<PAGE> 1
================================================================================
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 JUNE 30, 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 June 30, 1998, there were 8,354,224 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE> 2
LASER POWER CORPORATION
FORM 10-Q INDEX
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of Laser Power Corporation (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 competition, general economic conditions in the
Company's geographic markets, size and timing of individual orders, market
acceptance of new products and product enhancements, delays in the introduction
of new products or product enhancements, seasonality of revenues, and
developments with respect to the Company's contract research activities, 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).
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 1998 and August 31, 1997.................. 3
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended
June 30, 1998 and May 31, 1997............................................................................. 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended
June 30, 1998 and May 31, 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.................................................................. 13
ITEM 5. Other Information.......................................................................................... 13
ITEM 6. Exhibits and Reports on Form 8-K........................................................................... 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASER POWER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1998 AUGUST 31, 1997
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 4,335 $ 8,253
Accounts receivable, net .............................. 6,437 6,807
Inventories, net ...................................... 7,839 5,475
Other current assets .................................. 343 518
-------- --------
Total current assets .......................... 18,954 21,053
Property and equipment, net ............................. 9,186 7,080
Intangibles and other assets, net ...................... 977 940
-------- --------
Total assets .................................. $ 29,117 $ 29,073
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,327 $ 2,687
Accrued liabilities ................................... 4,616 3,133
Current portion of long-term debt ..................... 941 446
-------- --------
Total current liabilities ..................... 7,884 6,266
Long-term debt and deferred rent ........................ 4,073 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
8,354,224 shares at June 30, 1998 .............. 8 8
Additional paid-in capital ............................ 19,366 18,543
Foreign currency translation adjustment ............... (45) (51)
Accumulated deficit ................................... (3,829) (818)
-------- --------
Total stockholders' equity .................... 15,500 17,682
-------- --------
Total liabilities and stockholders' equity .... $ 29,117 $ 29,073
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
JUNE 30, 1998 MAY 31, 1997 JUNE 30, 1998 MAY 31, 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales .................................. $ 7,948 $ 7,782 $ 24,013 $ 21,477
Contract research and development .............. 676 1,519 3,178 4,648
-------- -------- -------- --------
Total revenues ......................... 8,624 9,301 27,191 26,125
Costs and expenses:
Cost of product sales .......................... 5,319 5,430 17,051 14,893
Contract research and development .............. 650 1,187 2,691 3,687
Internal research and development .............. 685 402 2,020 949
Selling, general and administrative ............ 1,831 1,564 5,709 4,586
Acquisition and related ........................ -- -- 2,000 --
-------- -------- -------- --------
Total costs and expenses ............... 8,485 8,583 29,471 24,115
-------- -------- -------- --------
Income (loss) from operations .................... 139 718 (2,280) 2,010
Interest expense, net ............................ 84 135 189 359
-------- -------- -------- --------
Income (loss) before income taxes ................ 55 583 (2,469) 1,651
Income taxes ..................................... 79 14 239 46
-------- -------- -------- --------
Net income (loss) ................................ $ (24) $ 569 $ (2,708) $ 1,605
======== ======== ======== ========
Basic earnings (loss) per share .................. $ (0.00) $ 0.11 $ (0.33) $ 0.32
======== ======== ======== ========
Diluted earnings (loss) per share ................ $ (0.00) $ 0.08 $ (0.33) $ 0.23
======== ======== ======== ========
Average common shares outstanding - Basic ....... 8,346 5,055 8,222 5,047
======== ======== ======== ========
Average common shares outstanding - Diluted ..... 8,346 6,909 8,222 6,866
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
JUNE 30, MAY 31,
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from operations .......................... $(2,708) $ 1,605
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 1,359 978
Other .................................................... 2,203 67
Changes in operating assets and liabilities .............. (3,317) (151)
------- -------
Net cash provided by (used in) operating activities (2,463) 2,499
INVESTING ACTIVITIES
Additions to property and equipment ........................ (3,303) (2,747)
Increase in intangibles and other assets ................... (127) (183)
------- -------
Net cash used in investing activities ............. (3,430) (2,930)
FINANCING ACTIVITIES
Deferred costs of initial public offering .................. -- (605)
Payments on borrowings ..................................... (2,211) (426)
Proceeds from borrowings ................................... 3,404 2,037
Net proceeds from issuance and repurchase of stock ......... 836 (14)
------- -------
Net cash provided by financing activities ......... 2,029 992
------- -------
Net increase (decrease) in cash and cash equivalents ....... (3,864) 561
Cash and cash equivalents at beginning of the period ....... 8,199 978
------- -------
Cash and cash equivalents at end of the period ............. $ 4,335 $ 1,539
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................... $ 488 $ 552
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
LASER POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Laser Power Corporation (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 June 30, 1998 and the consolidated results
of operations for the three and nine months ended June 30, 1998 and May 31,
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. For the month of
September, 1997, 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 June 30, 1998 are not necessarily indicative of the results that
may be attained for the entire fiscal year.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income" and FAS No. 131, "Segment Information". Both of
these standards are effective for fiscal years beginning after December 15,
1997. FAS No. 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 adjustments, and unrealized gains and losses on
investments, shall be reported, net of their relaxed tax effect, to arrive at
comprehensive income. Comprehensive income is not materially different than
reported net income for the periods ended May 1, 1998 and May 4, 1998. FAS No.
131 amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. Operating
segments,as defined in FAS No. 131, are components of an enterprise for which
separate financial information is required to be reported on the basis that is
used internally for evaluating the segment performance. As stated above, the
Company believes it operates in one business and operating segment and that
adoption of these standards will not have a material impact on the Company's
financial statements.
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 (loss) per
share considers the weighted average number of common shares outstanding.
Diluted earnings (loss) per share considers the shares included as basic shares
outstanding, conversion of outstanding preferred stock to common stock, and the
dilutive effects of stock options and warrants to purchase common stock.
3. FINANCING AGREEMENTS
In June 1998, the Company renewed a line of credit with a bank, subject to
maximum advances of $2,500,000 and at an annual interest rate of 1% above the
bank's prime rate. The line of credit expires on February 1, 1999 and there is
no balance outstanding at June 30, 1998. As part of the credit agreement, the
Company has pledged a $1 million certificate of deposit as collateral to the
bank. The amount is included in cash as of June 30, 1998.
The Company also obtained a $2,000,000 equipment line of credit at the
bank's prime rate. The balance outstanding at February 1, 1999 will convert
to a loan, and principal payments will be paid over the following sixty months.
The Company has borrowed $1.5 million against this line as of June 30, 1998.
All borrowings under the above credit agreements are secured by accounts
receivable, inventory, intangibles, and property and equipment. The agreements
contain restrictive covenants which include limitations on losses,
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
the Company's Belgian subsidiary, additional borrowings and payments of
dividends.
6
<PAGE> 7
4. INVENTORIES (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1998 AUGUST 31, 1997
------------- ---------------
<S> <C> <C>
Raw materials .............................. $ 3,309 $ 2,121
Work in progress ........................... 3,282 2,626
Finished goods ............................. 1,248 728
-------- --------
$ 7,839 $ 5,475
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Revenues
For the three and nine months ended June 30, 1998, product sales were
$7,948,000 and $24,013,000 compared to $7,782,000 and $21,477,000 for the three
and nine months ended May 31, 1997, an increase of $166,000 or 2% for the three
months and $2,536,000 or 12% for the nine months ended June 30, 1998. Contract
research and development revenues were $676,000 and $3,178,000 for the three and
nine months ended June 30, 1998 compared to $1,519,000 and $4,648,000 for the
three and nine months ended May 31,1997, a decrease of $843,000 or 55% for the
three months and $1,470,000 or 32% for the nine months ended June 30, 1998.
Product sales in the three-month period increased primarily due to growth in
sales of the Company's optics for military applications and to initial
production shipments of microlasers, for which shipments were negligible in the
prior year. This was mostly offset by a decline in sales of the Company's optics
for industrial and medical applications, primarily due to competition in
domestic markets and to reduced demand related to the Asian economic situation.
Growth in product sales for the nine months is due primarily to increased sales
of optics for military applications and to a lesser extent increased sales of
optics for industrial and medical applications. The decrease in contract
revenues for the three and nine months is due primarily to lower levels of
contract funding for development of microlaser-based 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 significant
competition in laser optics markets, uncertainties in foreign markets
(particularly Asia) and currency exchange rates, the timing of exercise of
customer options on long-term production contracts for optics for military
applications, and the Company's ability to improve the manufacture and sale of
microlaser products. Contract research and development revenues are expected to
be lower than in recent periods because of the lower levels of funding for
microlaser-based display development activities.
Gross Profit
Gross profit on product sales was $2,629,000 and $6,962,000 for the three
and nine months ended June 30, 1998 compared to $2,352,000 and $6,584,000 for
the three and nine months ended May 31, 1997, an increase of $277,000 or 12% for
the three months and $378,000 or 6% for the nine months. Gross profit on
research and development revenues was $26,000 and $487,000 for the three and
nine months ended June 30, 1998 compared to $332,000 and $961,000 for the three
and nine months ended May 31, 1997, a decrease of $306,000 or 92% for the three
months and $474,000 or 49% for the nine months. Gross margin on product sales
was 33% and 29% for the three and nine months ended June 30, 1998 compared to
30% and 31% for the three and nine months ended May 31, 1997. Gross margin
improvement in the three months is primarily due to higher margins in military
optics contract sales. The decrease in gross margin for the nine months 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 4% and 15% for the three and nine months ended June 30, 1998 compared to 22%
and 21% for the three and nine months ended May 31, 1997. The decrease in gross
margin is due primarily to cost overruns on several microlaser-based display
development contracts during the later stages of completion.
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, and are expected to be below historical levels through
the fourth quarter of fiscal 1998.
7
<PAGE> 8
Internal Research and Development Expense
Internal research and development expense was $685,000 and $2,020,000 for
the three and nine months ended June 30, 1998 compared to $402,000 and $949,000
for the three and nine months ended May 31, 1997, an increase of $283,000 or 70%
for the three months and $1,071,000 or 113% for the nine months. The increase
was due to increased microlaser product research and development activities, 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 $1,831,000 and $5,709,000
for the three and nine months ended June 30, 1998 compared to $1,564,000 and
$4,586,000 for the three and nine months ended May 31, 1997, an increase of
$267,000 or 17% for the three months and $1,123,000 or 24% for the nine 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.
Interest Expense
Net interest expense was $84,000 and $189,000 for the three and nine months
ended June 30, 1998 compared to $135,000 and $359,000 for the three and nine
months ended May 31, 1997, a decrease of $51,000 or 38% for the three months and
$170,000 or 47% for the nine months. The decrease was due primarily to the
retirement of debt and investment of cash from proceeds of the Company's initial
public offering of common stock completed in June 1997 (the "IPO"). The Company
expects interest expense to increase as it continues to invest in fixed assets
and working capital through utilization of long-term bank borrowings.
Income Taxes
Income taxes were $79,000 and $239,000 for the three and nine months ended
June 30, 1998 compared to $14,000 and $46,000 for the three and nine months
ended May 31, 1997, an increase of $65,000 or 464% for the three months and
$193,000 or 420% for the nine months. The increase is due to the provision for
income taxes for EMI. 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 $2,463,000 for the nine months ended
June 30, 1998 compared to cash provided by operations of $2,499,000 for the nine
months ended May 31, 1997, a reduction in cash of $4,962,000. The primary
reasons for the use of cash were the operating loss sustained for the nine month
period and inventory investments in raw materials and components for optics and
microlasers, work in process for military customers, and finished goods for
overnight order fulfillment for optics customers.
8
<PAGE> 9
Cash used in investing activities was $3,430,000 for the nine months ended
June 30, 1998 compared to $2,930,000 for the nine month periods ended May 31,
1997, an increase in investment of $500,000. The change is due primarily to
additions to property and equipment for manufacturing operations. The Company
expects to invest in capital equipment at a lower rate for the remainder of the
fiscal year..
Cash provided by financing activities was $2,029,000 for the nine months
ended June 30, 1998 compared to $992,000 for the nine months ended May 31, 1997.
The primary sources of cash in the current year are new bank financing for
equipment and 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 will satisfy its cash requirements for at least the next
twelve months.
Year 2000
Many older computer software programs refer to years in terms of their final
two digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, these programs could cause date-related transaction
failures. This problem is often referred to as the "Year 2000" issue.
The Company recognizes the need to ensure that its operations will not be
impacted by the Year 2000 issue. The Company does not believe that it has a
material exposure to the Year 2000 issue with respect to its own products. The
Company intends to ensure that its information systems are Year 2000 ready
primarily by investing in new information systems, and is developing plans to
survey critical suppliers and customers to determine the status of their Year
2000 readiness programs. The can be no assurance that failure of the Company to
complete installation of Year 2000 ready information systems, or of its critical
suppliers and customers to adequately address the Year 2000 issue in a timely
fashion, will not result in a material adverse effect on the Company's business,
financial condition or operating results.
RISK FACTORS
Fluctuation in Quarterly Performance
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. Competitive pressures in
markets for the Company's optics products may result in significant changes in
timing, size and pricing of customer orders. 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 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.
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 laser and non-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.
Risks Associated With International Sales
International sales accounted for approximately 36% and 45% of the Company's
total revenues in the three months ended June 30, 1998 and May 31, 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 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
9
<PAGE> 10
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. Lower sales levels which typically occur during the summer
months and the calendar year end in Europe and certain other overseas markets
may also materially and adversely affect the Company's business and operating
results. 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, financial condition and operating results. The Company has
received notice from its vendor of beam delivery devices that the vendor intends
to terminate its relationship with the Company whereby the Company distributes
certain of such vendor's products in Europe. The Company and the vendor are
currently negotiating the terms of an agreement to effect such termination.
There can be no assurance that the termination of the relationship will not have
a material adverse effect on the Company's business, financial condition and
operating results.
Exposure to Government Markets
Approximately 43% of the Company's product sales in the three months ended
June 30, 1998 were derived from customers in the defense industry. These
customers in turn generally contract with a governmental entity, typically the
U.S. government. In addition, over 50% of the Company's contract research and
development revenues were derived from contracts with various U.S. government
agencies. 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.
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 nine months ended June 30, 1998, and, at June 30, 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.
10
<PAGE> 11
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.
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 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.
11
<PAGE> 12
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.
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.
12
<PAGE> 13
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. 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 June 30,
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 $1,200,000 had been used
for general corporate purposes, approximately $1,000,000 had been used for
acquisition related costs, approximately $2,300,000 had been used for the
purchase of certain machinery and equipment, approximately $500,000 had been
used for facilities expansion and improvements and approximately $1,200,000
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
$1,000,000 of the net offering proceeds remain as working capital.
ITEM 5. Other Information
Pursuant to the Company's by-laws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company by September 1,
1998 (unless such matters are included in the Company's proxy statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as amended).
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
<TABLE>
<S> <C>
10.1 Second Amendment, Third Amendment and Fourth Amendment to
Credit Agreement dated January 31, 1997 between the Company
and Wells Fargo Bank and related promissory notes and security
agreements.
27.1 Financial Data Schedule
</TABLE>
13
<PAGE> 14
(b) REPORTS ON FORM 8-K
None.
14
<PAGE> 15
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: August 14, 1998 /s/ Paul P. Wickman, Jr.
----------------------------------------
Paul P. Wickman, Jr.
Senior Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting
Officer)
15
<PAGE> 1
Exhibit 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of May 15, 1998, by and between LASER POWER CORPORATION, a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of January 31, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1.(a) is hereby amended (a) by deleting "May 1, 1998" as the
last day on which Bank will make advances under the Line of Credit, and by
substituting for said date "February 1, 1999," and (b) by deleting "Two Million
Dollars ($2,000,000.00)" as the maximum principal amount available under the
Line of Credit, and by substituting for said amount "Two Million Five Hundred
Thousand Dollars ($2,500,000.00)," with such changes to be effective upon the
execution and delivery to Bank of a promissory note substantially in the form of
Exhibit A attached hereto (which promissory note shall replace and be deemed the
Line of Credit Note defined in and made pursuant to the Credit Agreement) and
all other contracts, instruments and documents required by Bank to evidence such
change.
2. Section 1.4. shall be renumbered as "Section 1.5."
Section 1.5. shall be renumbered as "Section 1.6."
Section 1.6. shall be renumbered as "Section 1.7."
Section 1.7. shall be renumbered as "Section 1.8."
3. The following is hereby added to the Credit Agreement as new Section
1.4.:
"SECTION 1.4. TERM LOAN A.
(a) Term Loan A. Subject to the terms and conditions of this
Agreement, Bank hereby
<PAGE> 2
agrees to make a loan to Borrower in the principal amount of One
Million Nine Hundred Thousand Dollars ($1,900,000.00) ("Term Loan A"),
the proceeds of which shall be used for Debt Consolidation. Borrower's
obligation to repay Term Loan A shall be evidenced by a promissory
note substantially in the form of Exhibit D attached hereto ("Term
Note A"), all terms of which are incorporated herein by this
reference. Bank's commitment to grant Term Loan A shall terminate on
June 5, 1998.
(b) Repayment. The principal amount of Term Loan A shall be repaid in
accordance with the provisions of Term Note A.
(c) Prepayment. Borrower may prepay principal on Term Loan A solely in
accordance with the provisions of Term Note A."
4. Section 1.5.(a) is hereby deleted in its entirety, and the following
substituted therefor:
"(a) Interest. The outstanding principal balance of the Line of
Credit, Term Loan and Term Loan A shall bear interest at the rate of
interest set forth in the Line of Credit Note, Term Note and Term Note
A (collectively, the "Notes")."
5. Section 1.7. is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 1.7. COLLATERAL.
As security for all indebtedness of Borrower to Bank subject
hereto, Borrower hereby grants to Bank security interests of first
priority in all Borrower's accounts receivable and other rights to
payment, general intangibles, inventory and equipment.
As security for all indebtedness of Borrower to Bank subject
hereto Borrower shall cause Exotic Materials, Inc. to grant to Bank
security interests of first priority in all accounts receivable and
other rights to payment, general intangibles, inventory and equipment.
-2-
<PAGE> 3
All of the foregoing shall be evidenced by and subject to the
terms of such security agreements, financing statements, deeds of
trust and other documents as Bank shall reasonably require, all in
form and substance satisfactory to Bank. Borrower shall reimburse Bank
immediately upon demand for all costs and expenses incurred by Bank in
connection with any of the foregoing security, including without
limitation, filing and recording fees and costs of appraisals, audits
and title insurance."
6. Section 4.9. is hereby deleted in its entirety, and the following
substituted therefor:
"(a) Current Ratio not at any time less than 2.0 to 1.0, with "Current
Ratio" defined as total current assets divided by total current
liabilities.
(b) Tangible Net Worth not at any time less than $15,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders'
equity plus subordinated debt less any intangible assets.
(c) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.0 to 1.0, with "Total Liabilities" defined as the
aggregate of current liabilities and noncurrent liabilities less
subordinated debt, and with "Tangible Net Worth" as defined above.
(d) EBITDA Coverage Ratio not less than 0.6 to 1.0 as of FYE 09/30/98
1.75:1 as of 3/31/98; and 2.25:1 at FYE 1999 and thereafter;
with "EBITDA" defined as net profit before tax plus interest expense
(net of capitalized interest expense), depreciation expense and
amortization expense, and with "EBITDA Coverage Ratio" defined as
EBITDA divided by the aggregate of total interest expense plus the
prior period current maturity of long-term debt and the prior period
current maturity of subordinated debt, determined semi-annually at end
of second and fourth fiscal quarter.
-3-
<PAGE> 4
(e) Pre-tax losses at fiscal year end September 30, 1998, not greater
than $2,750,000.00.
(f) Pre-tax profitability greater than $1.00 on a quarterly basis,
commencing first fiscal quarter December 31, 1998."
7. The following is hereby added to the Credit Agreement as Section 4.11.:
"SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably
necessary to ensure that (a) Borrower and any business in which
Borrower holds a substantial interest, and (b) all customers,
suppliers and vendors that are material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall include,
without limitation, performing a comprehensive review and assessment
of all of Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such
systems. As used herein, "Year 2000 Compliant" shall mean, in regard
to any entity, that all software, hardware, firmware, equipment, goods
or systems utilized by or material to the business operations or
financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000. Borrower
shall, immediately upon request, provide to Bank such certifications
or other evidence of Borrower's compliance with the terms hereof as
Bank may from time to time require."
8. Borrower shall pay to Bank a non-refundable commitment fee for the Line
of Credit equal to Eleven Thousand Two Hundred Fifty Dollars ($11,250.00), which
fee shall be due and payable in full upon execution of this Agreement.
9. Except as specifically provided herein, all terms and conditions of the
Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
10. Borrower hereby remakes all representations and warranties contained in
the Credit Agreement and reaffirms all
-4-
<PAGE> 5
covenants set forth therein. Borrower further certifies that as of the date of
this Amendment there exists no Event of Default as defined in the Credit
Agreement, nor any condition, act or event which with the giving of notice or
the passage of time or both would constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
LASER POWER CORPORATION NATIONAL ASSOCIATION
By: /s/ PAUL P. WICKMAN, JR. By: /s/BERNIE PALMER
------------------------------- ---------------------------------
Bernie Palmer
Title: Chief Financial Officer Vice President
----------------------------
-5-
<PAGE> 6
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of June 1, 1998, by and between LASER POWER CORPORATION, a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of January 31, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.5. shall be renumbered as "Section 1.6."
Section 1.6. shall be renumbered as "Section 1.7."
Section 1.7. shall be renumbered as "Section 1.8."
Section 1.8. shall be renumbered as "Section 1.9."
2. The following is hereby added to the Credit Agreement as new Section
1.5.:
SECTION 1.5. TERM COMMITMENT.
(a) Term Commitment. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time
to time up to and including February 1, 1999, not to exceed the
aggregate principal amount of Two Million Dollars ($2,000,000.00)
("Term Commitment"), the proceeds of which shall be used to purchase
equipment, and which shall be converted on February 1, 1999, to a term
loan, as described more fully below. Borrower's obligation to repay
advances under the Term Commitment shall be evidenced by a promissory
note substantially in the form of Exhibit E attached hereto ("Term
Commitment Note"), all terms of which are incorporated herein by this
reference.
<PAGE> 7
(b) Limitation on Borrowings. Notwithstanding any other provision of
this Agreement, the aggregate amount of all outstanding borrowings
under the Term Commitment shall not at any time exceed a maximum of
one hundred percent (100%) of the cost of each item of equipment
purchased with the proceeds thereof, as evidenced by the sellers
invoice.
(c) Borrowing and Repayment. Borrower may from time to time during the
period in which Bank will make advances under the Term Commitment
borrow and partially or wholly repay its outstanding borrowings,
provided that amounts repaid may not be reborrowed, subject to all the
limitations, terms and conditions contained herein; provided however,
that the total outstanding borrowings under the Term Commitment shall
not exceed the maximum principal amount available thereunder, as set
forth above. The outstanding principal balance of the Term Commitment
shall be due and payable in full on February 1, 1999; provided
however, that so long as Borrower is in compliance on said date with
all terms and conditions contained herein and in any other documents
evidencing the Credits, Bank agrees to restructure repayment of said
outstanding principal balance so that principal shall be amortized
over five years and shall be repaid in sixty (60) installments, as set
forth in the promissory note executed by Borrower on said date to
evidence the new repayment schedule.
(c) Prepayment. Borrower may prepay principal on the Term Commitment
solely in accordance with the provisions of the Term Commitment Note.
3. Section 1.5.(a) is hereby deleted in its entirety, and the following
substituted therefor:
"(a) Interest. The outstanding principal balance of the Line of
Credit, Term Commitment, Term Loan and Term Loan A shall
- 2 -
<PAGE> 8
bear interest at the rate of interest set forth in the Line of Credit
Note, Term Commitment Note, Term Note and Term Note A (collectively,
the "Notes")."
4. Section 4.9.(d) is hereby deleted in its entirety, and the following
substituted therefor:
"(d) EBITDA Coverage Ratio not less than 0.6 to 1.0 as of fiscal year
end September 30, 1998, not less than 1.75 to 1.0 as of March 31,
1999, not less than 2.25 to 1.0 at fiscal year end September 30, 1999
or at any time thereafter, with "EBITDA" defined as net profit before
tax plus interest expense (net of capitalized interest expense),
depreciation expense and amortization expense, and with "EBITDA
Coverage Ratio" defined as EBITDA divided by the aggregate of total
interest expense plus the prior period current maturity of long-term
debt and the prior period current maturity of subordinated debt,
determined semi-annually at end of each second and fourth fiscal
quarter."
5. The following is hereby added to the Credit Agreement as Section 4.9.
(g):
"Liquid assets (defined as the aggregate of cash and readily
marketable securities acceptable to Bank, excluding the One Million
Dollars ($1,000,000.00) Certificate of Deposit pledged as collateral
to Bank.) in amount at all times in excess of One Million Dollars
($1,000,000.00)."
6. Borrower shall pay to Bank a non-refundable commitment fee for the Term
Commitment equal to One Thousand Dollars ($1,000.00), which fee shall be due and
payable in full upon execution of this Agreement.
7. Except as specifically provided herein, all terms and conditions of the
Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
8. Borrower hereby remakes all representations and warranties contained in
the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as
-3-
<PAGE> 9
of the date of this Amendment there exists no Event of Default as defined in the
Credit Agreement, nor any condition, act or event which with the giving of
notice or the passage of time or both would constitute any such Event of
Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
LASER POWER CORPORATION NATIONAL ASSOCIATION
By: /s/ PAUL P. WICKMAN By: /S/ BERNIE PALMER
------------------------------- ---------------------------------
Bernie Palmer
Title: Chief Financial Officer Vice President
----------------------------
-4-
<PAGE> 10
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of June 17, 1998, by and between LASER POWER CORPORATION, a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of January 31, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.5(b) is hereby deleted in its entirety, and the following
substituted therefor:
"Limitation on Borrowings. Notwithstanding any other provision of this
Agreement, the aggregate amount of all outstanding borrowings under
the Term Commitment shall not at any time exceed a maximum of ninety
percent (90%) of the cost of each item of equipment purchased with the
proceeds thereof, as evidenced by the sellers invoice."
2. Section 1.7 is hereby deleted in its entirety, and the following
substituted therefor:
"As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in
all Borrower's accounts receivable and other rights to payment,
general intangibles, inventory and equipment; and for the Term
Commitment, Borrower shall provide to Bank as additional collateral,
security interests of first priority in Borrower's Certificate of
Deposit #1005005103000 in the amount of $1,000,000.00.
<PAGE> 11
As security for all indebtedness of Borrower to Bank under Term
Loan A, Borrower shall cause Exotic Materials, Inc. to grant to Bank
security interests of first priority in all accounts receivable and
other rights to payment, general intangibles, inventory and equipment;
and for the Term Commitment, Borrower shall cause Exotic Materials,
Inc. to provide to Bank a first priority interest in its equipment."
All of the foregoing shall be evidenced by and subject to the
terms of such security agreements, financing statements, deeds of
trust and other documents as Bank shall reasonably require, all in
form and substance satisfactory to Bank. Borrower shall reimburse Bank
immediately upon demand for all costs and expenses incurred by Bank in
connection with any of the foregoing security, including without
limitation, filing and recording fees and costs of appraisals, audits
and title insurance."
3. Except as specifically provided herein, all terms and conditions of the
Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
4. Borrower hereby remakes all representations and warranties contained in
the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
LASER POWER CORPORATION NATIONAL ASSOCIATION
By: /s/ GLENN H. SHERMAN By:
- ---------------------------------- ---------------------------------
Bernie Palmer
Title: CEO Vice President
----------------------------
-2-
<PAGE> 12
SECURITY AGREEMENT
WELLS FARGO BANK SPECIFIC RIGHTS TO PAYMENT
1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned LASER POWER CORPORATION, or any of them ("Debtor"), hereby grants
and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security
interest in the following accounts, deposit accounts, chattel paper,
instruments, documents and general intangibles or other rights to payment
(collectively called "Collateral"):
Certificate of Deposit #1005005103-000 in the amount of One Million
Dollars ($1,000,000.00) and all renewals thereof, whether or not any
such renewal is evidenced by a certificate of deposit.
and all renewals thereof, including all securities, guaranties, warranties,
indemnity agreements, insurance policies and other agreements pertaining to the
same or the property described therein, together with whatever is receivable or
received when any of the Collateral or proceeds thereof are sold, collected,
exchanged or otherwise disposed of, whether such disposition is voluntary or
involuntary, including without limitation, (a) all accounts, contract rights,
chattel paper, instruments, documents, general intangibles and rights to payment
of every kind now or at any time hereafter arising from any such sale,
collection, exchange or other disposition of any of the foregoing, (b) all
rights to payment, including returned premiums, with respect to any insurance
relating to any of the foregoing, and (c) all rights to payment with respect to
any cause of action affecting or relating to any of the foregoing (hereinafter
called "Proceeds").
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a) all present and future Indebtedness of Debtor to Bank;
(b) all obligations of Debtor and rights of Bank under this Agreement; and (c)
all present and future obligations of Debtor to Bank of other kinds. The word
"Indebtedness" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of Debtor, or any of them,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Debtor may
be liable individually or jointly, or whether recovery upon such Indebtedness
may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Debtor to Bank, including without limitation, the payment of
all Indebtedness of Debtor to Bank, and the termination of all commitments of
Bank to extend credit to Debtor, existing at the time Bank receives written
notice from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans
hereunder. Any money received by Bank in respect of the Collateral may be
deposited, at Bank's option, into a non-interest bearing account over which
Debtor shall have no control, and the same shall, for all purposes, be deemed
Collateral hereunder.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the owner and has possession or control of the
Collateral and Proceeds; (b) Debtor has the right to grant a security interest
in the Collateral and Proceeds; (c) all Collateral and Proceeds are genuine,
free from liens, adverse claims, setoffs, default, prepayment, defenses and
conditions precedent of any kind or character, except the lien created hereby or
as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in
writing: (d) all statements contained herein and, where applicable, in the
Collateral are true and complete in all materials respects; (e) no financing
statement covering any of the Collateral or Proceeds, and naming any secured
party other than Bank, is on file in any public office; (f) all persons
appearing to be obligated on Collateral and Proceeds have authority and capacity
to contract and are bound as they appear to be; (g) all property subject to
chattel paper has been property registered and filed in compliance with law and
to perfect the interest of Debtor in such property; and (h) all Collateral and
Proceeds comply with all applicable laws concerning form, content and manner of
preparation and execution, including where applicable Federal Reserve Regulation
Z and any State consumer credit laws,
6. COVENANTS OF DEBTOR.
(a) Debtor Agrees in general: (i) to pay Indebtedness secured hereby
when due, (ii) to indemnify Bank against all losses, claims, demands,
liabilities and expenses of every kind caused by property subject hereto: (iii)
to pay all costs and expenses, including reasonable attorneys' fees, incurred by
Bank in the perfection and preservation of the Collateral or Bank's interest
therein and/or the realization, enforcement and exercise of Bank's rights,
powers and remedies hereunder (iv) to permit Bank to exercise its powers; (v) to
execute and deliver such documents as Bank deems necessary to create, perfect
and continue the security interests contemplated hereby; and (vi) not to change
its chief place of business (or personal residence, if applicable) or the places
where Debtor keeps any of the Collateral or Debtor's records concerning the
Collateral and Proceeds without first giving Bank written notice of the address
to which Debtor is moving same.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless
Bank agrees otherwise in writing: (i) where applicable, to insure the Collateral
with Bank as loss payee, in form, substance and amounts, under agreements,
against risks and liabilities, and with insurance companies satisfactory to
Bank; (ii) not to permit any security interest in or lien on the Collateral or
Proceeds, except in favor of Bank; (iii) not to withdraw any funds from any
deposit account pledged to Bank hereunder; (iv) not to sell, hypothecate or
otherwise dispose of, nor permit the transfer by operation of law of, any of the
Collateral or Proceeds or any interest therein; (v) to keep, in accordance with
generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time; (vi) if requested by Bank,
SECURITY AGREEMENT (06/97), Page 1
<PAGE> 13
to receive and use reasonable diligence to collect Proceeds, in trust and as the
property of Bank, and to immediately endorse as appropriate and deliver such
Proceeds to Bank daily in the exact form in which they are received together
with a collection report in form satisfactory to Bank; (vii) not to commingle
Collateral or Proceeds, or collections thereunder, with other property; (viii)
in the event Bank elects to receive payments of Collateral and Proceeds
hereunder, to pay all expenses incurred by Bank in connection therewith,
including expenses of accounting, correspondence, collection efforts, reporting
to account or contract debtors, filing, recording, record keeping and expenses
incidental thereto; and (ix) to provide any service and do any other acts which
may be necessary to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims.
7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to
perform any of the following powers, which are coupled with an interest, are
irrevocable until termination of this Agreement and may be exercised from time
to time by Bank's officers and employees, or any of them, whether or not Debtor
is in default: (a) to perform any obligation of Debtor hereunder in Debtor's
name or otherwise; (b) to give notice to account debtors or others of Bank's
rights in the Collateral and Proceeds, to enforce the same and make extension
agreements with respect thereto; (c) to release persons liable on Collateral or
Proceeds and to give receipts and acquittances and compromise disputes in
connection therewith; (d) to release security; (e) to resort to security in any
order; (f) to prepare, execute, file, record or deliver notes, assignments,
schedules, designation statements, financing statements, continuation
statements, termination statements, statements of assignment, applications for
registration or like papers to perfect, preserve or release Bank's interest in
the Collateral and Proceeds; (g) to receive, open and read mail addressed to
Debtor; (h) to take cash, instruments for the payment of money and other
property to which Bank is entitled; (i) to verify facts concerning the
Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own
name or a fictitious name; (j) to endorse, collect, deliver and receive payment
under instruments for the payment of money constituting or relating to Proceeds;
(k) to prepare, adjust, execute, deliver and receive payment under insurance
claims, and to collect and receive payment of and endorse any instrument in
payment of loss or returned premiums or any other insurance refund or return,
and to apply such amounts received by Bank, at Bank's sole option, toward
repayment of the Indebtedness; (1) to exercise all rights, powers and remedies
which Debtor would have, but for this Agreement, with respect to all Collateral
and Proceeds subject hereto; and (m) to do all acts and things and execute all
documents in the name of Debtor or otherwise, deemed by Bank as necessary,
proper and convenient in connection with the preservation, perfection or
enforcement of its rights hereunder.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and upon the failure
of Debtor to do so, Bank at its option may pay any of them and shall be the sole
judge of the legality or validity thereof and the amount necessary to discharge
the same. Any such payments made by Bank shall be obligations of Debtor to Bank,
due and payable immediately upon demand, together with interest at a rate
determined in accordance with the provisions of Section 15 herein, and shall be
secured by the Collateral and Proceeds, subject to all terms and conditions of
this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default, under
(i) any contract or instrument evidencing any Indebtedness, or (ii) any other
agreement between any Debtor and Bank, including without limitation any loan
agreement, relating to or executed in connection with any Indebtedness; (b) any
representation or warranty made by any Debtor herein shall prove to be incorrect
in any material respect when made; (c) any Debtor shall fail to observe or
perform any obligation or agreement contained herein; (d) any attachment or like
levy on any property of any Debtor; and (e) Bank, in good faith, believes any or
all of the Collateral and/or Proceeds to be in danger of misuse, dissipation,
commingling, loss, theft, damage or destruction, or otherwise in jeopardy or
unsatisfactory in character or value
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall
have the right to declare immediately due and payable all or any Indebtedness
secured hereby and to terminate any commitments to make loans or otherwise
extend credit to Debtor. Bank shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the California
Uniform Commercial Code or otherwise provided by law, including without
limitation, the right to contact all persons obligated to Debtor on any
Collateral or Proceeds and to instruct such persons to deliver all Collateral
and/or Proceeds directly to Bank. All rights, powers, privileges and remedies of
bank shall be cumulative. No delay, failure or discontinuance of Bank in
exercising any right, power, privilege or remedy hereunder shall affect or
operate as a waiver of such right, power, privilege or remedy, nor shall any
single or partial exercise of any such right, power, privilege or remedy
preclude, waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power, privilege or remedy. Any waiver, permit,
consent or approval of any kind by Bank of any default hereunder, or any such
waiver of any provisions or conditions hereof, must be in writing and shall be
effective only to the extent set forth in writing. It is agreed that public or
private sales, for cash or on credit, to a wholesaler or retailer or investor,
or user of property of the types subject to this Agreement, or public auction,
are all commercially reasonable since differences in the sales prices generally
realized in the different kinds of sales are ordinarily offset by the
differences in the costs and credit risks of such sales.
While an Event of Default exists: (a) Debtor will deliver to Bank from time to
time, as requested by Bank, current lists of all Collateral and Proceeds; (b)
Debtor will not dispose of any of the Collateral or Proceeds except on terms
approved by Bank; (c) Bank may, at any time and at Bank's sole option, liquidate
any time deposits pledged to Bank hereunder and apply the Proceeds thereof to
payment of the Indebtedness, whether or not said time deposits have matured and
notwithstanding the fact that such liquidation may give rise to penalties for
early withdrawal of funds; and (d) at Bank's request, Debtor will assemble and
deliver all Collateral and Proceeds, and books and records pertaining thereto,
to Bank at a reasonably convenient place designated by Bank.
SECURITY AGREEMENT (06/97), Page 2
<PAGE> 14
11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or
any part of the Indebtedness, Bank may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and responsibility with respect to any of the foregoing so
transferred, and the transferee shall be vested with all rights and powers of
Bank hereunder with respect to any of the foregoing so transferred; but with
respect to any Collateral or Proceeds not so transferred Bank shall retain all
rights, powers, privileges and remedies herein given. Any proceeds of any
disposition of any of the Collateral or Proceeds, or any part thereof, may be
applied by Bank to the payment of expenses incurred by Bank in connection with
the foregoing, including reasonable attorneys' fees, and the balance of such
proceeds may be applied by Bank toward the payment of the Indebtedness in such
order of application as Bank may from time to time elect.
12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid
in full and all commitments by Bank to extend credit to Debtor have been
terminated, the power of sale and all other rights, powers, privileges and
remedies granted to Bank hereunder shall continue to exist and may be exercised
by Bank at any time and from time to time irrespective of the fact that the
Indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all Indebtedness
secured hereunder.
13. MISCELLANEOUS. (a) The obligations of Debtor are joint and several;
(b) Debtor hereby waives any right (i) to require Bank to make any presentment
or demand, or give any notice of nonpayment or nonperformance, protest, notice
of protest or notice of dishonor hereunder, (ii) to direct the application of
payments or security for Indebtedness of Debtor or indebtedness of customers of
Debtor, or (iii) to require proceedings against others or to require exhaustion
of security; and (c) Debtor hereby consents to extensions, forbearances or
alterations of the terms of Indebtedness, the release or substitution of
security, and the release of any guarantors; provided however, that in each
instance, Bank believes in good faith that the action in question is
commercially reasonable in that it does not unreasonably increase the risk of
nonpayment of the Indebtedness to which the action applies. Until all
Indebtedness shall have been paid in full, no Debtor shall have any right of
subrogation or contribution, and each Debtor hereby waives any benefit of or
right to participate in any of the Collateral or Proceeds or any other security
now or hereafter held by Bank.
14. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Bank at the address specified in any
other loan documents entered into between Debtor and Bank and to Debtor at the
address of its chief executive office (or personal residence, if applicable)
specified below or to such other address as any party may designate by written
notice to each other party, and shall be deemed to have been given or made as
follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon
the earlier of the date of receipt or 3 days after deposit in the U. S. mail,
first class and postage prepaid; and (c) if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank
immediately upon demand the full amount of ail payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in exercising any right, power, privilege or remedy conferred
by this Agreement or in the enforcement thereof, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to Debtor or in any way
affecting any of the Collateral or Bank's ability to exercise any of its rights
or remedies with respect thereto. All of the foregoing shall be paid by Debtor
with interest from the date of demand until paid in full at a rate per annum
equal to the greater of ten percent (10%) or the Prime Rate in effect from time
to time. The "Prime Rate" is a base rate that Bank from time to time establishes
and which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by Bank and Debtor.
17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this
Agreement as Debtor hereby expressly agrees that recourse may be had against his
or her separate property for all his or her Indebtedness to Bank secured by the
Collateral and Proceeds under this Agreement.
18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of California.
Debtor warrants that its chief executive office (or personal residence,
if applicable) is located at the following address: 12777 HIGH BLUFF DRIVE, SAN
DIEGO, CA 92130
SECURITY AGREEMENT (06/97), Page 3
<PAGE> 15
IN WITNESS WHEREOF, this Agreement has been duly executed as of MAY 15,
1998.
LASER POWER CORPORATION
By: PAUL P. WICKMAN
-------------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------------
SECURITY AGREEMENT (06/97), Page 4
<PAGE> 16
TERM COMMITMENT NOTE
$2,000,000.00 San Diego, California
June 1, 1998
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at 401 B Street, Suite 2201, San Diego, California, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of Two
Million Dollars ($2,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rate per annum equal to the Prime Rate in effect from time to time. The "Prime
Rate" is a base rate that Bank from time to time establishes and which serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto. Each change in the rate of interest hereunder shall
become effective on the date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable
on the first day of each month, commencing July 1, 1998.
(c) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Burrower may from time to time from the
date of this Note up to arid including, borrow and partially or wholly repay its
outstanding borrowings, subject to all of the limitations, terms and conditions
of this Note and of any document executed in connection with or governing this
Note; provided however, that amounts repaid may not he reborrowed; and provided
further, that the total borrowings under this Note shall
<PAGE> 17
not exceed the principal amount stated above. The unpaid principal balance Of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
(b) Required Principal Payments. The outstanding principal balance of
this Note on February 1, 1999 shall be amortized over sixty (60) months, and
thereafter principal shall be payable on the first day of each month in equal
successive installments over said amortization term, commencing March 1, 1999,
and continuing up to and including January 1, 2004, with a final installment
consisting of all remaining unpaid principal due and payable in full on February
1, 2004.
(c) Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Glenn Sherman or Paul Wickman or Ron Suokko or Inamarie Sherman, any one
acting alone, who are authorized to request advances and direct the disposition
of any advances until written notice of the revocation of such authority is
received by the holder at the office designated above, or (ii) any person, with
respect to advances deposited to the credit of any account of any Borrower with
the holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Borrower regardless of the fact
that persons other than those authorized to request advances may have authority
to draw against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
(d) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of January
31, 1997, as amended from time to time (the "Credit Agreement"). Any default in
the payment or performance of any obligation under this Note, or any defined
event of default under the Credit Agreement, shall constitute an "Event of
Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be
2
<PAGE> 18
immediately due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor, all of which
are expressly waived by each Borrower, and the obligation, if any, of the holder
to extend any further credit hereunder shall immediately cease and terminate.
Each Borrower shall pay to the holder immediately upon demand the full amount of
all payments, advances, charges, costs and expenses, including reasonable
attorneys' fees (to include outside counsel fees and all allocated costs of the
holder's in-house counsel), expended or incurred by the holder in connection
with the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or defense
of any action in any way related to this Note, including without limitation, any
action for declaratory relief, whether incurred at the trial or appellate level,
in an arbitration proceeding or otherwise, and including any of the foregoing
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought by Bank
or any other person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
LASER POWER CORPORATION
By: /s/ PAUL P. WICKMAN
-------------------------------
Title: Chief Financial Officer
-------------------------------
3
<PAGE> 19
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
$2,500,000.00 San Diego, California
May 15, 1998
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Diego RCBO, 401 B Street Suite 2201, San Diego, CA 92101,
or at such other place as the holder hereof may designate, in lawful money of
the United States of America and in immediately available funds, the principal
sum of $2,500,000.00, or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rate per annum 1.00000% above the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. Each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each month, commencing June 1, 1998.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay Its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of the Credit Agreement between Borrower and Bank defined below;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on February 1, 1999.
(b) Advances. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) GLENN SHERMAN or PAUL WICKMAN or RON SUOKKO or INAMARIA SHERMAN,
any one acting alone, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (ii) any
person, with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of January
31, 1997, as amended from time to time (the "Credit Agreement"). Any default In
the payment or performance of any obligation under this Note, or any defined
event of default under the Credit Agreement, shall constitute an "Event of
Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default as defined In
the Credit Agreement, the holder of this Note, at the holder's option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor, all of which
are expressly waived by each Borrower, and the obligation, if any, of the holder
to extend any further credit hereunder shall immediately cease and terminate.
Each Borrower shall pay to the holder immediately upon demand the full amount of
all payments, advances, charges, costs and expenses, including reasonable
attorneys' fees (to include outside counsel fees and all allocated costs of the
holder's in-house counsel), expended or incurred by the holder in connection
with the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or defense
of any action in any way related to this Note, including without limitation, any
action for declaratory relief, whether incurred at the trial or appellate level,
in an arbitration proceeding or otherwise, and Including any of the foregoing
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought by Bank
or any other person) relating to any Borrower or any other person or entity.
REVOLVING LINE OF CREDIT NOTE (08/96), Page 1
<PAGE> 20
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) This Note shall be governed by and construed in accordance with the
laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
LASER POWER CORPORATION
By: /s/ PAUL P. WICKMAN, JR.
-------------------------------
Title: Chief Financial Officer
----------------------------
REVOLVING LINE OF CREDIT NOTE (08/96), Page 2
<PAGE> 21
TERM NOTE
$1,900,000.00 San Diego, California
May 15, 1998
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at 401 B Street, Suite 2201, San Diego, California, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of One
Million Nine Hundred Thousand Dollars ($1,900,000.00), with interest thereon as
set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rate per annum one percent (1%) above the Prime Rate in effect from time to
time. The "Prime Rate" is a base rate that Bank from time to time establishes
and which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto. Each change in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable
on the first day of each month, commencing July 1, 1998.
(c) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum. (computed on
the basis of a 360-day year, actual days elapsed) equal to four percent (4%)
above the rate of interest from time to time applicable to this Note.
REPAYMENT AND PREPAYMENT:
(a) Repayment. Principal shall be payable on the first day of each month
in installments of Thirty Nine Thousand Five Hundred Eighty-three and 33/100
Dollars ($39,583.33) each, commencing July 1, 1998, and continuing up to and
including May 1, 2002, with a final installment consisting of all remaining
unpaid principal due and payable in full on June 1, 2002.
<PAGE> 22
(b) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
(c) Prepayment. Borrower may prepay principal on this Note at any time,
in any amount and without penalty. All prepayments of principal shall be applied
on the most remote principal installment or installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of January
31, 1997, as amended from time to time (the "Credit Agreement"). Any default in
the payment or performance of any obligation under this Note, or any defined
event of default under the Credit Agreement, shall constitute an "Event of
Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower. Each
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in-house counsel), expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of any
action in any way related to this Note, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
-2-
<PAGE> 23
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
LASER POWER CORPORATION
By: /s/ PAUL P. WICKMAN, JR.
-------------------------------
Title: Chief Financial Officer
---------------------------
-3-
<PAGE> 24
THIRD PARTY SECURITY AGREEMENT
WELLS FARGO BANK RIGHTS TO PAYMENT AND INVENTORY
- --------------------------------------------------------------------------------
1. GRANT OF SECURITY INTEREST. In consideration of any credit or other
financial accommodation heretofore, now or hereafter extended or made to LASER
POWER CORPORATION ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), and for other valuable consideration, as security for the
payment of all Indebtedness of Borrowers to Bank, the undersigned EXOTIC
MATERIALS, INC. ("Owner") hereby grants and transfers to Bank a security
interest in all accounts, deposit accounts, chattel paper, instruments,
documents and general intangibles (collectively called "Rights to Payment"), now
existing or at any time hereafter, and prior to the termination hereof, arising
(whether they arise from the sale, lease or other disposition of inventory or
from performance of contracts for service, manufacture, construction, repair or
otherwise or from any other source whatsoever), including all securities,
guaranties, warranties, indemnity agreements, insurance policies and other
agreements pertaining to the same or the property described therein, and in all
goods returned by or repossessed from Owner's customers, together with a
security interest in all inventory, goods held for sale or lease or to be
furnished under contracts for service, goods so leased or furnished, raw
materials, component parts, work in process or materials used or consumed in
Owner's business, and all warehouse receipts, bills of lading and other
documents evidencing goods owned or acquired by Owner, and all goods covered
thereby, now or at any time hereafter, and prior to the termination hereof,
owned or acquired by Debtor, wherever located, and all products thereof
(collectively called "Inventory"), whether in the possession of Owner,
warehousemen, bailees or any other person, or in process of delivery, and
whether located at Owners places of business or elsewhere (with all Rights to
Payment and Inventory referred to herein collectively as the "Collateral"),
together with whatever is receivable or received when any of the Collateral or
proceeds thereof are sold, leased, collected, exchanged or otherwise disposed
of, whether such disposition is voluntary or involuntary, including without
limitation, all Rights to Payment, including returned premiums, with respect to
any insurance relating to any of the foregoing, and all Rights to Payment with
respect to any cause of action affecting or relating to any of the foregoing
(hereinafter called "Proceeds"). The word "Indebtedness" is used herein in its
most comprehensive sense and includes any and all advances, debts, obligations
and liabilities of Borrowers, or any of them, heretofore, now or hereafter made,
incurred or created, whether voluntary or involuntary and however arising,
whether due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined, and whether Borrowers may be liable individually or
jointly, or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.
2. CONTINUING AGREEMENT; REVOCATION; OBLIGATION UNDER OTHER AGREEMENTS.
This is a continuing agreement and all rights, powers and remedies hereunder
shall apply to all past, present and future Indebtedness of each of the
Borrowers to Bank, including that arising under successive transactions which
shall either continue the Indebtedness, increase or decrease it, or from time to
time create new Indebtedness after all or any prior Indebtedness has been
satisfied, and notwithstanding the death, incapacity, dissolution, liquidation
or bankruptcy of any of the Borrowers or Owner or any other event or proceeding
affecting any of the Borrowers or Owner. This Agreement shall not apply to any
new Indebtedness created after actual receipt by Bank of written notice of its
revocation as to such new Indebtedness; provided however, that loans or advances
made by Bank to any of the Borrowers after revocation under commitments existing
prior to receipt by Bank of such revocation, and extensions, renewals or
modifications, of any kind, of Indebtedness Incurred by any of the Borrowers or
committed by Bank prior to receipt by Bank of such revocation, shall not be
considered new Indebtedness. Any such notice must be sent to Bank by registered
U.S. mail, postage prepaid, addressed to its office at San Diego RCBO, 401 B
Street Suite 2201, San Diego, CA 92101, or at such other address as Bank shall
from time to time designate. The obligations of Owner hereunder shall be in
addition to any obligations of Owner under any other grants or pledges of
security for any liabilities or obligations of any of the Borrower's or any
other persons heretofore or hereafter given to Bank unless said other grants or
pledges of security are expressly modified or revoked in writing; and this
Agreement shall not, unless expressly herein provided, affect or invalidate any
such other grants or pledges of security.
3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE OF
LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are joint and
several and independent of the obligations of Borrowers, and a separate action
or actions may be brought and prosecuted against Owner whether action is brought
against any of the Borrowers or any other person, or whether any of the
Borrowers or any other person is joined in any such action or actions. Owner
acknowledges that this Agreement is absolute and unconditional, there are no
conditions precedent to the effectiveness of this Agreement, and this Agreement
is in full force and effect and is binding on Owner as of the date written
below, regardless of whether Bank obtains collateral or any guaranties from
others or takes any other action contemplated by Owner. Owner waives the benefit
of any statute of limitations affecting Owner's liability hereunder or the
enforcement thereof, and Owner agrees that any payment of any Indebtedness or
other act which shall toll any statute of limitations applicable thereto shall
similarly operate to toll such statute of limitations applicable to Owner's
liability hereunder. The liability of Owner hereunder shall be reinstated and
revived and the rights of Bank shall continue if and to the extent that for any
reason any amount at any time paid on account of any Indebtedness secured hereby
is rescinded or must otherwise be restored by Bank, whether as a result of any
proceedings in bankruptcy or reorganization or otherwise, all as though such
amount had not been paid. The determination as to whether any amount so paid
must be rescinded or restored shall be made by Bank in its sole discretion;
provided however, that if Bank chooses to contest any such matter at the request
of Owner, Owner agrees to indemnify and hold Bank harmless from and against all
costs and expenses, including reasonable attorneys' fees, expended or incurred
by Bank in connection therewith, including without limitation, in any litigation
with respect thereto.
4. OBLIGATIONS OF BANK. Any money received by Bank in respect of the
Collateral may be deposited, at Bank's option, into a non-interest bearing
account over which Owner shall have no control, and the same shall, for
THIRD PARTY SECURITY AGREEMENT (06/97), Page 1
<PAGE> 25
all purposes, be deemed Collateral hereunder.
5. REPRESENTATIONS AND WARRANTIES. (a) Owner represents and warrants to
Bank that: (i) Owner is the owner and has possession or control of the
Collateral and Proceeds; (ii) Owner has the right to grant a security interest
in the Collateral and Proceeds; (iii) all Collateral and Proceeds are genuine,
free from liens, adverse claims, setoffs, default, prepayment, defenses and
conditions precedent of any kind or character, except the lien created hereby or
as otherwise agreed to by Bank, or heretofore disclosed by Owner to Bank, in
writing; (iv) all statements contained herein and, where applicable, in the
Collateral are true and complete in all material respects; (v) no financing
statement covering any of the Collateral or Proceeds, and naming any secured
party other than Bank, is on file in any public office; (vi) all persons
appearing to be obligated on Rights to Payment and Proceeds have authority and
capacity to contract and are bound as they appear to be; (vii) all property
subject to chattel paper has been properly registered and flied in compliance
with law and to perfect the interest of Owner in such property; and (viii) all
Rights to Payment and Proceeds comply with all applicable laws concerning form,
content and manner of preparation and execution, including where applicable
Federal Reserve Regulation Z and any State consumer credit laws.
(b) Owner further represents and warrants to Bank that: (i) the Collateral
pledged hereunder is so pledged at Borrowers' request; (ii) Bank has made no
representation to Owner as to the creditworthiness of any of the Borrowers; and
(iii) Owner has established adequate means of obtaining from each of the
Borrowers on a continuing basis financial and other information pertaining to
Borrowers' financial condition. Owner agrees to keep adequately informed from
such means of any facts, events or circumstances which might in any way affect
Owner's risks hereunder, and Owner further agrees that Bank shall have no
obligation to disclose to Owner any information or material about any of the
Borrowers which is acquired by Bank in any manner.
6. COVENANTS OF OWNER.
(a) Owner agrees in general: (i) to indemnify Bank against all losses,
claims, demands, liabilities and expenses of every kind caused by property
subject hereto; (ii) to pay all costs and expenses, including reasonable
attorneys' fees, incurred by Bank in the perfection and preservation of the
Collateral or Bank's interest therein and/or the realization, enforcement and
exercise of Bank's rights, powers and remedies hereunder; (iii) to permit Bank
to exercise its powers; (iv) to execute and deliver such documents as Bank deems
necessary to create, perfect and continue the security interests contemplated
hereby; and (v) not to change Owner's chief place of business (or personal
residence, if applicable) or the places where Owner keeps any of the Collateral
or Owner's records concerning the Collateral and Proceeds without first giving
Bank written notice of the address to which Owner is moving same.
(b) Owner agrees with regard to the Collateral and Proceeds, unless Bank
agrees otherwise in writing: (i) to insure Inventory and, where applicable,
Rights to Payment with Bank as loss payee, in form, substance and amounts, under
agreements, against risks and liabilities, and with insurance companies
satisfactory to Bank; (ii) not to use any Inventory for any unlawful purpose or
in any way that would void any insurance required to be carried in connection
therewith; (iii) not to remove Inventory from Owner's premises, except for
deliveries to buyers in the ordinary course of Owner's business and except
Inventory which consists of mobile goods as defined in the California Uniform
Commerical Code, in which case Owner agrees not to remove or permit the removal
of the Inventory from its state of domicile for a period in excess of 30
calendar days; (iv) not to permit any security interest in or lien on the
Collateral or Proceeds, including without limitation, liens arising from the
storage of Inventory, except in favor of Bank; (v) not to sell, hypothecate or
otherwise dispose of, nor permit the transfer by operation of law of, any of the
Collateral or Proceeds or any interest therein, except sales of Inventory to
buyers in the ordinary course of Owners business; (vi) to furnish reports to
Bank of all acquisitions, returns, sales and other dispositions of the Inventory
in such form and detail and at such times as Bank may require; (vii) to permit
Bank to inspect the Collateral at any time; (viii) to keep, in accordance with
generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time; (ix) if requested by Bank, to
receive and use reasonable diligence to collect Rights to Payment and Proceeds,
in trust and as the property of Bank, and to immediately endorse as appropriate
and deliver such Rights to Payment and Proceeds to Bank daily in the exact form
in which they are received together with a collection report in form
satisfactory to Bank; (x) not to commingle Rights to Payment, Proceeds or
collections thereunder with other property; (xi) to give only normal allowances
and credits and to advise Bank thereof immediately in writing if they affect any
Rights to Payment or Proceeds in any material respect; (xii) on demand, to
deliver to Bank returned property resulting from, or payment equal to, such
allowances or credits on any Rights to Payment or Proceeds or to execute such
documents and do such other things as Bank may reasonably request for the
purpose of perfecting, preserving and enforcing its security interest in such
returned property; (xiii) from time to time, when requested by Bank, to prepare
and deliver a schedule of all Collateral and Proceeds subject to this Agreement
and to assign in writing and deliver to Bank all accounts, contracts, leases and
other chattel paper, instruments, documents and other evidences thereof; (xiv)
in the event Bank elects to receive payments of Rights to Payment or Proceeds
hereunder, to pay all expenses incurred by Bank in connection therewith,
including expenses of accounting, correspondence, collection efforts, reporting
to account or contract debtors, filing, recording, record keeping and expenses
incidental thereto; and (xv) to provide any service and do any other acts which
may be necessary to maintain, preserve and protect all Collateral and, as
appropriate and applicable, to keep all Collateral in good and saleable
condition in accordance with the standards and practices adhered to generally by
users and manufacturers of like property, and to keep all Collateral and
Proceeds free and clear of all defenses, rights of offset and counterclaims.
7. POWERS OF BANK. Owner appoints Bank its true attorney in fact to perform
any of the following powers, which are coupled with an interest, are irrevocable
until termination of this Agreement and may be exercised from time to time by
Bank's officers and employees, or any of them, whether or not any of the
Borrowers
THIRD PARTY SECURITY AGREEMENT (06/97), PAGE 2
<PAGE> 26
or Owner is in default: (a) to perform any obligation of Owner hereunder in
Owner's name or otherwise; (b) to give notice to account debtors or others of
Bank's rights in the Collateral and Proceeds, to enforce the same and make
extension agreements with respect thereto; (c) to release persons liable on
Proceeds and to give receipts and acquittances and compromise disputes in
connection therewith; (d) to release security; (e) to resort to security in any
order; (f) to prepare, execute, file, record or deliver notes, assignments,
schedules, designation statements, financing statements, continuation
statements, termination statements, statements of assignment, applications for
registration or like papers to perfect, preserve or release Bank's interest in
the Collateral and Proceeds; (g) to receive, open and read mail addressed to
Owner; (h) to take cash, instruments for the payment of money and other property
to which Bank is entitled; (i) to verify facts concerning the Collateral and
Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a
fictitious name; (j) to endorse, collect, deliver and receive payment under
instruments for the payment of money constituting or relating to Proceeds; (k)
to prepare, adjust, execute, deliver and receive payment under insurance claims,
and to collect and receive payment of and endorse any instrument in payment of
loss or returned premiums or any other insurance refund or return, and to apply
such amounts received by Bank, at Bank's sole option, toward repayment of the
Indebtedness or replacement of the Collateral; (l) to exercise all rights,
powers and remedies which Owner would have, but for this Agreement, with
respect to all Collateral and Proceeds subject hereto; (m) to enter onto Owner's
premises in inspecting the Collateral; (n) to make withdrawals from and to close
deposit accounts or other accounts with any financial institution, wherever
located, into which Proceeds may have been deposited, and to apply funds so
withdrawn to payment of the Indebtedness; (o) to preserve or release the
interest evidenced by chattel paper to which Bank is entitled hereunder and to
endorse and deliver evidences of title incidental thereto; and (p) to do all
acts and things and execute all documents in the name of Owner or otherwise,
deemed by Bank as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder.
8. OWNER'S WAIVERS.
(a) Owner waives any right to require Bank to: (i) proceed against any of
the Borrowers or any other person; (ii) marshal assets or proceed against or
exhaust any security held from any of the Borrowers or any other person; (iii)
give notice of the terms, time and place of any public or private sale of
personal property security held from any of this Borrowers or any other person,
or otherwise comply with the provisions of Section 9504 of the California
Uniform Commercial Code; (iv) take any action or pursue any other remedy in
Bank's power; or (v) make any presentment or demand for performance, or give
any notice of nonperformance, protest, notice of protest or notice of dishonor
hereunder or in connection with any obligations or evidences of indebtedness
held by Bank as security for or which constitute in whole or in part the
Indebtedness secured hereunder, or in connection with the creation of new or
additional Indebtedness.
(b) Owner waives any defense to its obligations hereunder based upon or
arising by reason of: (i) any disability or other defense of any of the
Borrowers or any other person; (ii) the cessation or limitation from any cause
whatsoever, other than payment in full, of the Indebtedness of any of the
Borrowers or any other person; (iii) any lack of authority of any officer,
director, partner, agent or any other person acting or purporting to act on
behalf of any of the Borrowers which is a corporation, partnership or other type
of entity, or any defect in the formation of any of such Borrower; (iv) the
application by any of the Borrowers of the proceeds of any Indebtedness for
purposes other than the purposes represented by Borrowers to, or intended or
understood by, Bank or Owner; (v) any act or omission by Bank which directly or
indirectly results in or aids the discharge of any of the Borrowers or any
portion of the Indebtedness by operation of law or otherwise, or which in any
way impairs or suspends any rights or remedies of Bank against any of the
Borrowers; (vi) any impairment of the value of any interest in any security for
the Indebtedness or any portion thereof, including without limitation, the
failure to obtain or maintain perfection or recordation of any interest in any
such security, the release of any such security without substitution, and/or the
failure to preserve the value of, or to comply with applicable law in disposing
of, any such security; or (vii) any modification of the Indebtedness, in any
form whatsoever, including any modification made after revocation hereof to any
Indebtedness incurred prior to such revocation, and including without limitation
the renewal, extension, acceleration or other change in time for payment of, or
other change in the terms of, the Indebtedness or any portion thereof, including
increase or decrease of the rate of interest thereon. Until all Indebtedness
shall have been paid in full, Owner shall have no right of subrogation, and
Owner waives any right to enforce any remedy which Bank now has or may hereafter
have against any of the Borrowers or any other person, and waives any benefit
of, or any right to participate in, any security now or hereafter held by Bank.
Owner further waives all rights and defenses Owner may have arising out of (A)
any election of remedies by Bank, even though that election of remedies, such as
a non-judical foreclosure with respect to any security for any portion of the
Indebtedness, destroys Owner's rights of subrogation or Owner's rights to
proceed against any of the Borrowers for reimbursement, or (B) any loss of
rights Owner may suffer by reason of any rights, powers or remedies of any of
the Borrowers in connection with any anti-deficiency laws or any other laws
limiting, qualifying or discharging Borrowers' Indebtedness, whether by
operation of Sections 726, 580a or 580d of the Code of Civil Procedure as from
time to time amended, or otherwise, including any rights Owner may have to a
Section 580a fair market value hearing to determine the size of a deficiency
following any trustee's foreclosure sale or other disposition of any real
property security for any portion of the Indebtedness.
9. AUTHORIZATIONS TO BANK. Owner authorizes Bank either before or after
revocation hereof, without notice to or demand on Owner, and without affecting
Owner's liability hereunder, from time to time to: (a) alter, compromise, renew,
extend, accelerate or otherwise change the time for payment of, or otherwise
change the terms of, the Indebtedness or any portion thereof, including increase
or decrease of the rate of interest thereon; (b) take and hold security, other
than the Collateral and Proceeds, for the payment of the Indebtedness or any
portion thereof, and exchange, enforce, waive, subordinate or release the
Collateral and Proceeds, or any part thereof, or any such other security; (c)
apply the Collateral and Proceeds or such other security and direct the order or
manner of sale thereof, including without limitation, a non-judicial sale
permitted by the terms of the controlling security agreement or deed of trust,
as Bank in its discretion may determine; (d) release or substitute any one or
more of the
THIRD PARTY SECURITY AGREEMENT (06/97), PAGE 3
<PAGE> 27
endorsers or guarantors of the Indebtedness, or any portion thereof, or any
other party thereto; and (e) apply payments received by Bank from any of the
Borrower's to any Indebtedness of any of the Borrowers to Bank, in such order as
Bank shall determine in its sole discretion, whether or not such Indebtedness is
covered by this Agreement, and Owner hereby waives any provision of law
regarding application of payments which specifies otherwise. Bank may without
notice assign this Agreement in whole or in part.
10. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Owner
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and upon the failure
of Owner to do so, Bank at its option may pay any of them and shall be the sole
judge of the legality or validity thereof and the amount necessary to discharge
the same. Any such payments made by Bank shall be obligations of Owner to Bank,
due and payable immediately upon demand, together with interest at a rate
determined in accordance with the provisions of Section 15 herein, and shall be
secured by the Collateral and Proceeds, subject to all terms and conditions of
this Agreement.
11. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default, under
(i) any contract or instrument evidencing any Indebtedness, or (ii) any other
agreement between any of the Borrowers and Bank, including without limitation
any loan agreement, relating to or executed in connection with any Indebtedness;
(b) any representation or warranty made by Owner herein shall prove to be
incorrect in any material respect when made; (c) Owner shall fail to observe or
perform any obligation or agreement contained herein; (d) any attachment or like
levy on any property of Owner; and (e) Bank, in good faith, believes any or all
of the Collateral and/or Proceeds to be in danger of misuse, dissipation,
commingling, loss, theft, damage or destruction, or otherwise in jeopardy or
unsatisfactory in character or value.
12. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have
and may exercise without demand any and all rights, powers, privileges and
remedies granted to a secured party upon default under the California Uniform
Commercial Code or otherwise provided by law, including without limitation, the
right to contact all persons obligated to Owner on any Collateral or Proceeds
and to instruct such persons to deliver all Collateral and/or Proceeds directly
to Bank. All rights, powers, privileges and remedies of Bank shall be
cumulative. No delay, failure or discontinuance of Bank in exercising any right,
power, privilege or remedy hereunder shall affect or operate as a waiver of such
right, power, privilege or remedy; nor shall any single or partial exercise of
any such right, power, privilege or remedy preclude, waive or otherwise affect
any other or further exercise thereof or the exercise of any other right, power,
privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank
of any default hereunder, or any such waiver of any provisions or conditions
hereof, must be in writing and shall be effective only to the extent set forth
in writing. It is agreed that public or private sales, for cash or on credit, to
a wholesaler or retailer or investor, or user of property of the types subject
to this Agreement, or public auction, are all commercially reasonable since
differences in the sales prices generally realized in the different kinds of
sales are ordinarily offset by the differences in the costs and credit risks of
such sales.
While an Event of Default exists: (a) Owner will deliver to Bank from time to
time, as requested by Bank, current lists of all Collateral and Proceeds; (b)
Owner will not dispose of any of the Collateral or Proceeds except on terms
approved by Bank; (c) at Bank's request, Owner will assemble and deliver all
Collateral and Proceeds, and books and records pertaining thereto, to Bank at a
reasonably convenient place designated by Bank; and (d) Bank may, without notice
to Owner, enter onto Owner's premises and take possession of the Collateral.
With respect to any sale by Bank of any Collateral subject to this Agreement,
Owner hereby expressly grants to Bank the right to sell such Collateral using
any or all of Owner's trademarks, trade names, trade name rights and/or
proprietary labels or marks.
13. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or any
part of the Indebtedness, Bank may transfer all or any part of the Collateral or
Proceeds and shall be fully discharged thereafter from all liability and
responsibility with respect to any of the foregoing so transferred, and the
transferee shall be vested with all rights and powers of Bank hereunder with
respect to any of the foregoing so transferred; but with respect to any
Collateral or Proceeds not so transferred, Bank shall retain all rights, powers,
privileges and remedies herein given. Any proceeds of any disposition of any of
the Collateral or Proceeds, or any part thereof, may be applied by Bank to the
payment of expenses incurred by Bank in connection with the foregoing, including
reasonable attorneys' fees, and the balance of such proceeds may be applied by
Bank toward the payment of the Indebtedness in such order of application as Bank
may from time to time elect.
14, NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Bank at the address specified in
Section 2 hereof and to Owner at the address of its chief executive office (or
personal residence, if applicable) specified below or to such other address as
any party may designate by written notice to each other party, and shall be
deemed to have been given or made as follows: (a) if personally delivered, upon
delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days
after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent
by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Owner shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in exercising any right, power, privilege or remedy conferred
by this Agreement or in the enforcement thereof, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to Owner or in any way
affecting any of the Collateral or Bank's ability to exercise any of its rights
or remedies with respect thereto. All of the foregoing shall be paid by Owner
with interest from the date of demand until paid in full at a rate per annum
equal to the greater of
THIRD PARTY SECURITY AGREEMENT (06/97), Page 4
<PAGE> 28
ten percent (10%) or the Prime Rate in effect from time to time. The "Prime
Rate" is a base rate that Bank from time to time establishes and which serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto.
16. SUCCESSORS; ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Owner may not
assign or transfer any of its interests or rights hereunder without Bank's prior
written consent. Owner acknowledges that Bank has the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, any Indebtedness of Borrowers to Bank and any obligations with
respect thereto, including this Agreement. In connection therewith, Bank may
disclose all documents and information which Bank now has or hereafter acquires
relating to Owner and/or this Agreement, whether furnished by Borrowers, Owner
or otherwise. Owner further agrees that Bank may disclose such documents and
information to Borrowers.
17. AMENDMENT. This Agreement may be amended or modified only in writing
signed by Bank and Owner.
18. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is but a
single Borrower, then all words used herein in the plural shall be deemed to
have been used in the singular where the context and construction so require;
and when there is more than one Borrower named herein, or when this Agreement is
executed by more than one Owner, the word "Borrowers" and the word "Owner"
respectively shall mean all or any one or more of them as the context requires.
19. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be
held to be prohibited by or invalid under applicable law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of California.
21. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (a) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, this Agreement and each other
document, contract and instrument required hereby or now or hereafter delivered
to Bank in connection herewith (collectively, the "Documents"), or any past,
present or future extensions of credit and other activities, transactions or
obligations of any kind related directly or indirectly to any of the Documents,
including without limitation, any of the foregoing arising in connection with
the exercise of any self-help, ancillary or other remedies pursuant to any of
the Documents. Any party may by summary proceedings bring an action in court to
compel arbitration of a Dispute. Any party who falls or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Documents.
The arbitration shall be conducted at a location in California selected by the
AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable lo the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three
THIRD PARTY SECURITY AGREEMENT (06/97), Page 5
<PAGE> 29
arbitrators must actively participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding anything
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Documents or the subject matter of the Dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Documents or any relationship between the parties.
Owner warrants that its chief executive office (or personal residence, if
applicable) is located at the following address: 36570 BRIGGS ROAD, MURRIETA, CA
92564
Owner warrants that the Collateral (except goods in transit) is located or
domiciled at the following additional addresses: NONE
IN WITNESS WHEREOF, this Agreement has been duly executed as of MAY 15,
1998.
EXOTIC MATERIALS, INC.
By:/s/Glenn Sherman
-------------------------------
GLENN SHERMAN
CHIEF EXECUTIVE OFFICER
THIRD PARTY SECURITY AGREEMENT (06/97), Page 6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND FOR THE
NINE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,335
<SECURITIES> 0
<RECEIVABLES> 6,667
<ALLOWANCES> (230)
<INVENTORY> 7,839
<CURRENT-ASSETS> 18,954
<PP&E> 17,775
<DEPRECIATION> (8,589)
<TOTAL-ASSETS> 29,117
<CURRENT-LIABILITIES> 7,884
<BONDS> 1,660
0
0
<COMMON> 8
<OTHER-SE> (45)
<TOTAL-LIABILITY-AND-EQUITY> 29,117
<SALES> 24,013
<TOTAL-REVENUES> 27,191
<CGS> 17,051
<TOTAL-COSTS> 19,742
<OTHER-EXPENSES> 9,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> (2,469)
<INCOME-TAX> 239
<INCOME-CONTINUING> (2,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,708)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
<FN>
<F1>SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
