Article 8 (and the representations, warranties, covenants and
agreements of Target and the Principal Shareholders) shall survive the Closing
until the Claim Deadline.
8.6 MERGER CONSIDERATION ADJUSTMENTS. Any amount paid by the Shareholders
to Indemnitees pursuant to this Article 8 shall be an adjustment to the
consideration paid to the Shareholders in connection with the Merger.
8.7 SHAREHOLDERS' AGENTS.
(a) Each of the Shareholders hereby constitutes and appoints Dick Sharman,
Robert N. Haro and Robert P. Perkins as the Shareholders' agents and
attorneys-in-fact to take such action on behalf of the non-dissenting
Shareholders, and to exercise such rights, power and authority as are
authorized, delegated and granted to the Shareholders' agents under this
Agreement in connection with the transactions contemplated hereby, to give and
receive notices and communications, and to take all actions necessary or
appropriate in the judgment of the Shareholders' agents, under such instructions
as the Shareholders' agents determine are necessary or appropriate, to
accomplish the foregoing, including without limitation the right to resolve any
disagreement or disputes, to exercise such rights, power and authority as are
incidental thereto and to execute on behalf of the Shareholders an Escrow
Agreement (the "Escrow Agreement") in the form of Exhibit 8.7 hereto under which
the parties shall instruct the escrow agent to retain 10% of the aggregate
number of shares of Acquiror Common Stock to be received by each Shareholder
pursuant to the provisions of Section 1.5 above as security for the
indemnification obligations of the Shareholders contained herein. A decision,
act, consent, instruction or determination of a majority of the Shareholders'
agents shall constitute a decision of all Shareholders and shall be final,
binding and conclusive upon each of the Shareholders. The Shareholders' agents
shall not be liable for any act done or omitted hereunder as Shareholders'
agents unless resulting from gross negligence or willful misconduct. The
Shareholders shall jointly and severally indemnify the Shareholders' agents and
hold them harmless against any loss, liability or expense incurred without
negligence or bad faith on the part of such Shareholders' agents and arising out
of or in connection with the acceptance or administration of their duties
hereunder, including without limitation any legal or other professional fees and
expenses incurred by the Shareholders' agents hereunder. No bond shall be
required of the Shareholders' agents, and the Shareholders' agents shall receive
no compensation for their services.
(b) The provisions set forth in this Section 8.7 shall have no effect on
the obligations of either the Shareholders' agents or the Shareholders to
Indemnitees, and such provisions are solely for the purposes of determining the
rights and obligations of the Shareholders, on the one hand, and the
Shareholders' agents, on the other, vis-a-vis each other and shall in no way
impose any obligations on Indemnitees other than those explicitly set forth in
this Agreement. In particular, notwithstanding in any case any notice received
by any Indemnitee to the contrary, each Indemnitee shall be fully protected in
relying upon and shall be entitled (i) to rely upon actions, decisions,
consents, instructions and determinations of the Shareholders' agents in their
capacity as the Shareholders' agents, and (ii) to assume that all actions,
decisions, consents, instructions and determinations of the Shareholders' agents
are fully authorized by the Shareholders, and all such actions, decisions,
consents, instructions and determinations shall be binding and conclusive upon
each Shareholder.
(c) In the event that any of the Shareholders' agents is unavailable to act
in such capacity, or becomes incapable (through death or legal incapacity) of
acting, then the remaining Shareholders' agents shall select a replacement or
replacements.
ARTICLE 9
TERMINATION OF AGREEMENT
9.1 TERMINATION. At any time prior to the Closing Date, this Agreement may
be terminated:
(a) by mutual consent of all the parties;
(b) by Acquiror if (i) there has been a material breach by Target of any
covenant, representation or warranty contained in this Agreement, (ii) Acquiror
has notified Target in writing of the existence of such breach, and (iii) Target
has failed to cure such breach within ten days after receiving such notice;
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(c) by Target if (i) there has been a material breach by Acquiror of a
covenant, representation or warranty contained in this Agreement, (ii) Target
has notified Acquiror in writing of the existence of such breach, and (iii)
Acquiror has failed to cure such breach within ten days after receiving such
notice;
(d) by Acquiror if a majority of the members of the Board of Directors of
Acquiror does not approve the results of Acquiror's pre-acquisition
investigation and review as required in Section 6.1;
(e) by Target if a majority of the members of the Board of Directors of
Target does not approve the results of Target's pre-acquisition investigation
and review as required in Section 7.14;
(f) by either Acquiror or Target if (i) there shall be a non-appealable
order of a federal or state court in effect preventing consummation of the
Merger, (ii) there shall be any action taken, or any statute, rule, regulations
or order enacted, promulgated, issued or deemed applicable to the Merger, by any
governmental entity that would make consummation of the Merger illegal, (iii)
upon a vote at a duly held meeting of stockholders or any adjournment thereof,
any required approval of the holders of Target Common Shares or the holders of
Acquiror Common Stock shall not have been obtained, or (iv) it shall be after
February 27, 1998; or
(g) by Acquiror (at any time prior to the approval of this Agreement and
the Merger by the required vote of the Shareholders) if any of the following
shall have occurred: (i) the Board of Directors of Target shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Acquiror, its unanimous recommendation in favor
of the Merger or approval of this Agreement; (ii) Target shall have failed to
include in the Proxy Statement the unanimous recommendation of the Board of
Directors of Target in favor of approval of this Agreement and the Merger; (iii)
the Board of Directors of Target fails to reaffirm its unanimous recommendation
in favor of approval of this Agreement and the Merger within five business days
after Acquiror requests in writing that such recommendation be reaffirmed; (iv)
the Board of Directors of Target shall have approved, endorsed or recommended
any Acquisition Proposal; (v) Target shall have entered into any letter of
intent or similar document or any contract relating to any Acquisition Proposal;
(vi) Target shall have failed to hold the Target Shareholders' Meeting as
promptly as practicable and in any event within 45 days after the Form S-4
Registration Statement is declared effective under the Securities Act; (vii) a
tender or exchange offer relating to securities of Target shall have been
commenced and Target shall not have sent to its securityholders, within five
business days after the commencement of such tender or exchange offer, a
statement disclosing that Target recommends rejection of such tender or exchange
offer; or (viii) an Acquisition Proposal is publicly announced, and Target (A)
fails to issues a press release announcing its opposition to such Acquisition
Proposal within five business days after such Acquisition Proposal is announced
or (B) otherwise fails to actively oppose such Acquisition Proposal. In the
event Acquiror terminates this Agreement pursuant to this Section 9.1(g), Target
shall pay to Acquiror an amount equal to $400,000.
9.2 EFFECT OF TERMINATION. If this Agreement shall be terminated as
provided in Section 9.1, this Agreement shall forthwith become void and except
as provided in Section 9.1 there shall be no liability on the part of any party
hereto to any other party except for (a) if appropriate, payment of legal fees
pursuant to Section 10.3 and (b) any damages for a material breach of this
Agreement.
9.3 COSTS AND EXPENSES. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement will be paid by the
party incurring such expense; provided, however, that if the Merger is
consummated, the Shareholders shall indemnify and hold harmless Acquiror,
Acquiror Sub and Target from any costs or expenses incurred by any Shareholder
and for all costs and expenses of Target in excess of $275,000, which amount may
be increased only with the prior written approval of Acquiror.
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9.4 EXTENSION OF TIME; WAIVERS. At any time prior to the Closing Date:
(a) Acquiror and Acquiror Sub may (i) extend the time for the performance
of any of the obligations or other acts of Target, and (ii) waive compliance
with any of the agreements or conditions contained herein to be performed by
Target. Any agreement on the part of Acquiror and Acquiror Sub to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of Acquiror and Acquiror Sub; and
(b) Target may (i) extend the time for the performance of any of the
obligations or other acts of Acquiror and/or Acquiror Sub, and (ii) waive
compliance with any of the agreements or conditions contained herein to be
performed by Acquiror and/or Acquiror Sub. Any agreement on the part of Target
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of Target.
ARTICLE 10
MISCELLANEOUS
10.1 AMENDMENT. This Agreement may be amended with the approval of the
Boards of Directors of Acquiror, of Acquiror Sub and of Target at any time
before or after approval hereof by the shareholders of Target or by the
stockholders of Acquiror, but, after any such shareholder or stockholder
approval, no amendment shall be made which would change the principal terms of
this Agreement without the further approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
10.2 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
agreements contemplated by the exhibits hereto (a) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, (b) may
be executed in several counterparts, each of which will be deemed an original
and all of which shall constitute one and the same instrument and (c) shall be
governed in all respects, including validity, interpretation and effect, by the
laws of the State of California as applied to contracts entered into and to be
performed entirely within California.
10.3 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of the parties hereunder, the prevailing party in
such action or suit shall be entitled to receive a reasonable sum for its
attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
10.4 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure to the benefit of, the parties named herein and their
respective successors; provided, however, that this Agreement may not be
assigned by any party without the prior written consent of the other parties,
and any attempted assignment in violation of this Section 10.4 shall be void and
of no effect.
10.5 NOTICES. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if delivered by hand or mailed
by certified or registered mail:
<TABLE>
<S> <C>
To Target or Target Sub: with a copy to:
EMI Acquisition Corp. Dickinson Wright PLLC
36570 Briggs Road 500 Woodward Avenue, Suite 4000
Murrieta, CA 92563-2347 Detroit, MI 48226-3425
Attn: Dick Sharman Attn: Mark R. High, Esq.
</TABLE>
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To a Shareholder:
To such person's address as set forth on Schedule 2.1(c) hereof.
<TABLE>
<S> <C>
To Acquiror or Acquiror Sub: with a copy to:
Laser Power Corporation Cooley Godward LLP
12777 High Bluff Drive 4365 Executive Drive, Suite 1100
San Diego, CA 92130 San Diego, CA 92121-2128
Attn: Glenn H. Sherman Attn: D. Bradley Peck, Esq.
</TABLE>
or to such other address at which any party may be registered mail notify the
other party, and shall be deemed given on the date on which hand-delivered or on
the third business day following the date on which mailed.
10.6 TITLES. The titles and captions of the sections and paragraphs of
this Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.
10.7 COOPERATION. Acquiror, Acquiror Sub and Target each agree to execute
and deliver such other documents, certificates, agreements and other writings
and to take such other actions as may be necessary or desirable in order to
consummate expeditiously or implement the transactions contemplated by this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first written above.
LASER POWER CORPORATION
By:
--------------------------------------
Glenn H. Sherman
Chairman of the Board and
Chief Executive Officer
LPC ACQUISITION SUBSIDIARY, INC.
By:
--------------------------------------
Glenn H. Sherman
President
EMI ACQUISITION CORP.
By:
--------------------------------------
Dick Sharman
Chairman of the Board, President and
Chief Executive Officer
PRINCIPAL SHAREHOLDERS SOLELY FOR THE
PURPOSES OF SECTIONS 4 AND 8 HEREOF
AND EXPRESSLY NOT FOR PURPOSES OF
SECTION 2 HEREOF.
--------------------------------------
DICK SHARMAN
--------------------------------------
ROBERT P. PERKINS
--------------------------------------
ROBERT N. HARO
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<PAGE> 164
EXHIBIT 8.7 TO APPENDIX A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is entered into as of ,
1998, by and among LASER POWER CORPORATION, a Delaware corporation ("Acquiror"),
DICK SHARMAN, ROBERT N. HARO, AND ROBERT P. PERKINS, as representatives of the
shareholders (collectively, the "Shareholders' Agents") of EMI ACQUISITION
CORP., a California corporation ("Target") and AMERICAN SECURITIES TRANSFER &
TRUST, INC. (the "Escrow Agent").
RECITALS
A. Acquiror, LPC Acquisition Sub, Inc., a California corporation and
wholly-owned subsidiary of Acquiror ("Acquiror Sub"), Target, and certain of the
shareholders of Target have entered into an Agreement and Plan of Merger and
Reorganization, dated as of December 23, 1997 (the "Merger Agreement"), which
provides, among other things, that Acquiror Sub will be merged with and into
Target (the "Merger"), with Target being the surviving corporation, on the terms
and conditions set forth therein. Capitalized terms used herein and not
otherwise defined shall have the meanings given them in the Merger Agreement.
B. In connection with the Merger, the issued and outstanding shares of
Target Common Stock will be exchanged for shares of Common Stock of Acquiror.
C. The Merger Agreement provides for certain rights of indemnification by
the shareholders of Target (the "Shareholders") in favor of the Indemnitees, and
contemplates the establishment of an escrow arrangement to secure such
indemnification obligations.
D. The Shareholders have appointed Shareholders' Agents as their authorized
representative to execute this Agreement on behalf of the Shareholders.
AGREEMENT
Now, therefore, in consideration of the foregoing premises and the mutual
covenants and conditions contained herein, the parties to this Agreement,
intending to be legally bound, agree as follows:
SECTION 1.
ESCROW
1.1 SHARES TO BE PLACED IN ESCROW. On the Closing Date, Acquiror shall
deliver to the Escrow Agent a certificate representing [insert the number of
shares equal to the sum of 10% of the shares to be received in the Merger by
each of the Shareholders] shares of Company Common Stock to be issued to the
Shareholders in the Merger (the "Escrow Shares"), registered in the name of
Escrow Agent or any name suitable to the Escrow Agent, to be held in escrow in
accordance with this Agreement. The value of the Escrow Shares held in escrow
hereunder shall be determined pursuant to Section 5 hereof and such value shall
constitute an indemnity fund (the "Escrow Fund"). The Escrow Shares shall be
held as a trust fund and shall not be subject to any setoff, lien, attachment,
trustee process or any other judicial process of any creditor of any party
hereto. The Escrow Agent agrees to accept delivery of the Escrow Shares and to
hold the Escrow Shares in escrow (the "Escrow"), subject to and in accordance
with the terms and conditions of this Agreement.
1.2 SECURITY FOR INDEMNIFICATION. The Shareholders severally have agreed in
Section 8.1 of the Reorganization Agreement to indemnify, defend and hold
harmless each of the Indemnitees from and against certain Damages. The
Shareholders agree that the Escrow Shares shall be security for such indemnity
obligations, subject to the limitations, and in the manner provided in this
Agreement.
1.3 VOTING OF SHARES. On any matter brought before the Acquiror
shareholders for a vote following the Closing, the Escrow Agent shall vote the
Escrow Shares which are then in Escrow as directed by the
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Shareholders individually. Each Shareholder shall have the right to direct the
vote of the number of shares resulting from the multiplication of such Target
Shareholder's percentage set forth on Schedule A by the total number of Escrow
Shares held by Escrow Agent on the record date for the vote.
1.4 DIVIDENDS, ETC. Any distributions of cash, securities or other property
in respect of or in exchange for any of the Escrow Shares following the Closing,
shall be payable and distributed directly into Escrow and shall be held as part
of the Escrow Fund pursuant to this Agreement. At the time any of the Escrow
Shares are required to be released from the Escrow to any person pursuant to
this Agreement, any such distributions previously made in respect of such
released Escrow Shares and held in the Escrow shall be released from the Escrow
to such person.
1.5 TRANSFERABILITY. The interests of the Shareholders in the Escrow and in
the Escrow Shares held in the Escrow shall not be assignable or transferable,
other than by operation of law. No transfer of any of such interests by
operation of law shall be recognized or given effect until Acquiror shall have
received written notice of such transfer.
1.6 FRACTIONAL SHARES. No fractional shares of Acquiror Common Stock shall
be retained in or released from the Escrow pursuant to this Agreement. In
connection with any release of shares from the Escrow, the Escrow Agent shall be
permitted to "round down" or to follow such other rounding procedures as the
Escrow Agent reasonably determines to be appropriate in order to avoid (i)
retaining any fractional share in the Escrow or (ii) releasing any fractional
share from the Escrow.
SECTION 2.
CLAIM PROCEDURES
2.1 CLAIM NOTICE. If Acquiror determines that it or any other Indemnitee is
entitled to indemnification under the Merger Agreement, then Acquiror may, in
its sole and absolute discretion, without limitation of any other rights or
remedies available at law or in equity, deliver to the Shareholders' Agents and
the Escrow Agent a written notice thereof (a "Claim Notice") setting forth (i) a
brief description of the circumstances supporting Acquiror's belief that such
entitlement to indemnification exists and (ii) to the extent possible, a
non-binding, preliminary estimate of the aggregate dollar amount of all Damages
that have arisen or may arise therefrom or are otherwise associated therewith
(such aggregate amount being referred to as the "Claim Amount").
2.2 RESPONSE NOTICE. Within 30 days after the delivery of a Claim Notice to
the Shareholders' Agents, the Shareholders' Agents shall deliver to Acquiror,
with a copy to the Escrow Agent, a written notice (the "Response Notice")
containing: (i) instructions to the effect that shares of Acquiror Common Stock
having a Stipulated Value (as defined in Section 5 of this Agreement) equal to
the entire Claim Amount set forth in such Claim Notice are to be released from
the Escrow to Acquiror; or (ii) instructions to the effect that shares of
Acquiror Common Stock having a Stipulated Value equal to a specified portion
(but not the entire amount) of the Claim Amount set forth in such Claim Notice
are to be released from the Escrow to Acquiror, together with a statement that
the remaining portion of such Claim Amount is being disputed; or (iii) a
statement that the entire Claim Amount set forth in such Claim Notice is being
disputed. The Shareholders' Agents may contest the release of any part of the
Escrow Fund only based upon a good faith belief that such portion of the Claim
Amount does not constitute an amount for which any Indemnitee is entitled to
seek indemnification under the Merger Agreement. If no Response Notice is
received by Acquiror from the Shareholders' Agents within 30 days after the
delivery of a Claim Notice to the Shareholders' Agents, then the Shareholders'
Agents shall be deemed to have given instructions that shares of Acquiror Common
Stock having a Stipulated Value equal to the entire Claim Amount set forth in
such Claim Notice are to be released to Acquiror from the Escrow.
2.3 RELEASE OF SHARES TO ACQUIROR.
(a) AGREED CLAIMS. If the Shareholders' Agents give (or are deemed to have
given) instructions that shares of Acquiror Common Stock having a Stipulated
Value equal to the entire Claim Amount set forth in a
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Claim Notice are to be released from the Escrow to Acquiror, then the Escrow
Agent shall promptly transfer, deliver and assign to Acquiror such number of
Escrow Shares held in the Escrow as have a Stipulated Value equal to the Claim
Amount (or such lesser amount of the Escrow Fund as is then held in the Escrow).
(b) PARTIALLY CONTESTED CLAIMS. If a Response Notice delivered by the
Shareholders' Agents in response to a Claim Notice contains instructions to the
effect that shares of Acquiror Common Stock having a Stipulated Value equal to a
specified portion (but not the entire amount) of the Claim Amount set forth in
such Claim Notice are to be released from the Escrow to Acquiror, then (i) the
Escrow Agent shall promptly transfer, deliver and assign to Acquiror such number
of Escrow Shares held in the Escrow as have a Stipulated Value equal to such
specified portion of such Claim Amount, and (ii) the procedures set forth in
Sections 2.3(c) and (d) of this Agreement, as applicable, shall be followed with
respect to the remaining portion of such Claim Amount.
(c) CONTESTED AMOUNTS. In the event that any Response Notice indicates
that there is a dispute as to all or any portion of a Claim Amount (a "Contested
Amount"), the Shareholders' Agents and Acquiror shall for a period of not more
than 30 days attempt in good faith to resolve such Contested Amount.
(d) ARBITRATION. If no such resolution can be reached within such 30 day
period, either Acquiror or the Shareholders' Agents may demand arbitration of
the matter through binding and nonappealable arbitration administered by the
Judicial Arbitration & Mediation Services, Inc. ("JAMS") in San Diego County,
California. Any such arbitration shall be conducted before a single arbitrator
to be appointed by the parties from JAMS' roster. If the parties fail to agree
as to the identity of the single arbitrator, JAMS shall have the right to make
such appointment. The conduct of the arbitration hearing and discovery prior
thereto shall be in accordance with the California Code of Civil Procedure,
California Rules of Court, and California Rules of Evidence. There shall be
limited discovery prior to the arbitration hearing, subject to the discretion of
the arbitrator, as follows: (i) exchange of witness lists and copies of
documentary evidence and documents related to or arising out of the issues to be
arbitrated, (ii) depositions of all party witnesses, and (iii) such other
depositions as may be allowed by the arbitrator upon a showing of good cause.
The Shareholders' Agents shall be obligated to pay that portion of the
arbitrator's fees and expenses equal to the percentage of the Contested Amount
which is awarded to Acquiror, and Acquiror shall be obligated to pay the
remaining portion of the arbitrator's fees and expenses. The arbitrator shall
decide the matter to be arbitrated pursuant hereto within 60 days after the
appointment of the arbitrator.
The arbitrator's decision shall relate solely to whether Acquiror is
entitled to receive the number of Escrow Shares equal in value to the Contested
Amount (or a portion thereof) pursuant to the applicable terms of the Merger
Agreement and this Agreement. The final decision of the arbitrator shall be
furnished to Acquiror and the Shareholders' Agents in writing and shall
constitute a conclusive determination of the issue in question, binding upon
Acquiror, the Shareholders, the Shareholders' Agents and the Escrow Agent, and
shall not be contested by any of them. Such decision may be used in a court of
law only for the purpose of seeking enforcement of the arbitrator's award.
After delivery of a Response Notice that the Claim Amount is contested,
Escrow Shares equal in value to the Contested Amount shall continue to be held
in the Escrow Fund, notwithstanding the occurrence of the Release Date (defined
below), until (i) delivery of a copy of a settlement agreement executed by
Acquiror and the Shareholders' Agents setting forth instructions as to the
release of Escrow Shares from the Escrow Fund, if any, that shall be made with
respect to the Contested Amount or (ii) delivery of a copy of the final award of
the arbitrator setting forth instructions as to the release of Escrow Shares
from the Escrow Account, if any, that shall be made with respect to the
Contested Amount. In no event shall Acquiror have any liability for any decline
in value of the Escrow Shares while such Shares are being held in Escrow
pursuant to this Agreement.
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SECTION 3.
SHAREHOLDERS' AGENTS
The Shareholders shall be represented hereunder by the Shareholders'
Agents. The Shareholders' Agents have the authority granted in the Merger
Agreement to give and receive notices and communications, to authorize delivery
to Acquiror of Acquiror Common Stock placed in Escrow in satisfaction of claims
by any Indemnitee, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, demand arbitration of and comply with
awards of arbitrators with respect to such claims and to take any and all
actions necessary or appropriate in the judgment of the Shareholders' Agents for
the accomplishment of the foregoing.
SECTION 4.
RELEASE OF SHARES TO SHAREHOLDERS
4.1 SHARES TO BE RELEASED. Subject to Section 2 and Section 4.2 of this
Agreement, on or promptly after the earlier of (a) the completion of the first
audit of the Company subsequent to Effective Time (as evidenced by Acquiror's
earnings release) or (b) the first anniversary of the Effective Time (the
"Release Date"), the number of Escrow Shares equal to the difference, if any
(but not less than zero), between (i) the total number of Escrow Shares
deposited into Escrow on the Closing Date less (ii) the number of Escrow Shares
subject to (A) Claim Notices delivered to the Shareholders' Agents and (B)
reimbursement notices submitted pursuant to Section 6.2 prior to the Release
Date shall be released from Escrow and transferred, delivered and assigned by
the Escrow Agent to the Shareholders pursuant to Section 4.3. Any Escrow Shares
subject to any Claim Notices prior to the Release Date shall be promptly
distributed following satisfaction of any Claims specified therein to the extent
of the excess of the Escrow Shares actually used in satisfaction of such Claims.
4.2 SHARES HELD FOR SHAREHOLDERS' AGENTS. On or before the Release Date,
the Shareholders' Agents may give notice to the Escrow Agent of the number of
Escrow Shares reasonably estimated to be required to reimburse the Shareholders'
Agents pursuant to Section 6.2. On the Release Date, and prior to making any
distribution to the Shareholders pursuant to Section 4.1, the Escrow Agent shall
transfer, deliver and assign to, the Shareholders' Agents that number of Escrow
Shares which have a Stipulated Value equal to the amount then required to
reimburse the Shareholders' Agents pursuant to Section 6.2, and retain that
number of Escrow Shares having a Stipulated Value equal to the expenses
estimated to be incurred (the "Additional Expenses") by the Shareholders' Agents
pursuant to Section 6.2 (the "Retained Shares"); provided, however, that the
Shareholders' Agents total recovery from the Escrow Fund for any fees and
expenses shall be subordinate to and limited by Acquiror's claims to Escrow
Shares pursuant to Claim Notices as set forth in Section 2. The remaining Escrow
Shares above the number of Retained Shares, if any, shall be distributed
promptly to the Shareholders. That portion of the Retained Shares having a
Stipulated Value equal to the amount of the actual Additional Expenses incurred
by Shareholders' Agents shall be transferred, delivered and assigned to the
Shareholders' Agents upon receipt by the Escrow Agent of the final notice
pursuant to Section 6.2; the remaining Escrow Shares, if any, shall be
distributed promptly to the Shareholders.
4.3 PROCEDURES FOR RELEASING SHARES. Any distribution of all or a portion
of the Escrow Shares to the Shareholders shall be effected by mailing stock
certificates to the Shareholders in accordance with the percentages set forth
for each Target Shareholder on Schedule A.
SECTION 5.
VALUATION OF SHARES HELD IN ESCROW
For purposes of this Agreement, the "Stipulated Value" of each Escrow Share
shall be equal to [insert the average of the closing sales price per share of
Acquiror's Common Stock as reported by the Nasdaq National Market for the twenty
(20) market trading days immediately preceding the Closing Date] (the "Average
Price"). The number of Escrow Shares to be released from the Escrow Fund to
satisfy any claim for
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Damages shall be determined by dividing the Claim Amount, or the agreed portion
of the Claim Amount, if only part of the Claim Amount is disputed, by the
Average Price.
SECTION 6.
FEES AND EXPENSES
6.1 ESCROW FEES.
(a) The Escrow Agent will be entitled to reimbursement for ordinary fees
and expenses of the Escrow Agent, and for extraordinary expenses, incurred in
performance of its duties hereunder. Escrow Agent shall send all bills to both
the Acquiror and the Shareholders' Agents. Each of (i) Acquiror and (ii) the
Shareholders shall be liable for one-half ( 1/2) of such amounts; and Acquiror
shall make all such payments in full and shall be entitled to reimbursement from
the Escrow Shares of the Shareholders share of all such fees and expenses.
(b) The Escrow Agent will be entitled to reimbursement for reasonable fees
and expenses of the Escrow Agent, including mailing and postage fees, incurred
by Escrow Agent in connection with the Escrow Agent's delivery of such
information or materials to the beneficial owners of the Escrow Shares which
Acquiror may from time to time deliver to the Escrow Agent as record owner of
the Escrow Shares. Such reimbursement shall be payable by Acquiror.
6.2 SHAREHOLDERS' AGENTS EXPENSES. In the event that there are Escrow
Shares remaining in the Escrow Fund on the Release Date above the number of
Escrow Shares subject to Claim Notices, the Shareholders' Agents will be
entitled to reimbursement from the Escrow Fund upon submission of a notice
containing the appropriate supporting documentation to the Escrow Agent for
reasonable and appropriate legal or other professional fees and expenses
incurred by the Shareholders' Agents in connection with the performance of their
duties hereunder.
6.3 OTHER FEES. Except as may otherwise be provided herein, all expenses
(including attorneys' fees) incurred by any Target Shareholder in connection
with this Agreement shall be borne by such Target Shareholder.
6.4 REIMBURSEMENT OF CERTAIN COSTS. Upon a notice in writing delivered to
the Escrow Agent by Acquiror in respect of Section 6.1 or Section 7.3, the
Escrow Agent shall transfer, deliver and assign to Acquiror, in reimbursement of
fees and expenses pursuant to the last sentence of Section 6.1 or the second
sentence of Section 7.3, such number of Escrow Shares held in the Escrow which
have an aggregate Stipulated Value equal to the amount to be reimbursed.
6.5 INDEMNITY OF ACQUIROR BY SHAREHOLDERS' AGENTS. The Shareholders' Agents
shall indemnify the Acquiror for, and hold it harmless against, any loss,
liability or expense incurred, arising out of or in connection with
Shareholders' Agents' reimbursement from the Escrow Fund pursuant to this
Agreement, including without limitation any loss, liability or expenses
resulting from any action or claim by the Shareholders relating to the
reasonableness or appropriateness of the fees or expenses paid to Shareholders'
Agents and reimbursed from the Escrow Fund.
SECTION 7.
DUTIES OF THE ESCROW AGENT; LIMITATION OF ESCROW AGENT'S LIABILITY.
7.1 DUTIES. The sole duty of the Escrow Agent, other than as herein
specified, shall be to receive and hold the Escrow Shares, subject to
disbursement in accordance with this Agreement, and the Escrow Agent shall be
under no duty to determine whether Acquiror, the Shareholders' Agents or the
Shareholders are complying with the requirements of this Agreement or any other
agreement. The Escrow Agent shall not be liable for losses due to acts of God,
war, loss of electrical power or the failure of communication devices.
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7.2 LIMITATION OF LIABILITY. The Escrow Agent shall incur no liability with
respect to any action taken or suffered by it in reliance upon any notice,
direction, instruction, consent, statement or other documents believed by it to
be genuine and duly authorized, nor for other action or inaction except its own
willful misconduct or negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
this Agreement, the Escrow Agent may rely on the advice of counsel, and for
anything done, omitted or suffered in good faith by the Escrow Agent based on
such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
7.3 INDEMNITY. Acquiror and the Shareholders, jointly and severally, shall
indemnify the Escrow Agent for, and hold it harmless against, any loss,
liability or expense (including legal fees) incurred without negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. As among themselves, each of
Acquiror and the Shareholders shall be liable for one-half (1/2) of such amounts
and Acquiror shall be entitled to elect reimbursement from the Escrow Shares of
all or part of the Shareholders' share of any such loss, liability or expense,
if any of such share is paid by Acquiror.
SECTION 8.
GENERAL
8.1 OTHER AGREEMENTS. Nothing in this Agreement is intended to limit any of
Acquiror's or the Shareholders' rights, or any obligation of any Target
Shareholder or of Acquiror under the Merger Agreement (or any agreement entered
into in connection with the transactions contemplated by the Merger Agreement),
except as expressly provided herein.
8.2 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
the conflict of laws provisions thereunder.
8.3 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. None of the
Shareholders may assign any of his, her or its rights or obligations hereunder
without the prior written consent of the Acquiror. This Agreement will be
binding upon and inure to the benefit of the parties hereto, the Shareholders
and their respective successors and permitted assigns.
8.4 SEVERABILITY. If any provision of this Agreement, or the application
thereof, is for any reason and to any extent invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the greatest extent possible, the economic, business and
other purposes of the void or unenforceable provision.
8.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument. This Agreement will become binding
when one or more counterparts hereof, individually or taken together, bear the
signatures of all the parties reflected hereon as signatories.
8.6 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby; provided that this
Agreement may be amended on behalf of all of the Shareholders by either (i) the
Shareholders' Agents or (ii) a majority in interest (of the Acquiror Common
Stock received by such persons in connection with the Merger) of the
Shareholders. Notwithstanding any rights that may be created in any third party
under the terms of this Agreement, no such amendment or waiver will require the
consent of such third party to be effective. The waiver by a party of any breach
hereof or default in the performance hereof will not be deemed to constitute a
waiver of any other default or any succeeding breach or default.
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8.7 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
<TABLE>
<S> <C>
If to Acquiror to: LASER POWER CORPORATION
12777 High Bluff Drive
San Diego, CA 92130
Attn: Glenn H. Sherman
Telephone: (619) 755-0700
Fax: (619) 259-0956
With a copy to: COOLEY GODWARD LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: D. Bradley Peck, Esq.
Telephone: (619) 550-6000
Fax: (619) 453-3555
If to the DICK SHARMAN
Shareholders' 36575 Calle Puerto Bonita
Representative: Temecula, CA 92592
Telephone: (909) 695-3197
Fax: (909) 640-3132
With a copy to: DICKINSON WRIGHT PLLC
500 Woodward Ave., Suite 400
Detroit, MI 48226
Attention: Mark R. High, Esq.
Telephone: (313) 223-3650
Fax: (313) 223-3598
If to Escrow Agent to: AMERICAN SECURITIES TRANSFER & TRUST, INC.
1825 Lawrence Street, Suite 444
Denver, CO 80202
Attn: Gregg Tubbs
Telephone: (303) 298-5370
Fax: (303) 298-5380
</TABLE>
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the party receiving such copy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized overnight courier, on the business day following dispatch,
and (d) in the case of mailing, on the fifth business day following such
mailing.
8.8 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated by the
respective parties hereto and their attorneys and the language hereof will not
be construed for or against either party. A reference to a Section or an
attachment will mean a Section in, or attachment to, this Agreement unless
otherwise explicitly set forth. The titles and headings herein are for reference
purposes only and will not in any manner limit the construction of this
Agreement, which will be considered as a whole.
8.9 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and to
give such further written assurances as may be reasonably requested by any other
party to evidence and reflect the transactions described herein and contemplated
hereby and to carry into effect the intents and purposes of this Agreement.
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<PAGE> 171
8.10 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder (including the Shareholders), partner or any
party hereto or any other person or entity unless specifically provided
otherwise herein, and, except as so provided, all provisions hereof will be
personal solely between the parties to this Agreement.
8.11 ENTIRE AGREEMENT. This Agreement and the Merger Agreement and the
attachments hereto and thereto constitute the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof and supersede
all prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties with
respect hereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
8.12 RESIGNATION OR REPLACEMENT OF ESCROW AGENT. Acquiror may substitute a
successor Escrow Agent upon 30 days' advance written notice to the Shareholders'
Agents and the Escrow Agent. Such replacement escrow agent shall be a bank or
similar financial institution. Escrow Agent may resign upon 30 days' advance
written notice to Acquiror and the Shareholders' Agents. Within such 30-day
period, Acquiror shall appoint a successor Escrow Agent in accordance with this
Section 8.12. If Acquiror has not appointed a successor Escrow Agent within such
period, the Escrow Agent may petition any court of competent jurisdiction to
name a successor escrow agent.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of
, 1998.
LASER POWER CORPORATION
a Delaware corporation
By:
--------------------------------------
Glenn H. Sherman, Chairman of the
Board and
Chief Executive Officer
SHAREHOLDERS' AGENTS
--------------------------------------
Dick Sharman
--------------------------------------
Robert N. Haro
--------------------------------------
Robert P. Perkins
AMERICAN SECURITIES TRANSFER & TRUST,
INC.
By:
--------------------------------------
Gregg Tubbs, Senior Vice President,
Trust Officer
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<PAGE> 173
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHAREHOLDER ESCROW SHARES ESCROW SHARES
- ----------- ------------- -------------
<S> <C> <C>
</TABLE>
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<PAGE> 174
APPENDIX B
OPINION OF FREDERICKS, SHIELDS & CO., LLC
[LETTERHEAD OF FREDERICKS, SHIELDS & CO., LLC]
December 6, 1997
Board of Directors
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130
Attn: Dr. Glenn Sherman, Ph.D.
Gentlemen:
Laser Power Corporation ("LPC") retained Fredericks, Shields & Co. ("FSC")
to express our opinion as to the fairness, from a financial point of view, to
the shareholders of LPC of the consideration to be paid to EMI Acquisition Corp.
("EMI") for all the outstanding shares of EMI. The Agreement and Plan of
Reorganization (the "Agreement") calls for LPC to issue 2,004,676 shares of its
common stock at closing in exchange for all of the outstanding shares of common
stock of EMI, and the substitution of options to purchase 99,498 shares of LPC
common stock for all outstanding options to purchase EMI common stock.
FSC, as an integral part of our business, is continually engaged in the
valuation of both privately held and publicly traded businesses and their
securities in connection with mergers and acquisitions, divestitures, equity and
debt capital formation, recapitalizations, and other objectives.
In conducting our investigation and arriving at our opinion, we have
reviewed the Agreement and taken into account such accepted financial procedures
and considerations as we have deemed relevant. We have reviewed audited
financial statements of LPC for the periods ending August 31, 1995 through
August 31, 1997; unaudited condensed financial summaries of EMI for the periods
ending December 31, 1994 through December 31, 1996; and nine-month unaudited
financial statements of EMI for the period ending September 30, 1997. We have
analyzed revised projections for EMI and have reviewed EMI's most recent
Confidential Memorandum describing its business and forecasts dated August 13,
1997. We have visited EMI's facilities and met with EMI management as well as
LPC's management and discussed the current business and future prospects of EMI
and LPC. We have analyzed financial information regarding comparable public
companies and consideration paid in other merger and acquisition transactions
that we consider to be comparable. We have reviewed material discussing the
economic outlook and the outlook for the laser industry, and other material as
we deemed appropriate.
In rendering our opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations which have been provided to us by EMI and LPC or
which are publicly available.
Based on our analysis of the factors deemed relevant, it is our opinion
that the proposed offer of 2,004,676 shares and the substitution of options to
purchase 99,498 shares of LPC common stock for all of EMI's outstanding shares
and options to purchase common stock, is fair, from a financial point of view,
to the shareholders of LPC.
Very truly yours,
FREDERICKS, SHIELDS & CO., LLC
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APPENDIX C
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
1300. SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER -- (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF
SHARES -- (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivisions (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivisions
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares describe in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. DISSENTING SHARES, STAMPING OR ENDORSING -- Within 30 days after the
date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT -- (a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS -- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
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issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS
OF ACTION -- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market vale of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
undercertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Section 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF
FAIRMARKET VALUE. -- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. DISSENTING SHARES, DISPOSITION OF DIVIDENDS. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. DISSENTING SHARES, RIGHTS AND PRIVILEGES. -- Except as expressly
limited in this chapter, holders of dissenting shares continue to have all the
rights and privileges incident to their shares, until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
1309. DISSENTING SHARES, LOSS OF STATUS. -- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
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(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivisions (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING. -- If
litigation is instituted to test the sufficiency of regularity of the votes of
the shareholder in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES. -- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312. VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF. -- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right or law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-4
<PAGE> 179
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Amended and Restated Certificate of Incorporation and
Bylaws include provisions to (i) eliminate the personal liability of its
Directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
Directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as Directors
and officers. These provisions do not eliminate the Directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each Director will continue to be subject to liability for breach of
the Director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving misconduct, for knowing violations of law, for acts or
omissions that the Director believes to be contrary to the best interests of the
Registrant or its stockholders, for any transaction from which the Director
derived an improper personal benefit, for acts or omissions involving a reckless
disregard for the Director's duty to the Registrant or its stockholders when the
Director was aware or should have been aware of a risk of serious injury to the
Registrant or its stockholders, for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the Director's
duty to the Registrant or its stockholders, for improper transactions between
the Director and the Registrant and for improper distributions to stockholders
and loans to Directors and officers. The provision also does not affect a
Director's responsibilities under any other law, such as the federal securities
law or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder. The Registrant has entered into similar indemnity
agreements with certain of its key employees.
At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
II-1
<PAGE> 180
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ --------------------------------------------------------------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization. Reference is made to Appendix
A.
(1) 3.1 Registrant's Amended and Restated Certificate of Incorporation
(1) 3.2 Registrant's Amended and Restated Bylaws
(1) 4.4 Form of Common Stock Certificate of Registrant
5.1 Opinion of Cooley Godward LLP
8.1 Tax opinion of Cooley Godward LLP
8.2 Tax opinion of Dickinson Wright PLLC
(1) 10.1 Form of Indemnity Agreement entered into between Registrant and its
directors and executive officers
(1) 10.2 Registrant's Second Amended and Restated 1981 Stock Option Plan (the
"1981 Plan")
(1) 10.3 Incentive Stock Option Agreement Under Registrant's 1981 Plan
(1) 10.4 Registrant's 1993 Stock Option Plan (the "1993 Plan")
(1) 10.5 Form of Incentive Stock Option Agreement under the 1993 Plan
(1) 10.6 Form of Nonstatutory Stock Option Agreement under the 1993 Plan
(1) 10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan")
(1) 10.8 Form of Incentive Stock Option Agreement under the 1997 Plan
(1) 10.9 Form of Nonstatutory Stock Option Agreement under the 1997 Plan
(1) 10.10 Registrant's Employee Stock Purchase Plan
(1) 10.11 Form of Warrant issued by Registrant in favor of certain directors
of Registrant and attached schedule
(1)(2) 10.12 Cooperative Development and License Agreement between Proxima
Corporation and Registrant dated January 11, 1994
(1) 10.13 Registration Rights Agreement between Registrant, Union Miniere Inc.
and Proxima Corporation dated June 9, 1997
(1)(2) 10.14 Assignment Agreement between Registrant and ATx Telecom Systems,
Inc. dated September 30, 1996
(1) 10.15 Credit Agreement between Registrant and Wells Fargo dated January
29, 1997
(1) 10.16 Registrant's Form of Employment Agreement and attached schedule
(1) 10.17 Consulting Agreement dated December 1, 1996 between Registrant and
Arthur P. Minich
(1) 10.18 Lease dated August 30, 1984 between the Registrant and Highlands
Park Partnership and amendments thereto
(1)(2) 10.19 Development and Manufacturing Agreement for RGB Lasers between
Registrant and LDT GmbH & Co. dated July 1, 1996
10.20 Building Lease dated October 25, 1991, as amended, between Exotic
Materials, Inc. and Reisung Enterprises, Inc.
10.21 Unsecured Subordinated Installment Note dated October 31, 1996
between Exotic Materials, Inc. and Vitec Group US Holdings, Inc.
10.22 Employment Agreement between Exotic Materials, Inc. and Dick Sharman
dated December 5, 1997
10.23 Employment Agreement between Exotic Materials, Inc. and Robert N.
Haro dated December 5, 1997
10.24 Employment Agreement between Exotic Materials, Inc. and Thomas J.
Brawley dated December 24, 1997.
11.1 Statement re: computation of per share earnings
</TABLE>
II-2
<PAGE> 181
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ --------------------------------------------------------------------
<S> <C> <C>
(1) 21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of McGladrey & Pullen, LLP
24.1 Power of Attorney. Reference is made to page II-4
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form SB-2
(No. 333-24421) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment dated June 12, 1997.
ITEM 22. UNDERTAKING
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference to the Prospectus/Joint Proxy Statement
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and EMI being acquired
involved therein, that was not the subject of an included in the Registration
Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act, as
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Certificate of Incorporation and the Bylaws of the
Registrant and the Delaware General Corporation Law, 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 a successful defense of any action, such 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
question has been settled by controlling precedent, submit to a court of
approximate jurisdiction the question of 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.
(6) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act each filing of the
Registrant's annual report pursuant to Section 13(a) or 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
<PAGE> 182
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Laser
Power has duly caused this Registration Statement to be signed on its behalf by
the undersigned, in the City of San Diego, County of San Diego, State of
California, on the 29th day of December, 1997.
By: /s/ GLENN H. SHERMAN
------------------------------------
Glenn H. Sherman
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Glenn H. Sherman and Paul P. Wickman, Jr., or any
of them, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ GLENN H. SHERMAN Chairman of the Board and December 29, 1997
- ------------------------------------------ Chief Executive Officer
Glenn H. Sherman, Ph.D. (Principal Executive
Officer)
/s/ PAUL P. WICKMAN, JR. Senior Vice President, Chief December 29, 1997
- ------------------------------------------ Financial Officer and
Paul P. Wickman, Jr. Secretary (Principal
Financial and Accounting
Officer)
/s/ DOUGLAS H. TANIMOTO Director December 29, 1997
- ------------------------------------------
Douglas H. Tanimoto, Ph.D.
/s/ WILLIAM G. FREDRICK Director December 29, 1997
- ------------------------------------------
William G. Fredrick
/s/ ROBERT G. KLIMASEWSKI Director December 29, 1997
- ------------------------------------------
Robert G. Klimasewski
/s/ RICHARD C. LAIRD Director December 29, 1997
- ------------------------------------------
Richard C. Laird
/s/ KENNETH E. OLSON Director December 29, 1997
- ------------------------------------------
Kenneth E. Olson
/s/ JOHN C. STISKA Director December 29, 1997
- ------------------------------------------
John C. Stiska
</TABLE>
II-4
<PAGE> 183
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ --------------------------------------------------------------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization. Reference is made to Appendix
A.
(1) 3.1 Registrant's Amended and Restated Certificate of Incorporation
(1) 3.2 Registrant's Amended and Restated Bylaws
(1) 4.4 Form of Common Stock Certificate of Registrant
5.1 Opinion of Cooley Godward LLP
8.1 Tax opinion of Cooley Godward LLP
8.2 Tax opinion of Dickinson Wright PLLC
(1) 10.1 Form of Indemnity Agreement entered into between Registrant and its
directors and executive officers
(1) 10.2 Registrant's Second Amended and Restated 1981 Stock Option Plan (the
"1981 Plan")
(1) 10.3 Incentive Stock Option Agreement Under Registrant's 1981 Plan
(1) 10.4 Registrant's 1993 Stock Option Plan (the "1993 Plan")
(1) 10.5 Form of Incentive Stock Option Agreement under the 1993 Plan
(1) 10.6 Form of Nonstatutory Stock Option Agreement under the 1993 Plan
(1) 10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan")
(1) 10.8 Form of Incentive Stock Option Agreement under the 1997 Plan
(1) 10.9 Form of Nonstatutory Stock Option Agreement under the 1997 Plan
(1) 10.10 Registrant's Employee Stock Purchase Plan
(1) 10.11 Form of Warrant issued by Registrant in favor of certain directors
of Registrant and attached schedule
(1)(2) 10.12 Cooperative Development and License Agreement between Proxima
Corporation and Registrant dated January 11, 1994
(1) 10.13 Registration Rights Agreement between Registrant, Union Miniere Inc.
and Proxima Corporation dated June 9, 1997
(1)(2) 10.14 Assignment Agreement between Registrant and ATx Telecom Systems,
Inc. dated September 30, 1996
(1) 10.15 Credit Agreement between Registrant and Wells Fargo dated January
29, 1997
(1) 10.16 Registrant's Form of Employment Agreement and attached schedule
(1) 10.17 Consulting Agreement dated December 1, 1996 between Registrant and
Arthur P. Minich
(1) 10.18 Lease dated August 30, 1984 between the Registrant and Highlands
Park Partnership and amendments thereto
(1)(2) 10.19 Development and Manufacturing Agreement for RGB Lasers between
Registrant and LDT GmbH & Co. dated July 1, 1996
10.20 Building Lease dated October 25, 1991, as amended, between Exotic
Materials, Inc. and Reisung Enterprises, Inc.
10.21 Unsecured Subordinated Installment Note dated October 31, 1996
between Exotic Materials, Inc. and Vitec Group US Holdings, Inc.
10.22 Employment Agreement between Exotic Materials, Inc. and Dick Sharman
dated December 5, 1997
10.23 Employment Agreement between Exotic Materials, Inc. and Robert N.
Haro dated December 5, 1997
10.24 Employment Agreement between Exotic Materials, Inc. and Thomas J.
Brawley dated December 24, 1997.
11.1 Statement re: computation of per share earnings
(1) 21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of McGladrey & Pullen, LLP
24.1 Power of Attorney. Reference is made to page II-4
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form SB-2
(No. 333-24421) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment dated June 12, 1997.
<PAGE> 1
EXHIBIT 5.1
ATTORNEYS AT LAW San Francisco, CA
415 693-2000
4365 Executive Drive Palo Alto, CA
Suite 1100 415 843-5000
San Diego, CA
92121-2128 Menlo Park, CA
Main 619 550-6000 415 843-5000
Fax 619 453-3555
Boulder, CO
303 546-4000
Denver, CO
303 606-4800
http://www.cooley.com
December 29, 1997
D. BRADLEY PECK
Laser Power Corporation 619 550-6012
12777 High Bluff Drive [email protected]
San Diego, CA 92130
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Laser Power Corporation (the "Company") of a Registration
Statement on Form S-4, (the "Registration Statement"), with the Securities and
Exchange Commission (the "Commission"), covering the offering of up to 2,104,174
shares of the Company's Common Stock, $.001 par value (the "Shares"), including
up to 99,498 shares of the Company's Common Stock, $.001 par value, issuable
upon exercise of all outstanding unexpired and unexercised options to purchase
Common Stock of EMI Acquisition Corp. (the "Options").
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Restated
Certificate of Incorporation and Amended and Restated Bylaws and the originals
or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as we deem necessary as a basis
for this opinion. We have assumed the genuineness and authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as copies thereof and the due execution and delivery
of all documents where due execution and delivery are a prerequisite to the
effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares, when issued in accordance with the Registration Statement, the
related Prospectus and, as applicable, upon exercise of the Options, will be
validly issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ D. BRADLEY PECK
---------------------------------
D. Bradley Peck
<PAGE> 1
EXHIBIT 8.1
[COOLEY GODWARD LLP LETTERHEAD]
December 29, 1997
Laser Power Corporation, and
LPC Acquisition Subsidiary, Inc.
12777 High Bluff Drive
San Diego, CA 92130
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the Form S-4
registration statement (the "Registration Statement") filed pursuant to the
Agreement") and Plan Reorganization dated as of December 23, 1997 (the
"Reorganization Agreement") by and among Laser Power Corporation, a Delaware
corporation ("Parent"), LPC Acquisition Subsidiary, Inc., a California
corporation and wholly owned subsidiary of Parent ("Merger Sub"), EMI
Acquisition Corp., a California corporation (the "Company"), Dick Sharman,
Robert P. Perkins and Robert N. Haro.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to Parent and Merger Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined, and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in, the following documents
(including all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated December 29,
1997 delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters");
(c) Continuity of Interest Certificates to be delivered by the
Closing Date by certain shareholders of the Company in favor of Parent, Merger
Sub and the Company (the "Continuity of Interest Certificates"); and
(d) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the
<PAGE> 2
[COOLEY GODWARD LLP LETTERHEAD]
Laser Power Corporation
December 29, 1997
Page 2
Merger and the other transactions contemplated by the Reorganization Agreement
as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures
thereto) are authentic, documents submitted to us as copies conform to the
original documents, and that all such documents have been (or will be by the
Effective Time) duly and validly executed and delivered where due execution and
delivery are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed
to by Parent, Merger Sub and the Company, their managements, employees,
officers, directors and shareholders in connection with the Merger, including,
but not limited to, those set forth in the Reorganization Agreement (including
the exhibits thereto), the Tax Representation Letters and the Continuity of
Interest Certificates are true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement
(including exhibits thereto), the Tax Representation Letters and the Continuity
of Interest Certificates are performed without waiver or breach of any material
provision thereof;
4. There is no plan or intention on the part of the shareholders
of the Company to engage in a sale, exchange, transfer, distribution, pledge,
or other disposition or any transaction which results in a reduction of risk of
ownership, or a direct or indirect disposition of shares of Parent Common Stock
to be received in the Merger that would reduce the Company's shareholders'
ownership of Parent Common Stock to a number of shares having an aggregate fair
market value, as of the Effective Time, of less than fifty percent (50%) of the
aggregate fair market value of all of the Company Common Stock outstanding
immediately prior to the Effective Time. (For purposes of the preceding
sentence, shares of Company Common Stock as to which shareholders of the
Company exercise dissenters' rights in the Merger, which are exchanged for
consideration in the Merger other than shares of Parent Common Stock, including
being exchanged for cash in lieu of fractional shares of Parent Common Stock or
are sold, redeemed or disposed of in a transaction that is in contemplation of
or related to the Merger, shall be considered shares of the Company Common
Stock held by shareholders of the Company immediately prior to the Merger which
are exchanged for shares of Parent Common Stock in the Merger and then disposed
of pursuant to a plan); and
<PAGE> 3
[COOLEY GODWARD LLP LETTERHEAD]
Laser Power Corporation
December 29, 1997
Page 3
5. Any representation or statement made "to the best of knowledge"
or similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(2)(E) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Certain Federal Income Tax Matters" contained in the Registration
Statement and believe that such information fairly presents the current federal
income tax law applicable to the Merger and the material federal tax
consequences to Parent, Merger Sub, the Company and the Company's shareholders
as a result of the Merger.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Matters" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as
specifically set forth herein, and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein. Furthermore,
this opinion only relates to the holders of Company Common Stock who hold such
stock as a capital asset. No opinion is expressed as to the federal income tax
treatment that may be relevant to a particular investor in light of personal
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws (for example, life insurance companies,
dealers in securities, taxpayers subject to the alternative minimum tax, banks,
tax-exempt organizations, non-United States persons, and shareholders who
acquired their shares of Company Common Stock pursuant to the exercise of
options or otherwise as compensation or who hold their Company Common Stock as
part of a straddle or other risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if all of the transactions described in the
Reorganization Agreement are not consummated in
<PAGE> 4
[COOLEY GODWARD LLP LETTERHEAD]
Laser Power Corporation
December 29, 1997
Page 4
accordance with the terms of the Reorganization Agreement and without waiver of
any material provision thereof. To the extent that any of the representations,
warranties, statements and assumptions material to our opinion and upon which
we have relied are not accurate and complete in all material respects at all
relevant times, our opinion would be adversely affected and should not be relied
upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service
or any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered in connection with the filing of the
Registration Statement. It is intended for the benefit of Parent, Merger Sub
and their stockholders and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other
person without our prior written consent.
Sincerely,
COOLEY GODWARD LLP
/s/ WEBB B. MORROW III
Webb B. Morrow III
WBM/kmp
<PAGE> 1
Exhibit 8.2
December 29, 1997
EMI Acquisition Corp.
36570 Briggs Road
Murrieta, California 92563-2347
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the Form S-4
registration statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Reorganization dated as of December 23, 1997 (the
"Reorganization Agreement"), by and among Laser Power Corporation, a Delaware
corporation ("Parent"), LPC Acquisition Subsidiary, Inc., a California
corporation and wholly owned subsidiary of Parent ("Merger Sub"), EMI
Acquisition Corp., a California corporation (the "Company"), Dick Sharman,
Robert P. Perkins, and Robert N. Haro.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the
truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in, the following documents (including
all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated December 29, 1997,
delivered to us by Parent, Merger Sub, and the Company containing certain
representations of Parent, Merger Sub, and the Company (the "Tax Representation
Letters");
(c) Continuity of Interest Certificates to be delivered by the Closing
Date by certain shareholders of the Company in favor of Parent, Merger Sub and
the Company (the "Continuity of Interest Certificates"); and
<PAGE> 2
EMI Acquisition Corp.
December 29, 1997
Page 2
(d) such other instruments and documents related to the formation,
organization, and operation of the Company and to the consummation of the
Merger and the other transactions contemplated by the Reorganization Agreement
as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed with your knowledge
and consent (without any independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto) are
authentic documents submitted to us as copies conform to the original documents,
and that all such documents have been (or will be by the Effective Time) duly
and validly executed and delivered where due execution and delivery are a
prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and shareholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters and to be set forth in the
Continuity of Interest Certificates are true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters and to be set forth in the
Continuity of Interest Certificates are performed without waiver or breach of
any material provision thereof;
4. There is no plan or intention on the part of the shareholders of the
Company to engage in a sale, exchange, transfer, distribution, pledge, or other
disposition or any transaction which results in a reduction of risk of
ownership, or a direct or indirect disposition of shares of Parent Common Stock
to be received in the Merger that would reduce the Company's shareholders'
ownership of Parent Common Stock to a number of shares having an aggregate fair
market value, as of the Effective Time, of less than fifty percent (50%) of the
aggregate fair market value of all of the Company Common Stock outstanding
immediately prior to the Effective Time. (For purposes of the preceding
sentence, shares of Company Common Stock as to which shareholders of the Company
exercise dissenters' rights in the Merger, which are exchanged for consideration
in the Merger other than shares of Parent common Stock, including being
exchanged for cash in lieu of fractional shares of Parent Common Stock or are
sold, redeemed or disposed of in a transaction that is in contemplation of or
related to the Merger, shall be considered shares of the Company Common Stock
held by shareholders of the Company immediately prior to the Merger which are
exchanged for shares of Parent Common Stock in the Merger and then disposed of
pursuant to a plan); and
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
<PAGE> 3
EMI Acquisition Corp.
December 29, 1997
Page 3
We have further assumed that the Reorganization Agreements and the related
agreements entered into in connection with the Merger and the other transactions
contemplated thereby are each valid, binding, and enforceable in accordance with
their terms.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, and provided that the
Merger is effected in accordance with the Reorganization Agreement and all state
and federal statutes which are or may become applicable, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(2)(E) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Certain Federal Income Tax Matters" contained in the Registration
Statement and believe that such information fairly presents the current federal
income tax law applicable to the Merger and the material federal tax
consequences to Parent, Merger Sub, the Company and the Company's shareholders
as a result of the Merger.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Matters" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company Common Stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal circumstances or to
certain types of investors subject to special treatment under the federal income
tax laws (for example, life insurance companies, dealers in securities,
taxpayers subject to the alternative minimum tax, banks, tax-exempt
organizations, non-United States persons, and shareholders who acquired their
shares of Company Common Stock pursuant to the exercise of options or otherwise
as compensation or who hold their Company Common Stock as a part of a straddle
or other risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any other transaction whatsoever,
including the Merger, if all of the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of the Reorganization
Agreement and without waiver of any material provision thereof. To the extent
that any of the representations, warranties, statements and
<PAGE> 4
EMI Acquisition Corp.
December 29, 1997
Page 4
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered in connection with the filing of the
Registration Statement. It is intended for the benefit of Parent, Merger Sub
and their stockholders and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other
person without our prior written consent.
Very truly yours,
Dickinson, Wright, Moon, Van Dusen & Freeman
/s/ WILLIAM E. ELWOOD
William E. Elwood
<PAGE> 1
EXHIBIT 10.20
FIRST AMENDMENT TO LEASE AND CONSENT TO ASSIGNMENT OF LEASE
This First Amendment to Lease and Consent to Assignment of Lease ("Agreement")
is made to be effective this 3rd day of October, 1994 (the "Effective Date") by
and between REISUNG ENTERPRISES, INC., a California corporation ("Landlord") and
EXOTIC MATERIALS, INC., a California corporation ("Tenant").
RECITALS
This Agreement is made with reference to the following facts:
A. Landlord and Tenant entered into that certain written Building Lease
Agreement (the "Lease") dated October 25, 1991 pursuant to which Tenant leased
from Landlord that certain parcel of land and that certain building consisting
of approximately Sixty Thousand (60,000) square feet of space commonly known as
36570 Briggs Road, Murrieta, California.
B. Vinten Holdings, Inc., ("Vinten"), a California corporation and then
parent of Tenant, entered into a Stock Purchase Agreement dated June 30, 1993,
with Dick Sharman, Robert N. Haro, and Robert P. Perkins, as individuals (the
"Shareholders") for the purchase by the Shareholders of all of the when
outstanding capital stock of Tenant.
C. Pursuant to the certain Assignment Agreement dated July 2, 1993, the
Shareholders assigned and transferred all of their obligations, rights, title
and interest in, to and under the Stock Purchase Agreement to EMI Acquisition
Corporation ("EMI"), a California corporation ("EMI").
D. As of June 9, 1993 (the measurement date under the Stock Purchase
Agreement), Tenant owed Vinten and its affiliates Three Million Four Hundred
Sixty One Thousand Two Hundred Fifty Dollars ($3,461,250). On August 11, 1993,
Vinten contributed to the capital of Tenant One Million Four hundred Sixty One
Thousand Two Hundred Fifty Dollars ($1,461,250) by cancellation of the same
amount of indebtedness owed by Tenant to Vinten. Also on August 11, 1993, Tenant
issued that certain Promissory Note (the "Note") dated August 11, 1993, for the
sum of Two Million Dollars ($2,000,000) in favor of Vinten Group US Holdings,
Inc., a Delaware corporation (the "Holder") in satisfaction of all remaining
amounts owed by Tenant to Vinten and its affiliates. Among other things, the
Note requires Tenant to pay to Holder the sum of 75% of Tenant's net earnings
for the prior fiscal year.
E. Pursuant to the terms of the Stock Purchase Agreement and Assignment
Agreement, on August 12, 1993, EMI acquired all of the outstanding capital stock
of Tenant (the "Transaction").
F. Pursuant to section 14.2, Tenant may not transfer, assign, sublet,
mortgage or otherwise hypothecate the Lease or Tenant's interest in and to the
Premises without first obtaining Landlord's consent thereto. Pursuant to section
14.2.2 Landlord, in determining
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whether to consent to a proposed transfer, may consider, among other things, the
financial capacity of the proposed transferee to perform its obligations under
the Lease.
G. Pursuant to section 14.2, the Transaction set forth above is an
"assignment" or "transfer" of the Lease by Tenant. Tenant has heretofore failed
to obtain the consent of Landlord to the Transaction set forth above. Landlord
and Tenant disagree as to whether or not the financial capacity of the proposed
transferee is less than or greater than that of the Tenant prior to the
Transaction.
H. Tenant hereby seeks Landlord's consent and approval to the
Transaction and Landlord is willing to consent to the Transaction of the terms
and conditions set forth in this Agreement including, without limitation, the
condition that Tenant assigns its interest in the Lease to EMI.
I. As consideration for landlord's granting of consent, Landlord and
Tenant also agree to amend the Lease on the terms and conditions set forth in
this Agreement.
NOW THEREFORE, for good and valuable consideration, including, without
limitation, Landlord's agreement to not reasonably withhold its consent to the
Transaction, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
Landlord hereby grants its consent to the Transaction set forth above
conditional upon the satisfaction of the following express terms and conditions:
1. Line of Credit: Tenant shall use its best efforts to develop and
maintain a line of credit for the benefit of Tenant, shall provide to Landlord
copies of any written financing proposal or commitment that Tenant receives from
any proposed working capital lender, and shall otherwise keep Landlord advised
of the progress of such efforts.
2. Holder Agreement: Tenant has obtained the written agreement of the
Holder that the granting of the security deposit pursuant to this Agreement is
not a violation of the terms, conditions or covenants of the Note and that any
amount held as security by Landlord under the terms hereof shall be applied to
any amounts owing or due Landlord under the Lease and that Holder shall have no
claims to said funds.
3. Assignment of Lease to EMI: Tenant shall assign all of its right,
title and interest in and to the Lease to EMI. Landlord hereby consents to such
assignment and further sublease of the Premises by EMI to Tenant on the terms
and conditions specified in Attachment A, provided that EMI shall not be
released from it liabilities and obligations under the Lease by reason of such
sublease.
4. Amendment to Lease: The terms of the Lease shall be amended as
follows:
(a) Security Deposit: Tenant shall provide to landlord a
security deposit in the sum of Forty Thousand Dollars ($40,000) in cash (or
alternatively at Tenant's election in the
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<PAGE> 3
form of a Letter of Credit for the benefit of Landlord, in form and substance
reasonably acceptable to Landlord). If Tenant elects to provide a cash security
deposit and any portion of such security deposit is used by Landlord, Tenant
shall, within five (5) days after written demand therefor by Landlord, deposit
cash with Landlord in an amount sufficient to restore the security deposit to
its original amount. If Tenant elects to provide the security deposit in the
form of a Letter of Credit and Landlord draws on such Letter of Credit, Tenant,
for each such draw, shall open a new Letter of Credit within five (5) days after
written demand therefor by Landlord, for the benefit of Landlord, in form and
substance reasonably acceptable to Landlord, and in the sum which is in like
amount of each said draw. Tenant shall renew each and every such letter of
Credit on or before the day that is thirty (30) days prior to the day that such
Letter of Credit expires. If Tenant fails to so renew such Letter of Credit,
Landlord may draw on each and every Letter of Credit opened by Tenant in
accordance herewith in the sum of any theretofore undrawn amounts.
(b) Financial Statements: within forth-five (45) days following the end
of each of Tenant's first fiscal quarters, Tenant shall provide to Landlord
quarterly financial statements, including, without limitation, a balance sheet
as of the quarter end, and statements of operations and cash flow for the
quarter and year-to-date period then ended, all prepared in accordance with
generally accepted accounting principles. Within ninety (90) days of the end of
each of Tenant's fiscal years, Tenant shall provide to landlord annual financial
statements of the Tenant including, without limitation, a balance sheet as of
the end of the fiscal year and statements of operation and cash flows for the
fiscal year, all prepared in accordance with generally accepted accounting
principles and accompanied by the report of the firm of independent auditors of
the Tenant if the Tenant engages such a firm. Tenant hereby represents to
Landlord that all said financial statements are and will be true, correct and
complete in all material respects.
(c) Accounts Receivable Aging: Tenant has provided to Landlord an aging
of Tenant's accounts receivable as of the fiscal month end immediately preceding
the execution of this Agreement. Tenant hereby represent that such aging is
inclusive of all present accounts receivable only and that it is true, and
complete in all material respects as of such date.
(d) Cost and Expenses: In accordance with section 14.2 of the Lease,
Tenant shall pay to Landlord, as additional rent, the costs and expenses
incurred by Landlord in connection with the Agreement, and the associated Ground
Lease Agreement, the sum of Four Thousand Five Hundred Twenty-Nine Dollars
($4,529). Such amount includes all costs an expenses of landlord payable by
Tenant pursuant to section 14.2 of the Lease and includes, without limitation,
the costs and expenses of Wilson, Sonsini, Goodrich & Rosati and that of Kenneth
A. Corum of Financial Management Systems. Tenant shall pay such sum upon the
execution of this Agreement and the Landlord hereby acknowledges receipt
thereof.
5. No Further Assignment: This consent is not assignable, nor shall
this consent be a consent to any further amendment, modification, extension of
renewal of the Lease or to any other sublease or assignment of the Lease.
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<PAGE> 4
6. No Other Modifications: Other than the terms herein specifically
amended, all terms and conditions of the Lease remain in full force and effect
without modification.
7. No Waiver. Landlord's consent to the Transaction shall not in any
manner waive any right Landlord may now or hereafter have under the Lease or
otherwise with respect to the Property, except as expressly herein provided.
TENANT: LANDLORD:
EXOTIC MATERIALS, INC. REISUNG ENTERPRISES, INC.
/s/ DICK SHERMAN /s/ KENNETH A. CORVIN
- ------------------------------- -------------------------------
By: Dick Sherman By: Kenneth A. Corvin
Its: President Its:
Date: September 26, 1994 Date: October 10, 1994
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<PAGE> 5
ASSIGNMENT AND ASSUMPTION OF LEASE
THIS ASSIGNMENT AN ASSUMPTION OF LEASE is made between EXOTIC MATERIALS, INC., a
California corporation ("ASSIGNOR") and EMI ACQUISITION CORP., a California
corporation ("ASSIGNEE").
1. Recitals. This Assignment and Assumption of Lease is made with reference to
the following facts:
A. Reisung Enterprises, Inc., ("Landlord") and Assignor entered into a
written lease dated October 25, 1991, as amended concurrently herewith (the
"Lease") with respect to those premises commonly known as 36570 Briggs Road,
Murrieta, California (the "Premises").
B. Assignor desires to assign all of its right title and interest in
the Lease to Assignee; and Assignee desires to assume all of Assignor's rights
and obligations under the Lease.
2. Assignment. Assignor does hereby grant, transfer, assign and set over to
Assignee all of the Assignor's right, title and interest of whatsoever nature or
kind in and to the Lease.
3. Acceptance and Assumption. Assignee hereby accepts the foregoing assignment
of the Lease and assumes the rights and obligations of Assignor under the lease
which accrue or accrued on and after October 3, 1994. Assignee hereby expressly
assumes and agrees to perform and fulfill all the terms and obligations to be
performed by the tenant under the Lease.
4. Successors. This assignment shall be binding upon and inure to the benefit of
the parties and their successors.
ASSIGNEE: ASSIGNOR:
EMI ACQUISITION CORP., EXOTIC MATERIALS, INC.,
a California corporation a California corporation
/s/ DICK SHERMAN /s/ KENNETH A. CORVIN
- ------------------------------- -------------------------------
By: Dick Sherman By: Kenneth A. Corvin
Its: President Its: President
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EXHIBIT
Drafts are to be accompanied only by a written statement, signed by an officer
or director of Beneficiary, stating either of the following:
"The amount represented by the draft accompanying this statement is the
amount required to be paid to Beneficiary on account of the default of
the tenant under that certain Building Lease Agreement and amendments
thereto dated October 25, 1991 by and between Beneficiary, as landlord,
and Applicant, as the tenant/assignee"; or
"The amount represented by the draft accompanying this statement is the
amount required to be paid to Beneficiary on account of the failure of
the tenant to renew a Letter of Credit in favor of Beneficiary required
to be renewed under that certain Building Lease Agreement and
amendments thereto dated October 25, 1991 by and between Beneficiary,
as landlord, and Applicant, as the tenant/assignee."
<PAGE> 1
EXHIBIT 10.21
UNSECURED SUBORDINATED INSTALLMENT NOTE
$1,919,000 October 1, 1996
Murrieta, California
FOR VALUE RECEIVED, the undersigned, Exotic Materials, Inc., a California
corporation (the "Borrower"), promises to pay to the order of Vitec Group US
Holdings, Inc., a Delaware corporation (the "Creditor"), the principal amount of
One Million Nine Hundred Nineteen Thousand Dollars ($1,919,000), or such lesser
amount as may be outstanding on April 30, 2005, together with interest on the
principal amount outstanding, from the date hereof until the principal amount of
this Note is paid in full, at a rate equal to nine percent (9%) per annum,
calculated on the basis of a year of 365 or 366 days, as the case may be, and
paid for the actual number of days elapsed (including the first day of the
relevant period but excluding the last day). Any overdue principal of this Note
shall bear interest, payable on demand, for each day until paid at a rate equal
to ten (10%) per annum, but in no event shall such penalty interest exceed the
maximum amount of interest permitted by applicable law.
1. Installment payments. On April 30, 1997, and each April 30 thereafter
during the term of this Note, the Borrower shall pay to the Creditor the amount
set forth below. Such payments shall be applied first against any accrued but
unpaid interest then the balance of any such payment against the principal then
outstanding under the Note. Exhibit A attached hereto, allocates each of the
following installment payments between interest and principal.
April 30, 1997 .................... $128,300
April 30, 1998 .................... 190,000
April 30, 1999 .................... 230,000
April 30, 2000 .................... 270,000
April 30, 2001 .................... 310,000
April 30, 2002 .................... 350,000
April 30, 2003 .................... 390,000
April 30, 2004 .................... 430,000
April 30, 2005 .................... 795,624
2. Subordination. The Borrower's payment obligations hereunder are
subordinated in right of payment to any indebtedness of the Borrower incurred
for working capital purposes not exceeding $1,000,000 in principal amount
outstanding at any time (the "Working Capital Facility"), provided, that so long
as no default shall have occurred and be continuing under the Working Capital
Facility, the Borrower's payment obligations under this Note shall not be
impaired. If a default shall have occurred and be continuing under the Working
Capital Facility, the Borrower shall not make any further payments to the
Creditor, and the Creditor shall hold any amounts thereafter received from the
Borrower in trust for the holders of the Working Capital Facility and pay over
such amounts to such holders to be applied as required under the Working Capital
Facility.
3. Payment. Payments under this Note shall be made at the offices of the
Creditor, at c/o M. Martell, Abberley Koolman, 521 Fifth Avenue, New York, New
York 10175-0050, or at such other place or places within the United States as
may be specified by the Creditor in a written notice to the Borrower.
4. Covenants. Until the principal of and accrued interest on all
indebtedness evidenced by this Note has been paid in full, the Borrower agrees
that it shall not:
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(a) Liens. Create, incur, assume or suffer to exist any mortgage, pledge,
encumbrance, security interest, lien or charge of any kind upon any of its
properties or assets (including the right to receive income) whether now owned
or hereafter acquired, except (i) liens for taxes not delinquent, or being
contested in good faith and the payment of which is secured in a manner
satisfactory to the Creditor, (ii) liens not delinquent created by statute in
connection with worker's compensation, unemployment insurance, social security
and similar statutory obligations, (iii) purchase money security interests in
machinery, equipment, fixtures, or other personal property, not including
inventory or supplies, purchased by the Borrower and given to secure the
deferred purchase price, provided that no such purchase money security interest
shall extend to or cover any assets of the Borrower other than the asset being
purchased and that the security interest in the asset being purchased shall
secure only the purchase price thereof, and (iv) liens securing the Working
Capital Facility.
(b) Merger. Merge or consolidate or amalgamate with any other person or
take any other action having a similar effect; provided, however, that this
Section shall not prohibit any merger or acquisition of or by the Borrower if
the Borrower shall be the surviving or continuing corporation thereof and,
immediately after such merger or acquisition, no default hereunder ("Default")
or event which with notice or the passage of time would constitute a default
("Event of Default") shall exist or shall have occurred and be continuing.
(c) Disposition of Assets; Etc. Sell, lease, license, transfer, assign or
otherwise dispose of any portion of its business, assets, rights, revenues or
property, real, personal or mixed, tangible or intangible, whether in one or a
series of transactions (other than inventory sold in the ordinary course of
business upon customary credit terms and sales of scrap or obsolete material or
equipment), without first offering to the Creditor in writing the opportunity to
enter into such transaction on the same terms as have been presented to the
Borrower, which offer shall expire 30 days after the date on which the Creditor
receives such offer, provided, however, that this section shall not prohibit any
such sale, lease, license, transfer, assignment or other disposition if the
aggregate book value (disregarding any write-downs of such book value other than
ordinary depreciation and amortization) of all the business, assets, rights,
revenues and property involved in the transaction or series of transactions,
together with such aggregate book value of all other business, assets, rights,
revenues and property sold, leased, licensed, transferred or otherwise disposed
of by the Borrower and its subsidiaries in the same fiscal year constitutes less
than 10% of the aggregate book value of the consolidated total tangible assets
of the Borrower and its subsidiaries as of the end of the preceding fiscal year
of the Borrower and, together with the aggregate book value of all other
business, assets, rights, revenues and property sold, leased, licensed,
transferred or otherwise disposed of by the Borrower and its subsidiaries during
the entire period subsequent to the date of this Note constitutes less than 25%
of the aggregate book value of consolidated total tangible assets of the
Borrower and its subsidiaries as of the date of this Note, and if, immediately
after such transaction, no Default or Event of Default shall exist or shall have
occurred and be continuing.
(d) Sale of Stock. Sell or otherwise dispose of any shares of the
Borrower's capital stock without first offering to the Creditor in writing the
opportunity to enter into such transaction on the same terms as have been
presented to the Borrower, which offer shall expire 30 days after the date on
which the Creditor receives such offer, provided, however, that this section
shall not prohibit any sale, distribution, or other disposition by the Borrower
of shares of its common stock to persons who are officers, directors, employees,
or agents of the Borrower at the time of such disposition.
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<PAGE> 3
(e) Dividends. Declare any dividends (other than dividends payable in
the Borrower's capital stock) on any shares of its capital stock.
5. Financial Reports. Until the principal of and accrued interest on all
indebtedness evidenced by this Note has been paid in full, the Borrower agrees
to furnish to the Creditor(a) on or before April 30 of each year, the
consolidated and consolidating balance sheet of the Borrower and its
subsidiaries as of such date and related statements of income for the fiscal
year then ended, all in reasonable detail, reviewed by a firm of certified
public accountants acceptable to the Creditor, and (b) as soon as available
after the end of each fiscal quarter of the Borrower, the consolidated and
consolidating balance sheet of the Borrower and its subsidiaries as of such
date and related statements of income for the year-to-date portion then ended,
all in reasonable detail, unaudited and subject to normal year-end adjustments.
6. Defaults. It shall be a default under this Note if any of the
following shall occur:
(a) Any amount due hereunder is not paid to the Creditor within three
business days after the due date; or
(b) Any default occurs in the performance or observance of any other
term, covenant, condition or agreement contained in this Note and the same
continues for a period of five business days after the Borrower receives
notice from the Creditor of such default; or
(c) The Borrower shall be dissolved or liquidated (or any judgment,
order, or decree therefor shall be entered), or shall generally not pay
its debts when due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of its
creditors, or shall institute, or there shall be instituted against it,
any proceeding seeking to adjudicate it a bankrupt or insolvent or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or protection of debtors or seeking the entry of an
order for relief, or the appointment of a receiver, trustee, custodian, or
other similar official for its or any substantial part of its assets,
rights, revenues, or property, and, if such proceeding is instituted
against and is being contested by the Borrower in good faith by
appropriate proceedings, such proceedings shall remain undismissed or
unstayed for a period of 60 days, or the Borrower shall take any action to
authorize or further any of the actions described above.
7. Remedies. Upon the occurrence of any Default, the Creditor may by
notice to the Borrower declare the outstanding principal of and
accrued interest on all indebtedness to the Creditor provided for in this Note
to be immediately due and payable, provided, that upon any event described in
paragraph 6(c) occurring, all such amounts shall automatically become
immediately due and payable without notice.
8. Integration. This Note embodies the entire agreement and
understanding between the parties, and supersedes all prior agreements and
understandings, relating to the subject matter hereof. In case any one or more
obligations under this Note shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
obligations shall not be affected or impaired thereby, and such invalidity,
illegality or unenforceability in one jurisdiction shall not affect the
validity, legality or enforceability of this Note in any other jurisdiction.
9. Suits for Enforcement and Remedies. No right or remedy herein or in
any other agreement or instrument conferred upon the holder of this Note is
intended to be exclusive of any other right or remedy, and each and every such
right and remedy shall be cumulative and shall be in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise.
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10. Waivers. No forbearance, indulgence, delay or failure to exercise any
right or remedy with respect to this Note shall operate as a waiver, nor as an
acquiescence in any Default. No single or partial exercise of any right or
remedy shall preclude any other or further exercise thereof or the exercise of
any other right or remedy.
11. Successors and Assigns. This Note shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
provided, that the Creditor may not transfer or assign its rights or
obligations hereunder without the prior written consent of the Borrower.
12. Miscellaneous.
(a) This Note may not be modified or discharged orally, but only in
writing duly executed by the holder hereof.
(b) The Borrower and each endorser or guarantor hereof hereby waives
demand, presentment for payment, notice of dishonor, protest and notice of
protest and other notices of every kind, and all rights to plead any statute of
limitations as a defense to any action hereunder.
(c) The headings of the various Sections of this Note are for
convenience of reference only and shall in no way modify any of the terms or
provisions of this Note.
(d) This Note and the obligations of the Borrower and the rights of
the Creditor shall be governed by, and for all purposes construed in accordance
with, the laws of the State of California applicable to instruments made and
to be performed entirely within such state.
IN WITNESS WHEREOF, the Borrower has executed this Note as of the day and
year first above written.
EXOTIC MATERIALS, INC.
By: /s/ ROBERT P. PERKINS
-----------------------------
Robert P. Perkins
Title: Vice President & Chief Financial
Officer
Page 4
<PAGE> 5
EXHIBIT A
Allocation of Payment
Payment --------------------------------------
Date Interest Principal Total
- -------------- -------- --------- --------
April 30, 1997 $ 99,841 $ 28,459 $128,300
April 30, 1998 170,149 19,851 190,000
April 30, 1999 168,362 61,638 230,000
April 30, 2000 162,815 107,185 270,000
April 30, 2001 153,168 156,832 310,000
April 30, 2002 139,053 210,947 350,000
April 30, 2003 120,068 289,932 390,000
April 30, 2004 95,774 334,226 430,000
April 30, 2005 65,694 729,930 795,624
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 5th day of December, 1997,
between EXOTIC MATERIALS, INC., a California corporation (the "Company"), and
Dick Sharman ("Employee");
W I T N E S S E T H :
1. Employment.
The Company employs Employee, and Employee accepts such employment,
upon the terms hereinafter set forth. This agreement supersedes all prior
arrangements between the Company and Employee.
2. Term.
Subject to the provisions for termination as hereinafter provided,
the term of this agreement shall run until the end of the month in which
Employee reaches age 65.
3. Compensation.
For the services to be rendered by Employee under this agreement, and
for the disclosure, assignment and transfer by Employee to the Company of all
proprietary rights of Employee in ideas, designs, techniques, processes,
trademarks, inventions and improvements, as provided in Paragraph 5, the
Company shall pay Employee a salary of $199,200 per year, payable bi-weekly,
less income tax withholdings and other normal employee deductions in accordance
with existing Company policy regarding salaries and benefits. The Board of
Directors of the Company shall review Employee's salary on an annual basis on
the occasion of the annual organizational meeting, and shall increase such
salary from the amount determined to be paid during the prior annual period in
an amount to be determined in the sole discretion of the Board of Directors.
During the period of his employment, Employee will be reimbursed for
reasonable vouchered traveling, subsistence, and other expenses in accordance
with existing policy of the Company.
<PAGE> 2
4. Duties.
Employee shall be employed as a Senior Executive of the Company. For
the purposes of this agreement, "Senior Executive" is defined as an employee who
is, has been, or is eligible to be a member of the Board of Directors.
Employee shall devote his full productive time, energy, and ability
to the Company's business, including that of its affiliates. Without the prior
express authorization of the Board of Directors of the Company, Employee shall
not, directly or indirectly, during the term of this agreement:
(a) Render services of a business, professional, or commercial nature
to any other person or firm, whether for compensation or otherwise; or
(b) Engage in any activity competitive with or adverse to the
Company's business or welfare, whether alone, as a partner, or as an
officer, director, employee, or holder of more than 10% of the capital
stock of any class of any other corporation.
Notwithstanding the above, the parties acknowledge that Employee may
serve on the Board of Directors of Irvin Aerospace Inc., and may undertake any
other activity as may be approved by the Company's Board of Directors from time
to time.
5. Ownership of Intangibles.
Employee grants and assigns to the Company and its successor or
nominee all of his right, title and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions, and improvements, together with
all patents that are pending or that have been issued in the United States and
in all foreign countries ("Proprietary Rights"), of whatsoever nature, whether
or not within the scope of the Company's business and whether conceived by
Employee alone or with others, which Employee at any time heretofore has
invented, developed, or improved or caused to be invented, developed, or
improved during
- 2 -
<PAGE> 3
the course of his employment with the Company. All such Proprietary Rights
shall be the sole and exclusive property of the Company and shall remain as
such, notwithstanding the subsequent termination of this agreement as
hereinafter provided.
From and after the date hereof, Employee will promptly disclose and
assign to the Company all right, title, and interest of Employee in and to any
and all ideas, designs, techniques, processes, trademarks, inventions, and
improvements, together with all patents that may be issued thereon in the
United States and in all foreign countries, if within the scope of the
Company's business or relating to any experimental work carried on by the
Company or to any problems specifically assigned to Employee, conceived by him
alone or with others during the term of this agreement, and whether or not
conceived during regular working hours. Employee further agrees to promptly
disclose and assign to the Company all right, title, and interest of Employee
in and to any such ideas, designs, techniques, processes, trademarks,
inventions, and improvements, together with all patents that may be issued
thereon in the United States and in all foreign countries, which Employee may
invent, develop or improve, or cause to be invented, developed, or improved,
within a period of six (6) months after the termination of Employee's
employment with the Company. All such ideas, designs, techniques, processes,
trademarks, inventions, and improvements shall be the sole and exclusive
property of the Company.
In the event any such aforementioned idea, design, technique,
process, invention, or improvement shall be deemed by the Company to be
patentable, Employee shall, at the expense of the Company, assist the Company
to obtain a patent or patents thereon and execute all documents and do all of
the things necessary or proper to obtain patents or letters patent and to vest
the Company with full title thereto.
The word "invent" as herein used includes "make," "discover,"
"manufacture," or "produce," or any of them, and "invention" includes the
phrase "any new or useful original art, machine, methods of manufacture,
process, composition of matter, design, or configuration of any kind".
-3-
<PAGE> 4
6. Unfair Competition.
In the course of his employment, Employee will have access to
confidential records, data, formulae, specifications, customer lists, and
secret information owned by the Company and used in the course of its
business. During his employment by the Company and thereafter, Employee will
not directly or indirectly disclose or use any such information, except for the
benefit of the Company and in the course of and within the scope of his
employment by the Company. All records, files, drawings, documents, equipment,
and the like relating to the Company's business, which Employee shall prepare
or use or will come into contact with, shall remain the Company's sole property
and shall not be removed from the Company's premises without its written
consent.
7. Termination.
The Company shall have the right to terminate this agreement for good
cause upon written notice given to Employee, and thereafter the Company shall
have no further liability or obligation to Employee hereunder.
8. Merger or Reorganization.
This agreement shall not be terminated by the voluntary or involuntary
dissolution of the Company or by any merger or consolidation where the Company
is not the surviving or resulting corporation, or upon any transfer of all or
substantially all the assets of the Company. In the event of any such merger or
consolidation or transfer of assets, the provisions of this agreement shall be
binding on and shall inure to the benefit of the surviving or resulting
corporation or the corporation to which such assets shall be transferred.
9. Non-Assignability.
The obligations of Employee hereunder are personal and may not be
assigned or transferred in any manner whatsoever, nor are such obligations
subject to involuntary alienation, assignment, or transfer.
-4-
<PAGE> 5
10. Amendment.
This instrument contains the entire agreement of the parties. It may
not be changed orally but only by a written document signed by Employee if it
is against Employee whom enforcement of any waiver, change, modification,
extension, or discharge is sought and signed by an officer of the Company
pursuant to a resolution of the Board of Directors of the Company if it is the
Company against whom enforcement of any waiver, change, modification,
extension, or discharge is sought.
11. Governing Law.
This agreement is executed in, and shall be governed by the laws of,
the State of California.
IN WITNESS WHEREOF, the parties have executed this agreement on the date
hereinabove set forth.
EXOTIC MATERIALS, INC.
By: /s/ ROBERT P. PERKINS
------------------------------
Robert P. Perkins
Treasurer & Chief Financial Officer
EMPLOYEE
/s/ DICK SHARMAN
---------------------------------
Dick Sharman
-5-
<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 5th day of December, 1997,
between EXOTIC MATERIALS, INC., a California corporation (the "Company"), and
Robert N. Haro ("Employee");
WITNESSETH:
1. Employment.
The Company employs Employee, and Employee accepts such employment,
upon the terms hereinafter set forth. This agreement supersedes all prior
arrangements between the Company and Employee.
2. Term.
The term of this agreement shall run until the end of the month in
which Employee reaches age 65, unless terminated earlier under Paragraph 7 or by
twelve months written notice given by either party to the other.
3. Compensation.
For the services to be rendered by Employee under this agreement, and
for the disclosure, assignment, and transfer by Employee to the Company of all
proprietary rights of Employee in ideas, designs, techniques, processes,
trademarks, inventions, and improvements, as provided in Paragraph 5, the
Company shall pay Employee a salary of $129,350 per year, payable bi-weekly,
less income tax withholdings and other normal employee deductions in accordance
with existing Company policy regarding salaries and benefits. The Board of
Directors of the Company shall review employee's salary on an annual basis on
the occasion of the annual organization meeting, and shall increase such salary
from the amount determined to be paid during the prior annual period in an
amount to be determined in the sole discretion of the Board of Directors.
<PAGE> 2
During the period of his employment, Employee will be reimbursed for
reasonable vouchered traveling, subsistence, and other expenses in accordance
with existing policy of the Company.
4. Duties.
Employee shall be employed to perform such duties as the Company's
President or Board of Directors may direct. Employee shall devote his full
productive time, energy, and ability to the Company's business. Without the
prior express authorization of the Board of Directors of the Company, Employee
shall not, directly or indirectly, during the term of this agreement:
(a) Render services of a business, professional, or commercial nature
to any other person or firm, whether for compensation or otherwise; or
(b) Engage in any activity competitive with or adverse to the
Company's business or welfare, whether or alone, as a partner, or as an
officer, director, employee, or holder of more than 10% of the capital
stock of any class of any other corporation.
5. Ownership of Intangibles.
Employee grants and assigns to the Company and its successor or
nominee all of his right, title and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions, and improvements, together with
all patents that are pending or that have been issued in the United States and
in all foreign countries ("Proprietary Rights"), of whatsoever nature, whether
or not within the scope of the Company's business and whether conceived by
Employee alone or with others, which Employee at any time heretofore has
invented, developed, or improved or caused to be invented, developed, or
improved during the course of his employment with the
<PAGE> 3
Company. All such Proprietary Rights shall be the sole and exclusive property
of the Company and shall remain as such, notwithstanding the subsequent
termination of this agreement as hereinafter provided.
From and after the date hereof, Employee will promptly disclose and assign
to the Company all right, title, and interest of Employee in and to any and all
ideas, designs, techniques, processes, trademarks, inventions, and
improvements, together with all patents that may be issued thereon in the
United States and in all foreign countries, if within the scope of the
Company's business or relating to any experimental work carried on by the
Company or to any problems specifically assigned to Employee, conceived by him
alone or with others during the term of this agreement, and whether or not
conceived during regular working hours. Employee further agrees to promptly
disclose and assign to the Company all right, title, and interest of Employee
in and to any such ideas, designs, techniques, processes, trademarks,
inventions, and improvements, together with all patents that may be issued
thereon in the United States and in all foreign countries, which Employee may
invent, develop, or improve, or cause to be invented, developed, or improved,
within a period of six (6) months after the termination of Employee's
employment with the Company. All such ideas, designs, techniques, processes,
trademarks, inventions, and improvements shall be the sole and exclusive
property of the Company.
In the event any such aforementioned idea, design, technique, process,
invention, or improvement shall be deemed by the Company to be patentable,
Employee shall, at the expense of the Company, assist the Company to obtain a
patent or patents thereon and execute all documents and do all of the things
necessary or proper to obtain patents or letters patent and to vest the Company
with full title thereto.
The word "invent" as herein used includes "make", "discover",
"manufacture", or "produce", or any of them, and "invention" includes the
phrase "any
<PAGE> 4
new or useful original art, machine, methods of manufacture, process,
composition of matter, design, or configuration of any kind".
6. Unfair Competition.
In the course of his employment, Employee will have access to
confidential records, data, formulae, specifications, customer lists, and
secret information owned by the Company and used in the course of its business.
During his employment by the Company and thereafter, Employee will not directly
or indirectly disclose or use any such information, except for the benefit of
the Company and in the course of and within the scope of his employment by the
Company. All records, files, drawings, documents, equipment, and the like
relating to the Company's business, which Employee shall prepare or use or will
come into contact with, shall remain the Company's sole property and shall not
be removed from the Company's premises without its written consent.
7. Termination.
The Company shall have the right to terminate this agreement for good
cause upon written notice given to Employee, and either party shall have the
right to terminate this agreement upon twelve months advance written notice
given by either party to the other, and thereafter the Company shall have no
further liability or obligation to Employee hereunder.
8. Merger or Reorganization.
This agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company or by any merger or consolidation where
the Company is not the surviving or resulting corporation, or upon any transfer
of all or substantially all the assets of the Company. In the event of any such
merger or consolidation or transfer of assets, the provisions of this agreement
shall be binding on and shall inure to the benefit of the surviving or
resulting corporation or the corporation to which such assets shall be
transferred.
<PAGE> 5
9. Non-Assignability.
The obligations of Employee hereunder are personal and may not be
assigned or transferred in any manner whatsoever, nor are such obligations
subject to involuntary alienation, or transfer.
10. Amendment.
This instrument contains the entire agreement of the parties. It may
not be changed orally but only by a written document signed by Employee if it
is against Employee whom enforcement of any waiver, change, modification,
extension, or discharge is sought and signed by an Officer of the Company
pursuant to a resolution of the Board of Directors of the Company if it is the
Company against whom enforcement of any waiver, change, modification,
extension, or discharge is sought.
11. Governing Law.
This agreement is executed in, and shall be governed by the laws of,
the State of California.
IN WITNESS WHEREOF, the parties have executed this agreement on the date
hereinabove set forth.
EXOTIC MATERIALS, INC.
By: /s/ ROBERT P. PERKINS
------------------------------------
Robert P. Perkins
Treasurer & Chief Financial Officer
EMPLOYEE
/s/ ROBERT N. HARO
----------------------------------------
Robert N. Haro
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 24th day of December, 1997,
between EXOTIC MATERIALS, INC., a California corporation (the "Company"), and
Thomas J. Brawley ("Employee");
1. Employment.
The Company employs Employee, and Employee accepts such
employment, upon the terms hereinafter set forth. This agreement supersedes all
prior arrangements between the Company and Employee.
2. Term.
The term of this agreement shall run until terminated by either
party under Paragraph 7.
3. Compensation.
For the services to be rendered by Employee under this agreement,
and for the disclosure, assignment, and transfer by Employee to the Company of
all proprietary rights of Employee in ideas, designs, techniques, processes,
trademarks, inventions, and improvements, as provided in Paragraph 5, the
Company shall pay Employee a salary of $165,000 per year, payable bi-weekly,
less income tax withholdings and other normal employee deductions in accordance
with existing Company policy regarding salaries and benefits. The Board of
Directors of the Company shall review Employee's salary on an annual basis on
the occasion of the annual organization meeting, and shall increase such salary
from the amount determined to be paid during the prior annual period in an
amount to be determined in the sole discretion of the Board of Directors. During
the term of this agreement, Employee shall also receive such stock options and
access to stock purchase
<PAGE> 2
plans as the Company's Board of Directors shall determine from time to time,
and the additional benefits set forth on Exhibit A.
During the period of his employment, Employee will be reimbursed
for reasonable vouchered traveling, subsistence, and other expenses in
accordance with existing policy of the Company.
4. Duties.
Employee shall be employed as the President and Chief Executive
Officer of the Company, to perform such duties as the Company's Chairman or
Board of Directors may direct. After January 5, 1998, Employee shall devote his
full productive time, energy, and ability to the Company's business. Without the
prior express authorization of the Board of Directors of the Company, Employee
shall not, directly or indirectly, during the term of this agreement:
(a) Render services of a business, professional, or
commercial nature to any other person or firm, whether for compensation
or otherwise; or
(b) Engage in any activity competitive with or adverse to
the Company's business or welfare, whether alone, as a partner, or as an
officer, director, employee, or holder of more than 10% of the capital
stock of any class of any other corporation.
Notwithstanding the above, the parties acknowledge that Employee
may serve as a consultant to Optical Coating Laboratories, Inc., and may
undertake any other activity as may be approved by the Company's Board of
Directors from time to time.
<PAGE> 3
5. Ownership of Intangibles.
Employee grants and assigns to the Company and its successor or
nominee all of his right, title, and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions, and improvements, together with
all patents that are pending or that have been issued in the United States and
in all foreign countries ("Proprietary Rights"), of whatsoever nature, whether
or not within the scope of the Company's business and whether conceived by
Employee alone or with others, which Employee at any time heretofore has
invented, developed, or improved or caused to be invented, developed, or
improved during the course of his employment with the Company. All such
Proprietary Rights shall be the sole and exclusive property of the Company and
shall remain as such, notwithstanding the subsequent termination of this
agreement as hereinafter provided.
From and after the date hereof, Employee will promptly disclose
and assign to the Company all right, title, and interest of Employee in and to
any and all ideas, designs, techniques, processes, trademarks, inventions, and
improvements, together with all patents that may be issued thereon in the United
States and in all foreign countries, if within the scope of the Company's
business or relating to any experimental work carried on by the Company or to
any problems specifically assigned to Employee, conceived by him alone or with
others during the term of this agreement, and whether or not conceived during
regular working hours. Employee further agrees to promptly disclose and assign
to the Company all right, title, and interest of Employee in and to any such
ideas, designs, techniques, processes, trademarks, inventions, and improvements,
together with all patents that may be issued thereon in the United States and in
all foreign countries, which Employee may invent, develop, or improve, or cause
to be invented, developed, or improved, within a period of six (6) months after
the termination of Employee's employment with the Company. All such ideas,
designs, techniques, processes,
<PAGE> 4
trademarks, inventions, and improvements shall be the sole and exclusive
property of the Company.
In the event any such aforementioned idea, design, technique,
process, invention, or improvement shall be deemed by the Company to be
patentable, Employee shall, at the expense of the Company, assist the Company to
obtain a patent or patents thereon and execute all documents and do all of the
things necessary or proper to obtain patents or letters patent and to vest the
Company with full title thereto.
The word "invent" as herein used includes "make", "discover",
"manufacture", or "produce", or any of them, and "invention" includes the phrase
"any new or useful original art, machine, methods of manufacture, process,
composition of matter, design, or configuration of any kind".
6. Unfair Competition.
In the course of his employment, Employee will have access to
confidential records, data, formulae, specifications, customer lists, and secret
information owned by the Company and used in the course of its business. During
his employment by the Company and thereafter, Employee will not directly or
indirectly disclose or use any such information, except for the benefit of the
Company and in the course of and within the scope of his employment by the
Company. All records, files, drawings, documents, equipment, and the like
relating to the Company's business, which Employee shall prepare or use or will
come into contact with, shall remain the Company's sole property and shall not
be removed from the Company's premises without its written consent.
7. Termination.
Either party shall have the right to terminate this agreement at
any time, either with or without advance written notice given by either party to
the other, and
<PAGE> 5
thereafter the Company shall have no further liability or obligation to Employee
hereunder. Notwithstanding the above, if the Company terminates Employee without
cause on or before the first anniversary of this agreement, the Company shall
promptly pay Employee an amount equal to three times Employee's monthly salary
at the time of his termination, and, if the Company terminates Employee without
cause after the first anniversary of this agreement, the Company shall promptly
pay Employee an amount equal to six times Employee's monthly salary at the time
of his termination.
8. Merger or Reorganization.
This agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company or by any merger or consolidation where
the Company is not the surviving or resulting corporation, or upon any transfer
of all or substantially all the assets of the Company. In the event of any such
merger or consolidation or transfer of assets, the provisions of this agreement
shall be binding on and shall inure to the benefit of the surviving or resulting
corporation or the corporation to which such assets shall be transferred.
9. Non-Assignability.
The obligations of Employee hereunder are personal and may not be
assigned or transferred in any manner whatsoever, nor are such obligations
subject to involuntary alienation, assignment, or transfer.
10. Amendment.
This instrument contains the entire agreement of the parties. It
may not be changed orally but only by a written document signed by Employee if
it is against Employee whom enforcement of any waiver, change, modification,
extension, or discharge is sought and signed by an Officer of the Company
pursuant to a resolution of
<PAGE> 6
the Board of Directors of the Company if it is the Company against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
11. General.
Employee will be required to comply with all of the Company's
policies and procedures. In particular, Employee will familiarize himself with
and comply with the Company's policies prohibiting unlawful harassment and
discrimination and concerning substance abuse.
<PAGE> 7
12. Governing Law.
This agreement is executed in, and shall be governed by the laws
of, the State of California.
IN WITNESS WHEREOF, the parties have executed this agreement on the date
hereinabove set forth.
EXOTIC MATERIALS, INC.
By: /s/ DICK SHARMAN
--------------------------
Dick Sharman
Chairman
EMPLOYEE
/s/ THOMAS J. BRAWLEY
------------------------------
Thomas J. Brawley
<PAGE> 8
Exhibit A
Additional Benefits
The Company to provide housing for Employee for a period up to two years
from the date of this agreement, and shall pay for or reimburse Employee for
moving expenses up to an amount not to exceed 20% of Employee's initial annual
salary upon Employee providing receipts in accordance with Company policy.
The Company will provide Employee with term life insurance with a death
benefit equal to twice Employee's annual salary, such amount to be adjusted
annually to reflect any changes to Employee's salary level.
The Company will provide Employee with long-term disability insurance
with benefits equal to between 60% and 65% of Employee's annual salary, such
amount to be adjusted annually to reflect any changes to Employee's salary
level.
The Company will provide Employee with medical, dental, and vision
insurance with benefits equivalent to those provided to the Company's other
executive employees.
The Company will make contributions equal to 50% of Employee's
contributions to the Company's 401(k) retirement plan, the Company's
contributions not to exceed 4% of Employee's annual salary level during any
calendar year.
Employee will be entitled to vacation under the following schedule:
2 weeks vacation during each year 1998 through 2001
3 weeks vacation during each year 2002 through 2006
4 weeks vacation during the year 2007 and each year thereafter
<PAGE> 1
EXHIBIT 11.1
LASER POWER CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED AUGUST 31,
---------------------------------------
1995 1996 1997
---------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) $(2,269) $(1,231) $ 754
=======================================
Average common shares outstanding 2,994 3,000 3,654
Net effect of dilutive common share equivalents
based on the treasury stock method -- -- 439
Adjustments to reflect requirements of the
Securities and Exchange Commission
(Effect of SAB 83) 331 331 248
Effect of assumed conversion of preferred stock
from date of issuance 531 960 802
-------------------------------------
Shares used in pro forma per share computations 3,856 4,311 5,143
=====================================
Pro forma net income (loss) per share $(0.59) $(0.29) $0.15
=====================================
</TABLE>
<PAGE> 1
[ERNST & YOUNG LLP LOGO]
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 7, 1997 in the Registration Statement (Form
S-4) and related Prospectus/Joint Proxy Statement of Laser Power Corporation
for the registration of 2,104,174 shares of its common stock.
/s/ Ernst & Young LLP
San Diego, California
December 26, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Laser Power Corporation Registration
Statement on Form S-4 of our report, dated November 14, 1997, relating to the
consolidated financial statements as of and for the years ended December 31,
1995 and 1996 of EMI Acquisition Corp. and subsidiary and the reference to our
firm under the captions "Experts" and "Selected Historical Financial Data" in
the Prospectus.
McGLADREY & PULLEN, LLP
Anaheim, California
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
AND AUGUST, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 6,304
<SECURITIES> 0
<RECEIVABLES> 4,522
<ALLOWANCES> (241)
<INVENTORY> 3,612
<CURRENT-ASSETS> 334
<PP&E> 12,702
<DEPRECIATION> (6,982)
<TOTAL-ASSETS> 21,186
<CURRENT-LIABILITIES> 4,055
<BONDS> 1,660
0
0
<COMMON> 6
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,186
<SALES> 17,197
<TOTAL-REVENUES> 23,353
<CGS> 11,882
<TOTAL-COSTS> 16,731
<OTHER-EXPENSES> 5,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> 794
<INCOME-TAX> 40
<INCOME-CONTINUING> 754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 754
<EPS-PRIMARY> 0.15<F1>
<EPS-DILUTED> 0.15<F1>
<FN>
<F1>SEE NOTE 5 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
