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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 000-22625
LASER POWER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3423358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
12777 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices) (Zip Code)
(619) 755-0700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of March 31, 1998, there were 8,343,432 shares of the Registrant's Common
Stock outstanding.
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LASER POWER CORPORATION
FORM 10-Q INDEX
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ materially
from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding market
acceptance of new products and product enhancements, delays in the introduction
of new products or product enhancements, size and timing of individual orders,
competition, general economic conditions in the Company's geographic markets,
seasonality of revenues, and the management of the Company's growth, as well as
those factors discussed in the Company's Annual Report on Form 10-K and
Registration Statement on Form S-4 (No. 333-43415).
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (unaudited)
as of March 31, 1998 and August 31, 1997......................... 3
Condensed Consolidated Statements of Operations
(unaudited) for the three and six months ended
March 31, 1998 and February 28, 1997............................. 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three and six months ended
March 31, 1998 and February 28, 1997............................. 5
Notes to Condensed Consolidated Financial
Statements (unaudited)........................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION............................ 7
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 12
ITEM 6. Exhibits and Reports on Form 8-K................................. 12
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LASER POWER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
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MARCH 31, 1998 AUGUST 31, 1997
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ASSETS
Current assets:
Cash and cash equivalents ........................ $ 4,730 $ 8,253
Accounts receivable, net ......................... 7,189 6,807
Inventories, net ................................. 7,452 5,475
Other current assets ............................. 411 518
-------------- ---------------
Total current assets ..................... 19,782 21,053
Property and equipment, net ........................ 8,512 7,080
Intangibles and other assets, net ................. 959 940
-------------- ---------------
Total assets ............................. $ 29,253 $ 29,073
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 3,255 $ 2,687
Accrued liabilities .............................. 5,219 3,133
Current portion of long-term debt ................ 403 446
-------------- ---------------
Total current liabilities ................ 8,877 6,266
Long-term debt and deferred rent ................... 3,222 3,465
Subordinated convertible debentures ................ 1,660 1,660
Stockholders' equity:
Convertible preferred stock, $.001 par value:
Authorized -- 3,000,000 shares
Issued and outstanding - None ............... -- --
Common stock, $.001 par value:
Authorized -- 15,000,000 shares
Issued and outstanding
8,073,742 shares at August 31, 1997 and
8,343,432 shares at March 31, 1998 ........ 8 8
Additional paid-in capital ....................... 19,352 18,543
Foreign currency translation adjustment .......... (62) (51)
Accumulated deficit .............................. (3,804) (818)
-------------- ---------------
Total stockholders' equity ............... 15,494 17,682
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Total liabilities and stockholders' equity $ 29,253 $ 29,073
============== ===============
</TABLE>
See accompanying notes.
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LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
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THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- -----------------------------------
MARCH 31, 1998 FEBRUARY 28, 1997 MARCH 31, 1998 FEBRUARY 28, 1997
-------------- ----------------- -------------- -----------------
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Revenues:
Product sales ........................... $ 8,287 $ 6,513 $ 16,065 $ 13,695
Contract research and development ....... 1,103 1,566 2,502 3,129
-------------- ----------------- -------------- -----------------
Total revenues .................. 9,390 8,079 18,567 16,824
Costs and expenses:
Cost of product sales ................... 5,973 4,398 11,732 9,463
Contract research and development ....... 936 1,185 2,041 2,500
Internal research and development ....... 623 290 1,335 547
Selling, general and administrative ..... 1,927 1,549 3,878 3,022
Acquisition and related ................. 2,000 -- 2,000 --
-------------- ----------------- -------------- -----------------
Total costs and expenses ........ 11,459 7,422 20,986 15,532
-------------- ----------------- -------------- -----------------
Income (loss) from operations ............. (2,069) 657 (2,419) 1,292
Interest expense, net ..................... 56 119 105 224
-------------- ----------------- -------------- -----------------
Income (loss) before income taxes ......... (2,125) 538 (2,524) 1,068
Income taxes .............................. 73 15 160 32
-------------- ----------------- -------------- -----------------
Net income (loss) ......................... $ (2,198) $ 523 $ (2,684) $ 1,036
============== ================= ============== =================
Basic earnings (loss) per share ........... $ (0.27) $ 0.08 $(.0.33) $ 0.17
============== ================= ============== =================
Diluted earnings (loss) per share ......... $ (0.27) $ 0.08 $(.0.33) $ 0.15
============== ================= ============== =================
Average common shares outstanding - Basic . 8,221 6,246 8,160 6,236
============== ================= ============== =================
Average common shares outstanding - Diluted 8,221 6,851 8,160 6,844
============== ================= ============== =================
</TABLE>
See accompanying notes.
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LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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<CAPTION>
SIX MONTHS ENDED
-------------------------
MARCH 31, FEBRUARY 28,
1998 1997
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OPERATING ACTIVITIES
Net income (loss) from operations .......................... $ (2,684) $ 1,036
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 898 610
Other .................................................... 2,723 (342)
Changes in operating assets and liabilities .............. (2,720) 261
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Net cash provided by (used in) operating activities (1,783) 1,565
INVESTING ACTIVITIES
Additions to property and equipment ........................ (2,213) (1,922)
Increase in intangibles and other assets ................... (81) (159)
--------- ------------
Net cash used in investing activities ............. (2,294) (2,081)
FINANCING ACTIVITIES
Deferred costs of initial public offering .................. (5) (51)
Payments on borrowings ..................................... (215) (275)
Proceeds from borrowings ................................... -- 1,216
Net proceeds from issuance and repurchase of stock ......... 828 56
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Net cash provided by financing activities ......... 608 946
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Net increase (decrease) in cash and cash equivalents ....... (3,469) 430
Cash and cash equivalents at beginning of the period ....... 8,199 978
--------- ------------
Cash and cash equivalents at end of the period ............. $ 4,730 $ 1,408
========= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................... $ 175 $ 321
========= ============
</TABLE>
See accompanying notes.
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LASER POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X, and, in the opinion of management,
contain all adjustments necessary to present fairly the consolidated financial
position as of March 31, 1998 and the consolidated results of operations for the
three and six months ended March 31, 1998 and February 28, 1997.
On February 27, 1998, the Company acquired EMI Acquisition Corp. ("EMI").
The Company issued 2,021,178 shares of its common stock based on a 1.8511
exchange formula described in its Registration Statement on Form S-4 (No.
333-43415) and has accounted for the merger as a pooling-of-interests.
Accordingly, the condensed consolidated financial statements for the periods
prior to the merger have been retroactively restated as if the combining
companies had been combined for all periods presented. The Company incurred
transaction costs of $736,000 and accrued current and future costs of $1,264,000
in connection with a plan to restructure and integrate its existing optics
operations with EMI operations.
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, 1997. For the
month of September, the Company recorded a net loss of $302,000 on revenues of
$1,750,000. Total assets of the Company were $21,000,000 at September 30, 1997.
Certain information and footnote disclosures normally included in financial
statements have been omitted or condensed. These condensed consolidated
financial statements should be read in conjunction with the financial
information included in the Company's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission. The results of operations for the
periods ended March 31, 1998 are not necessarily indicative of the results that
may be attained for the entire fiscal year.
2. EARNINGS (LOSS) PER SHARE
The income (loss) per share information was computed applying the
requirements of recently effective Statement of Financial Accounting Standards
No. 128 and SEC staff accounting bulletin No. 98. Basic earnings per share
considers the weighted average number of common shares outstanding and the
assumed conversion of outstanding preferred stock to common stock. Diluted
earnings per share considers the shares included as Basic shares outstanding and
the dilutive effects of stock options and warrants to purchase common stock.
3. INVENTORIES (UNAUDITED) (IN THOUSANDS)
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MARCH 31, 1998 AUGUST 31, 1997
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Raw materials ....... $ 3,528 $ 2,121
Work in progress .... 2,978 2,626
Finished goods ...... 946 728
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$ 7,452 $ 5,475
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Revenues
For the three and six months ended March 31, 1998, product sales were
$8,287,000 and $16,065,000 compared to $6,513,000 and $13,695,000 for the three
and six months ended February 28, 1997, an increase of $1,774,000 or 27% for the
three months and $2,370,000 or 17% for the six months ended March 31, 1998.
Contract research and development revenues were $1,103,000 and $2,502,000 for
the three and six months ended March 31, 1998 compared to $1,566,000 and
$3,129,000 for the three and six months ended February 28, 1997, a decrease of
$463,000 or 30% for the three months and $627,000 or 20% for the six months
ended March 31,
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1998. The majority of the growth in product sales for the three and six months
is due to a transition to higher volume production under long-term contracts for
optics for thermal imaging systems and increased sales of new and replacement
optics for industrial and medical lasers. Also contributing to the growth in
product sales were initial production shipments of microlasers, for which
shipments were negligible in the prior year. The decrease in contract revenues
for the three and six months is due primarily to a lower level of contract
funding for development of commercial microlaser display technology.
A number of factors will determine whether the Company will be able to
sustain or increase the current level of product sales, including price
competition in laser optics markets, uncertainties in foreign markets and
currency exchange rates, the timing of exercise of customer options on long-term
production contracts for optics for thermal imaging systems, and the ability to
successfully increase manufacture and sale of microlaser products. For the
remainder of fiscal 1998, contract research and development revenues are
expected to be lower than the prior year because of the lower level of funding
for commercial microlaser display development.
Gross Profit
Gross profit on product sales was $2,314,000 and $4,333,000 for the three
and six months ended March 31, 1998 compared to $2,115,000 and $4,232,000 for
the three and six months ended February 28, 1997, an increase of $199,000 or 9%
for the three months and $101,000 or 2% for the six months. Gross profit on
research and development revenues was $167,000 and $461,000 for the three and
six months ended March 31, 1998 compared to $381,000 and $629,000 for the three
and six months ended February 28, 1997, a decrease of $214,000 or 56% for the
three months and $168,000 or 27% for the six months. Gross margin on product
sales was 28% and 27% for the three and six months ended March 31, 1998 compared
to 32% and 31% for the three and six months ended February 28, 1997. The
decrease in gross margin is primarily due to a change in mix of optics products
towards products with higher material cost content and to a lesser extent to
manufacturing start-up costs for microlaser products. Gross margin on contract
research and development revenues was 15% and 18% for the three and six months
ended March 31, 1998 compared to 24% and 20% for the three and six months ended
February 28, 1997. The decrease in gross margin is due primarily to cost
overruns on several display development contracts.
The Company's ability to maintain or improve its existing margins is
dependent on a number of factors, including the ability to manufacture or
purchase raw materials and purchased components at costs and prices lower than
currently paid by the Company, the successful implementation of automated
fabrication processes in its optics operations, and improvements in yield and
growth in volume in its microlaser operations. Gross margins on contract
research and development revenues are expected to fluctuate over time due to
uncertainties inherent in determining the amount of effort required to meet
customer expectations.
Internal Research and Development Expense
Internal research and development expense was $623,000 and $1,335,000 for
the three and six months ended March 31, 1998 compared to $290,000 and $547,000
for the three and six months ended February 28, 1997, an increase of $333,000 or
115% for the three months and $788,000 or 144% for the six months. The increase
was due to increased microlaser research and development activities for both
existing and new products, and to development of microlaser manufacturing
processes. The Company expects that internal research and development expense
will remain at current levels for the remainder of the fiscal year.
Selling, General and Administrative Expense
Selling, general and administrative expense was $1,927,000 and $3,878,000
for the three and six months ended March 31, 1998 compared to $1,549,000 and
$3,022,000 for the three and six months ended February 28, 1997, an increase of
$378,000 or 24% for the three months and $856,000 or 28% for the six months. The
increase is due to the additional expense related to the Company becoming
publicly held in June 1997 and to higher sales and marketing expense for
microlaser products. Selling, general and administrative expense are not
expected to increase significantly as a percentage of sales in future periods.
Acquisition and Restructuring Expense
In connection with its acquisition of EMI, the Company incurred transaction
costs of $736,000 and accrued current and future costs of $1,264,000 in
connection with a plan to restructure and integrate its existing optics
operations with EMI operations. All of these expenses, which are non-recurring,
were recognized during the three months ended March 31, 1998.
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Interest Expense
Net interest expense was $56,000 and $105,000 for the three and six months
ended March 31, 1998 compared to $119,000 and $224,000 for the three and six
months ended February 28, 1997, a decrease of $63,000 or 53% for the three
months and $119,000 or 53% for the six months. The decrease was due primarily to
the retirement of debt and investment of cash from proceeds of an initial public
offering completed in June 1997 (IPO). The Company expects interest expense to
increase as it continues to invest in fixed assets and working capital through
utilization of available cash and long-term bank borrowings.
Income Taxes
Income taxes were $73,000 and $160,000 for the three and six months ended
March 31, 1998 compared to $15,000 and $32,000 for the three and six months
ended February 28, 1997, an increase of $58,000 or 387% for the three months and
$128,000 or 400% for the six months. The increase is due to the provision for
income taxes for EMI for periods prior to acquisition by the Company. In the
past, the Company's effective tax rate has been reduced substantially by the
utilization of federal and state tax net operating loss carryforwards. The
future availability of carryforwards for any specific period will be limited by
the application of rules relating to change of control as a result of the
completion of the IPO and the acquisition of EMI in February 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the IPO in June 1997, raising approximately
$8,100,000 net of offering costs. Prior to the IPO, the Company 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, the issuance of subordinated debentures and capital equipment
leasing and bank debt.
Cash used in operating activities was $2,684,000 for the six months ended
March 31, 1998 compared to cash provided by operations of $1,036,000 for the six
months ended February 28, 1997, a reduction in cash of $3,720,000. The primary
reason for the change was the operating loss sustained for the six month period.
Cash used in investing activities was $2,294,000 for the six months ended
March 31, 1998 compared to $2,081,000 for the six month periods ended February
28, 1997, an increase in investment of $213,000. The change is due primarily to
additions to property and equipment for manufacturing operations. For the full
year, the Company expects to invest more in capital equipment than in the prior
year.
Cash provided by financing activities was $608,000 for the six months ended
March 31, 1998 compared to $946,000 for the six months ended February 28, 1997.
The primary source of cash in the current year is the exercise of employee stock
options, while in the prior year the primary source was bank borrowings. For the
remainder of the year, the Company expects the primary source of cash to be
additional bank borrowings to finance additions to property and equipment.
The Company believes that its current cash balance together with other
sources of liquidity and anticipated cash provided by operations and bank
borrowings will satisfy its cash requirements for at least the next twelve
months.
RISK FACTORS
Fluctuation in Quarterly Performance
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures, especially in connection with its
microlasers and microlaser based products. If significant variations were to
occur between forecasts and actual orders with respect to the Company's
business, the 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 and could occur again in the future as a
result of increases in development expenditures for proposed new products,
product
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introductions by competitors, changes in customer ordering patterns and other
factors. In addition, the Company's ability to fill orders in a timely and
responsive manner is dependent upon maintaining adequate manufacturing capacity
and significant inventories of raw material and finished optics for replacement
orders. The Company 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 Company's business, financial condition and results of operations. A
portion of the Company'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 Company's operating
results. In addition, the Company's quarterly performance could be adversely
affected by continuing consolidation in the defense industry and the resultant
impact on historical customers and their procurement activities.
History of Operating Losses and Accumulated Deficit
The Company has made substantial investments in research and development
and incurred significant start-up costs related to manufacture and sale of
microlaser products. As a result, the Company incurred operating losses in the
three and six months ended March 31, 1998, and, at March 31, 1998, had an
accumulated deficit of $3.8 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. The
Company has funded a substantial portion of its product development efforts
through development contracts. Any failure by the Company to maintain its
external funding sources could result in increased operating losses. There can
be no assurance that the Company will maintain its external funding sources or
be profitable in the future or that present capital and any funds provided by
operations will be sufficient to fund the Company's future capital requirements.
Integration of Operations
If the Company is to realize the anticipated benefits of its acquisition
of EMI, EMI's operations 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
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 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 Company. The Company has recorded a charge of approximately $2
million, to reflect the transaction and integration costs incurred and expected
to result from the acquisition of EMI. There can be no assurance that the
Company will not incur additional charges in subsequent quarters to reflect
costs associated with the acquisition.
Competition
The industries in which the Company sells its products, and will sell its
products under development, are highly competitive. In each of the markets it
serves, the Company faces intense competition from established competitors, many
of which have substantially greater financial, engineering, research and
development, manufacturing, sales, marketing, service and support resources,
including greater name recognition, a larger installed base of products and
longer standing customer relationships. There can be no assurance that the
Company will be able to compete successfully in the laser optics, laser and
laser systems industries in the future, that the 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 Company's
competitors will not render the Company's products or technologies obsolete or
uncompetitive.
Development Risks Relating to Microlaser Technologies
The Company has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of the Company'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 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
Company will successfully develop additional microlaser or microlaser based
products or that any products under development will achieve commercial sales
volumes. The Company 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 Company is unable to
successfully gain market acceptance of its microlasers and microlaser based
products, its business, operating results and financial condition will be
materially and adversely affected.
Dependence On New Products and Processes
To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects 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
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the Company's business. The success of the 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 Company will be able to develop and
introduce new products or enhancements to its 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 Company's business,
financial condition and results of operations.
Limited Microlaser Manufacturing Experience; Scale-Up Risk
The Company has no experience in producing microlasers other than in low
level production quantities. The Company's microlasers are assembled from
component parts at the Company's San Diego facility. The Company purchases
component parts for its microlasers, including laser crystals, nonlinear
crystals and diode lasers, from various sources around the world. However, none
of the Company's suppliers of microlaser component parts has experience in
supplying components with the Company's specifications at increased volumes. The
Company 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 Company in the quantities, with the quality or at the prices necessary for
production quantities of the Company's products and products under development.
The Company 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 Company's facilities. In the event the 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 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
Company's business, financial condition and results of operations.
Limited Microlaser Sales, Marketing and Distribution Experience
The Company has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products in
commercial quantities. The Company intends to sell its 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 Company intends to
sell its microlasers and microlaser based products primarily through agreements
with distributors or representatives, although the Company has not entered into
any such agreements or arrangements to date. To the extent that the Company
enters into distribution or representation arrangements for the sale of its
microlasers and microlaser based products, the Company will be dependent upon
the efforts of third parties. There can be no assurance that the 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 Company's sales and
marketing efforts will be successful. There can be no assurance that the 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 Company's
microlasers and microlaser based products. Failure to build an effective sales
and marketing organization or to establish effective distribution or
representation arrangements for the Company's microlaser products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Exposure to Government Markets
Approximately 45% of the Company's product sales 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 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
Company's business, financial condition and operating results.
Future Capital Requirements
Although the Company believes that its existing cash balances and
anticipated cash flow from operations and bank borrowings and available lines of
credit will be sufficient to meet its capital requirements for at least the next
12 months, the Company may seek additional equity or debt financing to compete
effectively in the markets it serves. The timing and amount of the Company's
capital requirements cannot be precisely determined at this time and will depend
on a number of factors, including the demand for the 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 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 37% of the Company's total
revenues in each of the quarters ended March 31, 1998 and February 28, 1997,
respectively, and the Company expects that international sales will continue to
account for a substantial portion of total revenues. The Company may continue to
expand its operations outside of the United States and to enter additional
international
10
<PAGE> 11
markets, both 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 the Company's foreign sales are denominated in U.S. dollars, the 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 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 the
Company's OEM customers are dependent on international sales, which increases
the Company's exposure to the risks associated with international sales. While
the Company has not been materially affected by the recent turmoil in Asian
markets to date, there can be no assurance that such turmoil will not in the
future negatively affect the Company's business and operating results.
11
<PAGE> 12
Environmental, Health and Safety Concerns
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of hazardous
materials used by the Company in connection with the manufacture of laser
optics. 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 Company's business, financial condition and results of operations. The
Company makes investments in protective equipment, and continually reviews and
monitors 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 the Company does not carry
environmental impairment insurance, such a failure could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
Volatility of Stock Price
Until June 1997, there had been no public market for the Company's common
stock, and there can be assurance that an active public market for the Company's
common stock will develop or be sustained. The trading price of the Company's
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 the Company and that have been unrelated to the operating performance of
those companies. These market fluctuations may materially and adversely affect
the market price of the Company's common stock.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(d) On June 18, 1997, the Company's Form SB-2 registration statement (File no.
333-24421) was declared effective by the Securities and Exchange
Commission. The registration statement, as amended, covered the offering of
1,650,000 shares of the Company's common stock, $.001 par value. The
offering commenced on June 19, 1997 and the sale to the public of 1,650,000
shares of Common Stock at $5.50 per share was completed on June 24, 1997
for an aggregate price of $9,075,000. The registration statement covered an
additional 247,500 shares of common stock that the underwriters had the
option to purchase solely to cover over-allotments. The managing
underwriters for the offering were Cruttenden Roth Incorporated and L.H.
Friend, Weinress, Frankson & Presson, Inc. On August 6, 1997, the
underwriters exercised their option to purchase all 247,500 additional
shares of common stock. A total of 1,897,500 shares of common stock were
sold in the offering at an aggregate price of $10,436,250. All of the
shares sold in the offering were sold by the Company.
Expenses incurred by the Company in connection with the issuance and
distribution of Common Stock in the offering included underwriting
discounts, commissions and allowances of $965,353 and other expenses of
$1,365,566
12
<PAGE> 13
Total offering expenses of $2,330,919 resulted in net offering proceeds to
the Company of $8,105,331. No expenses were paid to directors, officers or
affiliates of the Company or 10% owners of any class of equity securities
of the Company.
Of the net offering proceeds to the Company of $8,105,331, through March
31, 1998, approximately $700,000 had been used for repayment of certain
term loans and amounts outstanding under its line of credit with Wells
Fargo Bank N.A., approximately $200,000 had been used for the mandatory
repayment of certain term loans owed to Proxima, approximately $900,000 had
been used for general corporate purposes, approximately $700,000 had been
used for acquisition related costs, approximately $1,500,000 had been used
for the purchase of certain machinery and equipment, approximately $400,000
had been used for facilities expansion and improvements and approximately
$800,000 had been used for enhancement of internal research and development
capabilities. No payments were made to directors, officers or affiliates of
the Company or 10% owners of any class of equity securities of the Company,
other than compensation payments to officers of the Company. Approximately
$2,900,000 of the net offering proceeds remain as working capital,
primarily in the form of cash equivalents with approximately $1,700,000
held as temporary investments.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company (the "Annual Meeting")
was held on January 30, 1998 in San Diego, California.
PROPOSAL I - ELECTION OF DIRECTORS
Each of the candidates listed below was duly elected to the Board of
Directors at the Annual Meeting by the tally indicated.
<TABLE>
<CAPTION>
CANDIDATE VOTES IN FAVOR VOTES WITHHELD
--------- -------------- --------------
<S> <C> <C>
Glenn H. Sherman, Ph.D. 5,184,336 7,115
Douglas H. Tanimoto, Ph.D. 5,184,336 7,115
William G. Fredrick 5,184,336 7,115
Robert G. Klimasewski 5,184,336 7,115
Richard C. Laird 5,184,336 7,115
Kenneth E. Olson 5,184,336 7,115
John C. Stiska 5,184,336 7,115
</TABLE>
PROPOSAL II - RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED
-------------- ------------- ---------------
5,187,110 2,900 1,441
A special meeting of stockholders was held on February 26, 1998. At this
meeting the proposals to (i) approve and adopt an Agreement and Plan of
Reorganization, dated as of December 23, 1997, among the Company, LPC
Acquisition Subsidiary, Inc., ("SUB"), and EMI Acquisition Corp., a California
corporation ("EMI") and (ii) to approve the merger of SUB with and into EMI were
each ratified. The results of voting for each of the above proposals was
3,211,554 shares for, 150 shares against, and 4,803 abstentions.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K dated March 13, 1998 reporting under Item 2
("Acquisition or Disposition of Assets") that the Company had completed its
acquisition of EMI Acquisition Corp., pursuant to an Agreement and Plan
Reorganization, dated December 23, 1997, as amended February 9, 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LASER POWER CORPORATION
Date: May 15, 1998 /s/ Paul P. Wickman, Jr.
-----------------------------------
Paul P. Wickman, Jr.
Senior Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting
Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND FOR THE
SIX MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,730
<SECURITIES> 0
<RECEIVABLES> 7,361
<ALLOWANCES> (172)
<INVENTORY> 7,452
<CURRENT-ASSETS> 19,782
<PP&E> 16,763
<DEPRECIATION> (8,251)
<TOTAL-ASSETS> 29,253
<CURRENT-LIABILITIES> 8,877
<BONDS> 1,660
0
0
<COMMON> 8
<OTHER-SE> (62)
<TOTAL-LIABILITY-AND-EQUITY> 29,253
<SALES> 16,065
<TOTAL-REVENUES> 18,567
<CGS> 11,732
<TOTAL-COSTS> 13,773
<OTHER-EXPENSES> 7,213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (2,524)
<INCOME-TAX> 160
<INCOME-CONTINUING> (2,684)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,684)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
<FN>
<F1>SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
