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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12777 HIGH BLUFF DRIVE 92130
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 755-0700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the NASDAQ National Market System was $12,895,473 as of
December 1, 1999.*
The number of shares of Common Stock outstanding was 8,629,987 as of
December 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the 2000 Annual
Meeting of Stockholders to be held on or about March 3, 2000 (the "2000 Annual
Meeting") is incorporated herein by reference into Part III of this Report.
Certain exhibits filed with the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24421), as amended, and the Registrant's Registration
Statement on Form S-4 (No. 333-43415), as amended, are incorporated herein by
reference into Part IV of this Report.
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* Excludes 3,421,798 shares of Common Stock held by directors and officers and
certain stockholders whose beneficial ownership exceeds ten percent of the
shares outstanding on December 1, 1999. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is controlled
by or under common control with the Registrant.
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This Annual Report on Form 10-K contains certain forward-looking statements,
and the actual results for Laser Power Corporation ("Laser Power" or the
"Company") may differ materially from those discussed here. Additional
information concerning factors that could cause such a difference can be found
in this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain
Risk Factors Related to the Company's Business" and elsewhere throughout this
Annual Report.
PART I
ITEM 1. BUSINESS
Laser Power designs, manufactures and markets high performance optics for
industrial, medical and military applications. The Company also provides thin
film design and coating services to industrial and military customers. The
Company's laser optics products are sold to laser system OEMs and end users as
original and replacement components in high power CO2 and other lasers. The
Company's infrared optics products are sold primarily to the U.S. government and
its prime contractors for use in night vision and thermal imaging and guidance
systems.
The Company's laser optics customers use high power CO2 lasers in a variety
of industrial processing applications, such as sheet metal cutting, automobile
body welding, surface hardening for engine components and scribing and drilling
delicate ceramic circuits. The Company also sells high performance laser optics
to medical equipment OEMs for lower power CO2 lasers used in certain therapeutic
and cosmetic procedures, including surgery and skin wrinkle removal. In
addition, the Company has developed very low absorption thin film coatings for
laser optics for various government programs.
The Company's infrared optics products are primarily windows, window
assemblies and domes. Windows and window assemblies are utilized in thermal
imaging systems that provide night vision, target acquisition and designation
and low altitude navigation capabilities. These systems are installed in various
platforms, including ground vehicles, helicopters and fixed-wing aircraft. Domes
are utilized as a protective cover and infrared filter for various infrared
guided missiles. Missile sizes range from small, man-portable designs to larger
designs mounted on ground vehicles, helicopters and fixed-wing aircraft.
The Company's core competencies in the manufacture of laser optics and
infrared optics lie in its surface finishing processes and thin film coatings,
and in the growth of a key material used in most of its infrared windows. The
Company believes that its expertise in these areas provides it with a
significant competitive advantage.
RESTRUCTURING PLAN
In August 1999 the Board of Directors approved a strategic restructuring
plan intended to permit the Company to focus on its core business of the
manufacture and sale of high performance laser and infrared optics and thin film
coatings. As part of the restructuring plan, the Board approved the disposition
of the Company's microlaser manufacturing business and the phase-out of contract
research activities not related to the core optics business. The impact of the
plan to dispose or phase-out these operations is reported as discontinued
operations in the Consolidated Financial Statements for all periods presented.
On December 16, 1999, the Company concluded a transaction for the sale of
certain of its microlaser operations to Melles Griot, Inc., a unit of Barlow
Scientific Group Ltd. In exchange for the sale of essentially all of the assets
related to the visible microlaser product line, the Company received an initial
payment of approximately $2.0 million. An additional payment will be made in
January 2000, such that the sum of the two payments will approximate the
aggregate net book value of the transferred assets. In addition, the agreement
provides for royalty payments on sales of certain laser products, from October
1, 2000 until September 30, 2003. The maximum amount of royalty payments is
approximately $2.7 million. Royalty payments will be reported as income from
discontinued operations in the period in which they are earned.
The assets of the Company's inactive 1550nm microlaser product line and the
related contract research operations which will be phased out are stated at
their estimated realizable value on the Consolidated Balance Sheet at September
30, 1999. The Company is actively seeking one or more buyers for these assets.
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INDUSTRY AND MARKET OVERVIEW
INDUSTRIAL AND MEDICAL LASER TECHNOLOGY
The use of lasers in industrial and medical applications continues to grow
and to expand into new areas. High power CO2 lasers are widely used in
industrial applications, such as welding automobile bodies, scribing delicate
ceramic circuits and sheet metal cutting. CO2 lasers offer greater quality,
speed, flexibility and automation than conventional cutting and welding
technologies. Lower power CO2 lasers are used in various medical procedures,
including surgical, dermatology and ophthalmology applications. Surgical laser
procedures reduce blood loss and post-operative pain compared to other
procedures.
The precision optics which collect, form, reflect and transmit the laser beam
are crucial to a laser's function. In gas lasers, the lasing medium is encased
in a tube with optics at either end. These internal optics may direct the beam
from one tube to another, may turn the beam back on itself to further energize
the lasing medium or may allow part of the beam to exit the tube while turning
the rest of the beam back on itself. In addition to the internal optics, a
number of external optics may be used to deliver the beam for its intended
application. These external optics may include mirrors, beam splitters, focusing
lenses and other special function optics
INFRARED SENSOR TECHNOLOGY
Infrared sensors are used in a variety of military and aerospace
applications. Fielded systems range from small, personal use devices such as
range finders and night vision goggles to sophisticated airborne and space-based
imaging and targeting systems. As sensor and signal processing technologies
evolve, infrared-based technology is expected to gain wider acceptance for
commercial applications.
Infrared optics are critical to the performance of infrared sensor systems.
The typical infrared sensor system utilizes an optic, which acts as a window to
the environment external to the sensor package, such as a flat window or a dome,
and one or more internal optics. External thin film coatings and surfaces of
windows and domes degrade through exposure to the outside environment, and where
practical, these optics are periodically refurbished or replaced. Refurbishment
and replacement of damaged windows represents an important component of the
Company's infrared optics business.
LARGE APERTURE OPTICS
The market for thin film design and coating services for large aperture
optics is expected to increase due to increased U.S. government funding for
development of ground, airborne and space based defensive laser weapon systems.
Although the number of fielded systems is likely to be small, design and process
research before and after fielding of these systems is expected to be a
sustainable market.
High performance thin film coating technology is an enabling technology for
extremely high-energy laser systems. For example, space based systems and ground
based systems with space based optical components might not be feasible without
light weight optics which are dependent on very low absorption thin film
coatings.
PRODUCTS AND SERVICES
LASER OPTICS PRODUCTS
The Company produces optics, including total reflectors, output couplers,
beam splitters and lenses, for use in high power industrial, medical, scientific
and military lasers. The Company's expertise in the area of surface finishing
and, in particular, thin film coatings, is critical to producing high
performance laser optics. In general, the performance of an optic is primarily
dependent on the quality of the thin film coating. Thin film coatings include
various reflective coatings for mirrors and transmissive and partially
transmissive coatings for lenses, beam splitters and output couplers. The
Company believes that the high quality of its thin film coatings and its
commitment to customer service enhance its reputation as a supplier of high
power and technically advanced laser optics.
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CO2 LASER OPTICS. Reliable operation of high power CO2 lasers requires high
quality, low absorption optics. The Company supplies substantially all types of
optics used in CO2 lasers and laser systems. Such optics fall broadly into two
categories: transmissive and reflective optics.
Zinc selenide is the substrate material of choice for high power CO2 laser
transmissive optics such as lenses, output couplers and beam splitters because
of its low absorption of laser energy. Generally, zinc selenide optics with low
absorption thin film coatings are able to handle up to three kilowatts of power.
As laser power increases to the multi-kilowatt range, reflective optics replace
transmissive optics in certain applications.
Reflective optics (such as folding mirrors, phase shifting mirrors, beam
bending mirrors and focusing mirrors) utilize a highly reflective substrate,
such as copper or silicon. Silicon optics are fabricated by conventional
polishing processes, while copper optics are usually fabricated by single-point
diamond turning, a process which involves cutting by gem quality diamonds to
create a mirror finish. The Company is a leader in the use of single-point
diamond turning methods to produce both standard optics and those with
complicated surfaces such as aspheres, parabolas and hyperbolas, which are used
with higher power CO2 lasers. The Company's fabrication and thin film coating
technologies have earned Laser Power a reputation as a leading manufacturer of
laser optics.
The Company supplies optics to high power CO2 laser and laser system
manufacturers and to the aftermarket as replacement parts. Because CO2 laser
optics wear or become contaminated, every new laser installed increases the
market for replacement optics. In order to meet this growing aftermarket demand,
the Company provides same day shipment of critical replacement optics for most
high power CO2 lasers.
OTHER LASER OPTICS. In addition to CO2 laser optics, the Company provides
optics for a variety of industrial and military lasers operating at different
wavelengths.
MILITARY PRODUCTS AND SERVICES. The Company has developed thin film coatings
for a variety of optics utilized in ongoing U.S. government programs. The
Company has developed very low absorption thin film coatings for uncooled
optics, which are critical to a space-based laser for defense against long range
ballistic missiles. The Company has also developed thin film coatings for use in
ground based and airborne laser defense systems for use against shorter-range
missiles.
The technology used to produce coatings for optics for these lasers is
derived from technology used by the Company for CO2 laser optics. The Company
believes that participation in these military programs fosters continued
improvement in its optics technology for commercial applications.
During fiscal year 2000, the Company expects to complete construction of a
large aperture optic thin film coating facility. When complete, the facility
will enable the Company to provide coating services for optics over 80 inches in
diameter. The U.S. government has funded construction of the facility.
INFRARED OPTICS PRODUCTS
The Company produces optics for use in infrared systems for night vision
imaging and navigation applications, principally for use by the U.S. government.
These products include monolithic and segmented windows and window assemblies,
focusing optics and missile domes. In addition, the Company provides thin film
design and coating services to customers for military and commercial infrared
applications. Performance of infrared optics is highly dependent on the
durability and optical performance of the thin film coatings applied to the
polished surfaces of the optics. The Company believes that the high quality of
its thin film coatings, along with its in-house capability for growth of
germanium substrates and expertise in high-speed fabrication and polishing
provide it with significant competitive advantages.
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GERMANIUM WINDOWS. The substrate material utilized in optics for a
significant number of infrared systems is germanium. Depending upon the
operating environment, germanium windows may be heated through a metallic grid
applied to the surface of the optic. Windows manufactured by the Company are
utilized in a variety of platforms including the M1 tank and Bradley fighting
vehicle, the AH-64 Apache helicopter, and B-52 and tactical fixed-wing aircraft.
Applications include electronic viewing, night vision, target acquisition and
designation, and low altitude navigation and targeting. The Company supplies
optics during production phases of sensor programs, and provides post-production
repair, refurbishment and replacement services. The Company believes it is the
principal supplier of heated germanium windows for infrared systems utilized by
the U.S. government.
OTHER WINDOWS. The Company also supplies windows fabricated from materials
other than germanium, such as silicon and zinc sulfide. These products are
manufactured utilizing the same fabrication and thin film coating processes as
are germanium windows. Typically, these products are sold in substantially lower
volumes than germanium windows.
MISSILE DOMES. The Company manufactures domes for the U.S. Army's Javelin
missile (a shoulder launched infrared guided anti-tank missile), and is
currently in the development or pre-production phase of other U.S. government
missile programs. Missile domes are mounted on the tip of infrared guided
missiles as a protective cover for the underlying sensor system. These optics
are designed to optimize the performance of the sensor system while
accommodating the size and weight limitations of the missile. The resultant dome
shape is difficult to fabricate in a cost-effective manner utilizing
conventional fabrication techniques. The Company has developed and automated
high-speed fabrication and polishing processes, which it believes, have enabled
it to become a leading supplier of missile domes.
STRATEGY
The Company's strategy is to expand its current precision optics business
through internal growth and industry consolidation, and to expand into related
markets where its technologies and its knowledge of laser and laser system
technologies and applications provide it with a competitive advantage. Key
aspects of the Company's strategy include:
CONTINUE TO GROW HIGH PERFORMANCE CO2 LASER OPTICS BUSINESS
The Company's core competencies in the design and manufacture of high
performance laser optics, including its polishing and diamond turning processes
and thin film coatings, have made Laser Power one of the leading suppliers of
such components, especially for high power CO2 lasers. The Company's strategy is
to continually improve quality and customer service while lowering production
costs. The Company believes it is well positioned to meet more stringent
requirements for optics used in higher power CO2 lasers because of its
proprietary and state-of-the-art technologies.
EXPAND MARKETS FOR HIGH PERFORMANCE OPTICS PRODUCTS
The Company believes that its technologies have applications in markets not
currently served by the Company. The Company plans to use its technology base
developed for CO2 laser optics and crystal polishing and thin film coating to
produce certain optics for neodymium-YAG lasers and visible lasers. The Company
also plans to enter other non- CO2 infrared markets using CO2 coatings.
INCREASE MARGINS ON OPTICS PRODUCTS
The Company has a multifaceted strategy to reduce costs and increase margins
on its optics products. To reduce costs, the Company is consolidating its laser
and infrared optics operations and is increasing the use of automation which
will reduce labor costs and improve yields on certain manufacturing processes.
To increase margins, the Company plans to intensify its sales efforts on higher
margin products and to serve high performance, high margin niches in such
markets as the emerging high power neodymium-YAG laser market.
SUPPLEMENT PRODUCT DEVELOPMENT ACTIVITIES THROUGH CONTRACT FUNDING
The Company will opportunistically secure research contracts that will
enhance and advance its products under development.
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EXPAND CAPABILITIES THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS
Through alliances with other companies, Laser Power has enhanced its high
performance laser optics technologies and broadened its research activities. The
Company will continue to identify and, if possible, acquire technologies or
other companies that complement its current technologies.
SALES AND MARKETING
As of December 1, 1999, Laser Power employed 19 persons in continuing
operations in sales and marketing at sales offices in the United States and
Belgium. The Company promotes its products to OEM and end user customers through
a multi-faceted program which includes trade journal advertising, catalog
distribution, direct mail promotion, field sales presentations, technical
seminars, trade show exhibits and direct telemarketing. The Company sells its
products through its direct sales force in the United States and Belgium and
through its distributors in the rest of the world.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in large part on its
ability to continue to enhance its existing products and manufacturing processes
and to develop new products and processes. As of December 1, 1999, the Company
had 14 employees in continuing operations performing research and development in
the United States and Belgium. The Company spent $2.4 million during fiscal year
1999 on research and development. The sources of such funds included contracts
with customers as well as internal Company funds.
The Company continuously develops proprietary manufacturing processes for
optics fabrication and polishing to lower costs and provide a more flexible
manufacturing environment. In addition, the Company continues to improve thin
film designs and processes under programs funded by the Company and certain of
its customers.
The successful completion of process and product development activities and
the implementation of process changes or transition to manufacture and sale of
any resultant products is dependent on a number of factors. These factors
include availability of capital for investment in process improvements,
determination of demand and appropriate product design, length of development
period, development of appropriate manufacturing processes, product performance
and sales and marketing. There can be no assurance that development of process
improvements or new products will be successfully completed, or that new
products developed by the Company will be commercially available or achieve
market acceptance.
See "Certain Risk Factors Related to the Company's Business."
MANUFACTURING
The Company manufactures high performance optics and provides sophisticated
thin film design and coating services. Some materials are available only from
single suppliers.
The Company manufactures optics at its Temecula, California and Mexico
facilities. Thorium fluoride, zinc selenide, zinc sulfide and germanium are
important to the manufacture of optics. The Company purchases all of its thorium
fluoride for use in its low absorption thin film coating processes from Cerac
Incorporated ("Cerac"), which the Company believes is the sole source for high
quality thorium fluoride. Any interruption or cessation of supply by Cerac would
have a material adverse effect on the Company's business, financial condition
and results of operations.
In the case of zinc selenide and zinc sulfide, critical raw materials in a
significant percentage of the Company's optics products, the Company currently
relies principally on one supplier, the Advanced Materials unit of Rohm and Hass
Company. To date, the Company has not experienced any material difficulties in
the quantity or the quality of the zinc selenide and zinc sulfide delivered. If
any such problem arises in the future, the Company would have to seek an
alternate supplier. However, there can be no assurance that the Company would be
able to secure sufficient inventory of zinc selenide and zinc sulfide to produce
sufficient product to meet its customers' needs. A transition to alternate
arrangements would involve additional costs and delays in production.
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Germanium is mined as a byproduct of zinc mining. Germanium and refined
germanium are available through a limited number of suppliers worldwide. Because
of its status as a byproduct, availability of germanium is linked to the effects
of supply and demand for zinc. Germanium also has other uses such as in solar
panels used in space vehicles and satellites and in certain radar systems.
Changes in demand for and supply of germanium have resulted in significant
fluctuations in price in the past. While the Company attempts to structure its
contracts to protect it from the effects of price increases, there can be no
assurance that future price increases will not materially affect the
profitability of the Company's products which utilize germanium.
The manufacture of optics is capital intensive. Future manufacturing
capacity requirements may require substantial investment in equipment and
facilities. See "Certain Risk Factors Related to the Company's Business."
PATENTS AND PROPRIETARY RIGHTS
In general, the Company's optics products do not use design technology,
which is patentable. The Company has filed a patent application for a thin film
design, which it believes, provides a significant competitive advantage in
certain high power CO2 laser applications. However, there can be no assurance
that a patent will be issued.
The Company has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. The Company's
strategy is to continue to develop a significant portion of its proprietary
technology pursuant to funding received from development contracts. There can be
no assurance that the Company will be able to continue to obtain funding for the
development of its proprietary technology, or that, if received, the Company
will obtain rights to such technology sufficient to permit the Company to
develop and market new products or to prevent third parties from using such
technology to compete with the Company.
In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by Laser Power could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the high technology and physics
fields. There can be no assurance that such publication would not adversely
affect the Company's ability to obtain patent protection for certain
technologies in which it may have a commercial interest.
COMPETITION
The industries in which the Company sells its products are highly
competitive. Laser Power's competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service, the quality of its manufacturing processes, the compatibility
of its products with existing laser and infrared systems and Laser Power's
ability to participate in the growth of emerging technologies. In the laser
optics market, Laser Power primarily competes with II-VI, Inc. ("II-VI"),
Coherent, Inc. ("Coherent") and Sumitomo Electric Industries, Ltd. II-VI
produces its own supply of zinc selenide. The Company uses zinc selenide as the
substrate for 40% to 50% of the CO2 laser optics sold by the Company and
purchases this raw material from the Advanced Materials unit of Rohm and Haas
Corporation. In the infrared optics market, the Company primarily competes with
in-house optical fabrication and thin film coating capabilities of major prime
contractors, such as Raytheon Corporation.
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ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company uses or generates certain hazardous substances in its research
and manufacturing facilities. The Company believes that its handling and
disposal of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each operating
location. The Company invests substantially in proper protective equipment,
process controls and specialized training to minimize risks to employees,
surrounding communities and the environment due to the presence and handling of
such hazardous substances. The Company conducts monthly workplace monitoring
regarding such substances. When exposure problems or potential problems have
been indicated, corrective actions have been implemented and re-occurrence has
been minimal or non-existent. The Company does not carry environmental
impairment insurance.
The Company uses a low-level radioactive material called thorium fluoride to
manufacture low absorption thin film coatings. The use, storage and disposal of
this material is governed by the State of California which last inspected and
licensed the Company's facilities and procedures in February 1996. All thorium
fluoride-bearing by-products are collected and disposed of at an appropriately
licensed facility.
The generation, use, collection, storage and disposal of all other hazardous
by-products resulting from the Company's manufacturing of its products and
research and development of new products, such as suspended solids containing
heavy metals or airborne particulates, are believed by the Company to be in
material compliance with local, state and federal regulations. The Company
believes that it possesses all of the permits and licenses required for
operation. Although the Company is not aware of any material environmental,
safety and health problems in its properties or processes, there can be no
assurance that problems will not develop in the future which would have a
material adverse effect on the Company.
BACKLOG
With the exception of contracts with the U.S. government and its prime
contractors, most customer orders for optics are from stock or for deliveries
within one to two months. Backlog of optics was $13.0 million at September 30,
1999, consisting primarily of backlog for infrared optics. Backlog of research
contracts fluctuates based on the timing of contract awards and was $700,000 at
September 30, 1999.
EMPLOYEES
As of December 1, 1999, in continuing operations the Company had 207 full
time and 3 part time employees in the United States and 37 full time employees
in its foreign subsidiaries, and 27 full time employees in discontinued
operations in the United States. Of the Company's employees in continuing
operations, in the United States 14 were engaged in marketing, sales and related
customer-support services, 12 in research and development and 184 in operations,
administration and finance. None of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Dick Sharman....................................... 65 Chief Executive Officer and Director
Paul P. Wickman.................................... 50 Senior Vice President and Chief Financial Officer
Douglas H. Tanimoto, Ph.D.......................... 59 President, Research Division and Director
</TABLE>
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DICK SHARMAN has served as Chief Executive Officer of the Company since
December 1998 and as a director of the Company since February 1998. Mr. Sharman
has served as Chairman of the Board, President and Chief Executive Officer of
EMI from 1993 until February 1998 and as Chairman of the Board of its wholly
owned subsidiary, Exotic Materials, Inc., from 1988 until February 1998. From
1988 until June 1996, and again from June 1997 until November 1997, Mr. Sharman
served as President and Chief Executive Officer of Exotic. Mr. Sharman received
an A.A. in Electronics from Orange Coast College.
PAUL P. WICKMAN has served as Senior Vice President and Chief Financial
Officer of the Company since September 1992. From 1982 to 1992, he served as
Group Vice President, Finance, and Controller of The Titan Corporation, a
diversified high technology company. Mr. Wickman received a B.S. in Accounting
from San Diego State University and is a Certified Public Accountant.
DOUGLAS H. TANIMOTO, PH.D. has served as President of the Research Division
since 1988 and has served as a director of the Company since 1984. Dr. Tanimoto
intends to retire on or before the 2000 Annual Meeting.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to those risks identified elsewhere in this Annual Report on
Form 10-K, the Company's business and results of operations are subject to other
risks, including the following risk factors:
POSSIBLE CHANGE OF CONTROL
In September 1999, II-VI Inc., one of the Company's principal competitors,
publicly announced its willingness to buy the outstanding capital stock of the
Company. The Company's Board of Directors, which had previously been told
privately of such proposal, rejected the public proposal on the grounds that the
proposal did not adequately reflect the value of the Company. The Board of
Directors also re-affirmed its commitment to maximizing stockholder value. The
Board subsequently retained the services of Cruttenden Roth & Company as its
financial advisor and directed Cruttenden Roth to evaluate the proposal by II-VI
and to advise the Board on the proposal and other strategic alternatives that
may be available to the Company. The Board continues to evaluate such
alternatives. II-VI, which as of December 1, 1999 owns approximately 14.6% of
the outstanding voting stock of the Company, has informed the Company that it
intends to propose its own slate of directors for election at the Company's next
annual meeting of stockholders. If a majority of directors elected at the next
annual meeting are nominees of II-VI, II-VI will be able to control the Company
through the newly elected Board of Directors. A II-VI-controlled Board of
Directors could then cause the Company to be sold to II-VI on terms and at a
price that may not maximize stockholder value. There can be no assurance that
the nominees for election to the Board of Directors proposed by the current
Board will be elected directors at the next annual meeting or that if control of
the Company passes to a II-VI-controlled Board, the Company will be sold on
terms consistent with those published in II-VI's proposal. In addition, due to
the time spent and effort expended by the Company's management in addressing the
proposal by II-VI and considering strategic alternatives, the Company's officers
have had less time and effort to conduct the business of the Company. Other
employees of the Company have expressed some concern over the possible change in
control of the Company and how it may effect their personal employment
situations. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred operating losses in the past and, at September 30,
1999, had an accumulated deficit of $9.6 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.
9
<PAGE>
COMPETITION
In each of the markets that the Company serves, the Company faces
competition from established companies, many of which have substantially greater
financial, engineering, research, development, manufacturing, sales, marketing,
service and support resources, including greater name recognition, a larger
installed base of products and long-standing customer relationships. In
addition, some of the Company's competitors are customers of the Company, which
might have the ability to perform or obtain the capability to perform projects,
which are presently being performed for them by the Company. There can be no
assurance that the Company will be able to maintain the Company's existing
contracts or obtain additional contracts for projects at favorable rates, 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.
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
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.
FUTURE CAPITAL REQUIREMENTS
Although the Company believes that its existing cash balances 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.
FLUCTUATION IN QUARTERLY PERFORMANCE
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures. If significant variations were to
occur between forecasts and actual orders, the Company may not be able to reduce
its expenses proportionately and in a timely manner, and operating results could
be adversely affected. 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.
10
<PAGE>
EXPOSURE TO GOVERNMENT MARKETS
Product sales to customers in the defense industry accounted for 54% of
product sales from continuing operations in the fiscal year ended September 30,
1999. These customers in turn generally contract with a governmental entity,
typically the U.S. government. In addition, essentially all of the Company's
contract research and development revenues were derived from contracts with
customers in the defense industry. 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, could have a material adverse effect on the Company's business,
financial condition and operating results.
EXPOSURE TO MAJOR CUSTOMER
Approximately 31% of the Company's sales from continuing operations in the
fiscal year ended September 30, 1999, were derived from net sales to Lockheed
Martin Corporation. The loss of this major 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.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 25% of the Company's total
revenues from continuing operations in the fiscal year ended ended September 30,
1999 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 economic instability in foreign markets,
difficulties in staffing and management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations and potentially adverse tax consequences. Since
substantially all of the Company's foreign sales are denominated in U.S.
dollars, the Company's products may also become less price competitive in
countries in which local currencies decline in value relative to the U.S.
dollar. The Company's business and operating results may also be materially and
adversely affected by lower sales levels, which typically occur during the
summer months and the calendar year end in Europe and certain other overseas
markets. The sales of many of the Company's OEM customers are dependent on
international sales, which increases the Company's exposure to the risks
associated with international sales.
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 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 1997, there had been no public market for the Common Stock, and there
can be no assurance that an active public market for the Common Stock will
develop or be sustained. The trading price of the Common Stock could 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
Company or its competitors, general conditions in the optics and laser
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 Common Stock.
11
<PAGE>
ITEM 2. PROPERTIES
The Company leases a facility of approximately 44,000 square feet in San
Diego, California, which is used for its headquarters and for certain of its
discontinued operations. This facility is leased through December 31, 2001 and
may be purchased pursuant to an option that may be exercised at the expiration
of the lease with a purchase price equal to the prevailing market value of the
property. As of December 1, 1999 approximately 73% of this facility has been
subleased to unrelated parties under terms which provide for rental periods
expiring concurrently with the Company's master lease, and at rates which in the
aggregate are less than the total cost to the Company. The estimated loss was
expensed in the fiscal year ended September 30, 1998. The Company also leases a
facility in Temecula, California of approximately 60,000 square feet under a
lease agreement that provides for an initial term expiring in June 2007. In
addition to the initial lease term, the lease provides for two additional
five-year terms that are exercisable at the Company's option. The Company has an
option to purchase the Temecula facility at its fair market value at the time
the option is exercised. The Company also leases facilities in Tijuana, Mexico
and Gent, Belgium, consisting of approximately 4,600 and 3,900 square feet,
respectively. The lease on the Mexico facility expires in September 2000, and
the lease on the Belgium facility expires in December 2000. The Company believes
that its leased properties are adequately covered by insurance. The Company
believes that its facilities are adequate for its current and projected needs
and that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
In October 1999, the Company and certain directors of the Company were sued
by Kathy and George Roelofsen, Jonathan Bryrum, and Cheryl Roelofsen, in the
Delaware Chancery Court (ROELOFSEN ET AL. VS. KLIMASEWSKI ET AL, Del. Ch. C.A.
No. 17450NC). The complaint, which purports to be a class action, asserts claims
for purported breaches of fiduciary duty in connection with the Company's
rejection of an acquisition proposal by II-VI. The Company and a number of the
individual defendants have moved to dismiss the complaint. The Company believes
that the claims are without merit and intends to defend itself vigorously.
However, there can be no assurance that the Company will prevail in these
proceedings or that an outcome unfavorable to the Company in these proceedings
will not materially adversely affect the Company's business, financial condition
or results of operations. The Company had previously entered into
indemnification contracts with each of its officers and directors, including the
directors who were named defendants in the complaint. As a result, the Company
is paying the expenses of the directors in defending themselves in this matter
subject to reimbursement under its insurance policies. Subject to certain
limited exceptions, the Company will reimburse the directors for any monetary
damages assessed against the individual directors that are not covered by the
Company's insurance policies. In addition, the conduct of litigation can be
time-consuming and costly. There can be no assurance that these factors will not
materially adversely affect the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended September 30, 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock was first traded on June 19, 1997 on the
Nasdaq National Market under the symbol LPWR. The following table sets forth,
for the periods indicated, the high and low sales prices per share of the Common
Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1997 ---- ---
Fourth Quarter (beginning June 19, 1997).......................................... 7 3/8 5 1/2
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter..................................................................... 9 3/4 5 3/8
Second Quarter.................................................................... 8 7/8 4 5/16
Third Quarter..................................................................... 5 5/32 3 1/8
Fourth Quarter.................................................................... 4 1/2 1 1/8
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter..................................................................... 2 5/8 1
Second Quarter.................................................................... 1 17/32 1/2
Third Quarter..................................................................... 1 1/16 17/32
Fourth Quarter.................................................................... 3 1/8 3/4
</TABLE>
The Company had approximately 309 stockholders of record of its Common Stock
as of September 30, 1999. This number does not reflect the number of beneficial
holders of the Company's Common Stock, which the Company believes to be in
excess of 800 holders. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company's credit agreements restrict the payment of cash dividends.
(b) 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 through September 30, 1999 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.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED SEPTEMBER 30,(2)
------------------------------------ ---------------------------
1995 1996 1997 1998 1999
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Product sales.............. $ 19,136 $ 25,764 $ 29,118 $ 30,035 $ 31,278
Contract research and
development.............. 460 179 622 81 2,732
--------- --------- ---------- --------- ---------
Total revenues......... 19,596 25,943 29,740 30,116 34,010
Cost of revenues:
Product sales.............. 13,466 17,356 19,373 22,177 23,059
Contract research and
development.............. 270 117 418 239 1,820
--------- --------- ---------- --------- ---------
Total cost of revenues. 13,736 17,473 19,791 22,416 24,879
Gross profit:
Product sales................. 5,670 8,408 9,745 7,858 8,219
Contract research and
development 190 62 204 (158) 912
--------- --------- ---------- --------- ---------
Total gross profit..... 5,860 8,470 9,949 7,700 9,131
Income (loss) from continuing
operations.................. 94 1,761 2,780 (3,862) 1,639
Loss from discontinued
operations.................. (1,931) (1,708) (505) (3,169) (3,126)
Net income (loss) before
extraordinary items......... $ (1,837) $ 54 $ 2,275 $ (7,032) $ (1,487)
Net income (loss)............. $ (1,837) $ 173 $ 2,275 $ (7,032) $ (1,487)
Diluted earnings (loss)
per share(1)................ $ (.38) $ .03 $ .32 $ (.85) $ (.18)
Average common shares
outstanding - Diluted(1).... 4,790 6,573 7,196 8,263 8,454
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1998 1999
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................. $ 834 $ 1,508 $ 8,253 $ 2,412 $ 860
Working capital............................ 4,819 6,647 15,202 5,304 5,928
Total assets............................... 14,224 17,159 28,119 24,618 21,908
Long-term debt,
net of current portion.................. 2,922 2,640 3,230 287 3,083
Subordinated convertible debentures........ 1,660 1,660 1,660 1,660 1,660
Total stockholders' equity................. 5,809 7,922 17,682 11,233 9,925
- ------------
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share and the number of shares
used in the per share calculation.
(2) See the Notes to Consolidated Financial Statements regarding the change in
fiscal year end and the results of operations for the one-month ended
September 30, 1997.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Laser Power's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the sections
entitled "Certain Risk Factors Related to the Company's Business" as well as
those discussed elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER
30, 1998
REVENUES
For the fiscal year ended September 30, 1999, product sales were $31.3
million compared to $30.0 million for fiscal 1998, an increase of $1.3 million
or 4%. Contract research and development revenues were $2.7 million for fiscal
1999 compared to $81,000 for fiscal 1998, an increase of $2.6 million. The
increase in product sales was due primarily to increased shipments of infrared
optics on long-term production contracts, partially offset by reduced shipments
of laser optics. Laser optics orders decreased due to delivery delays resulting
from relocation of the laser optic product line to the Company's Temecula,
California facility, and increased competition. The increase in contract
research and development revenues was due to a significant subcontract to design
and construct a large aperture optic thin film coating facility at the Temecula
location, for which there were no revenues in fiscal 1998.
The Company's ability to increase product sales for fiscal 2000 is dependent
on successful consolidation of optics operations, increased manufacturing
capacity for anticipated customer requirements for infrared optics, and recovery
of laser optics market share. Contract research and development revenues are
expected to decrease due to a shift in focus from facility construction to thin
film coating process development.
GROSS PROFIT
Gross profit on product sales was $8.2 million in fiscal 1999 compared to
$7.9 million in fiscal 1999, an increase of $300,000 or 4%. Gross profit on
research and development revenues was $912,000 in fiscal 1999 compared to a
gross loss of $158,000 in fiscal 1998. Gross margin on product sales was 26% in
fiscal 1999 and fiscal 1998. Increased gross margins due to a product mix shift
to infrared optics was offset by the negative impact on gross margin of laser
optic manufacturing inefficiencies related to the relocation to Temecula. Gross
margin on contract research and development revenues was 33% in fiscal 1999.
Losses on fixed price contracts experienced in fiscal 1998 did not recur in
fiscal 1999.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSE
Internal research and development expense was $620,000 in fiscal 1999
compared to $870,000 in fiscal 1998, a decrease of $250,000 or 29%. The decrease
was due to a change in focus in development activities from new product
development to process improvement, which is primarily accounted for in cost of
sales. As a percentage of sales, the Company does not expect internal research
and development expense to increase significantly in the near term. In the long
term, increases and decreases as a percentage of sales are less predictable and
depend on a number of factors, including the Company's ability to obtain
contract funding for development of key technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense was $6.5 million in fiscal 1999
and fiscal 1998. A reduction in corporate administrative expense was offset by
an increase in operating unit selling and administrative expenses. The Company
anticipates that these expenses will continue to increase to enable the sales
and marketing activities and information systems infrastructure necessary to
support the Company's long-term growth objectives. However, as a percentage of
sales, these expenses are expected to remain constant or increase moderately.
15
<PAGE>
INTEREST EXPENSE
Net interest expense was $342,000 in fiscal 1999 compared to $187,000 in
fiscal 1998, an increase of $155,000 or 83%. The increase was due primarily to
higher average borrowings during fiscal 1999 resulting from capital and other
expenditures related to consolidation of optics operations and use of cash to
fund discontinued operations. Future increase or decrease in interest expense
will depend in part on the time required to dispose of discontinued operations
and the timing of proceeds from disposal.
INCOME TAXES
Income taxes were $11,000 in fiscal 1999 compared to $249,000 in fiscal
1998, a decrease of $238,000 or 96%. The tax provision in 1998 was due to
taxable income of EMI for the period prior to the merger of EMI and the Company.
The Company has substantial federal and state tax operating loss carryforwards
available for future periods. The availability of these carryforwards may be
limited by the application of rules relating to a change in control as a result
of the merger with EMI and the completion of the Company's initial public
offering of Common Stock in August 1997.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1997
REVENUES
For the fiscal year ended September 30, 1998, product sales were $30.0
million compared to $29.1 million for fiscal 1997, an increase of $.9 million or
3%. Contract research and development revenues were $81,000 for fiscal 1998
compared to $623,000 for fiscal 1997, a decrease of $542,000 or 87%. The
increase in product sales was due primarily to shipments of infrared optics on
long-term production contracts. The decrease in contract research and
development revenues was primarily due to a reduction in commercial laser and
optics technology development contracts.
GROSS PROFIT
Gross profit on product sales was $7.9 million in fiscal 1998 compared to
$9.7 million in fiscal 1997, a decrease of $1.8 million or 19%. Gross loss on
research and development revenues was $158,000 in fiscal 1998 compared to a
gross profit of $204,000 in fiscal 1997, a decrease of $.4 million. Gross margin
on product sales was 26% in fiscal 1998 compared to 33% in fiscal 1997. The
decrease in gross margin was primarily due to manufacturing inefficiencies and
reduced selling prices in the laser optics product line. A gross loss was
experienced on contract research and development revenues in fiscal 1998 due to
costs incurred to complete a fixed price development contract.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSE
Internal research and development expense was $870,000 in fiscal 1998 and
$916,000 in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense was $6.5 million in fiscal 1998
compared to $5.8 million in fiscal 1997, an increase of $.7 million or 12%. The
increase was due to the increased expense of being a publicly held company after
the Company's IPO in June 1997.
INTEREST EXPENSE
Net interest expense was $187,000 in fiscal 1998 compared to $254,000 in
fiscal 1997, a decrease of $68,000 or 27%. The decrease was due primarily to
income from investment of the net proceeds of the Company's initial public
offering, partially offset by increased borrowings for capital
investments.
16
<PAGE>
INCOME TAXES
Income taxes were $249,000 in fiscal 1998 compared to $185,000 in fiscal
1997, an increase of $64,000 or 35%. The increase was due to increased taxable
income of EMI prior to its merger with the Company. The Company's effective tax
rate in fiscal 1997 was reduced substantially by the utilization of federal and
state tax net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its initial public offering in August 1997, raising
approximately $8.1 million, net of offering costs. Prior to the public offering,
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, from issuance of subordinated debentures
and capital equipment leasing and bank debt.
In November 1999, the Company entered into a credit agreement with a unit of
Wells Fargo Bank. The new credit agreement provides for a $4 million working
capital line of credit, subject to a borrowing base, and a $1.95 million term
loan to be amortized over 5 years. The Company utilized the proceeds of the term
loan and an initial draw on the working capital line to retire its debt to Wells
Fargo Bank under a prior credit agreement. The new credit agreement also
provides for a capital equipment financing facility, and for a reduction in
interest rates in the event that the net proceeds of the sale of its
discontinued operations exceeds $2,000,000. The credit agreement expires in
November 2002. The amount due under the working capital line is classified as
long-term debt in the Consolidated Balance Sheet at September 30, 1999, and is
secured by substantially all of the assets of the Company.
Cash provided by operating activities of continuing operations was $2.7
million in fiscal 1999 compared to cash used of $454,000 in fiscal 1998 and cash
provided of $2.8 million in 1997. The primary reasons for the use of cash in
1998 were expenses related to the merger with EMI and subsequent integration
activities, and the restriction of $1 million in cash in connection with renewal
of a bank credit agreement. The Company's new credit agreement does not provide
for a restriction on cash.
Cash used in investing activities of continuing operations was $2.2 million
in fiscal 1999 compared to $2.9 million and $3.0 million in fiscal 1998 and
1997, respectively. The decrease in 1999 is due to reduced requirements for
plant expansion and process automation investments. The Company expects capital
equipment investment to be lower in the near term.
Cash used in financing activities of continuing operations was $391,000 in
fiscal 1999 compared to cash provided of $1.9 million and $8.6 million for
fiscal 1998 and 1997, respectively. Cash usage in 1999 was primarily the net
reduction of debt. For fiscal 1998, the primary sources of financing were bank
borrowings and exercise of stock options. For fiscal 1997, the primary source of
financing was the public offering. The Company had $1.7 million outstanding on
its line of credit under its new credit agreement at December 1, 1999.
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 last
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 the Year 2000 issue will not
impact its operations. The Company does not believe that it has an exposure to
the Year 2000 issue with respect to its own products. As of December 1, 1999,
the Company has determined that all of its 215 critical systems are Year 2000
ready. The Company also has contacted critical suppliers and customers to
determine the status of their Year 2000 readiness programs. The Company has
requested that each critical supplier and customer provide information with
respect to their efforts to address the Year 2000 issue. Based primarily on
reliance on representations and certifications provided by these vendors and
customers, the Company has not identified any material customer or vendor
exposure to the Y2K issue.
17
<PAGE>
To date, the Company's expenditures on such corrective actions and surveys
have not been material and the Company does not expect to incur material costs
in the future related to addressing the Year 2000 issue. The Company does not
have the financial resources to maintain higher than normal levels of inventory
and to take other actions to insulate itself from disruption to its suppliers
and customers caused by their failure to achieve Year 2000 compliance. Although
the Company does not believe that it has an exposure to the Year 2000 issue with
respect to its own products, there can be no assurance that failure of software
upgrades and fixes provided to it by third parties for microprocessor software
which supports critical operations, or that failure 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures pursuant to item 7A. are not material
and are therefore not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2),
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors of the
Company is incorporated by reference to Registrant's Definitive Proxy Statement
to be filed with the Commission in connection with the 2000 Annual Meeting (the
"Proxy Statement") under the headings "Nominees" and "Directors." The
information required by this section with respect to Executive Officers is set
forth under Part I, Item 1, "Business--Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements:
The consolidated financial statements required by this item are submitted in
a separate section beginning on page 21 of this Annual Report on Form 10-K.
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... 22
Consolidated Balance Sheets at September 30, 1999 and September 30, 1998............ 23
Consolidated Statements of Operations for the years ended
September 30, 1999, September 30, 1998 and August 31, 1997
and the one month ended September 30, 1997....................................... 24
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, September 30, 1998 and August 31, 1997
and the one month ended September 30, 1997....................................... 25
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, September 30, 1998 and August 31, 1997
and the one month ended September 30, 1997....................................... 26
Notes to Consolidated Financial Statements.......................................... 27
</TABLE>
(2) All schedules have been omitted because they are not applicable or
required, or the information required to be set forth therein is
included in the Financial Statements or notes thereto.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended September 30, 1999.
(c) Exhibits
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- -------- ------ -----------
(7) 2.1 Asset Purchase Agreement dated December 16, 1999
between Registrant and Melles Griot, Inc.
(1) 3.1 Registrant's Amended and Restated Certificate of
Incorporation
(6) 3.2 Registrant's Amended and Restated Bylaws
(1) 4.1 Reference is made to Exhibits 3.1 and 3.2
(1) 4.2 Form of Common Stock Certificate of Registrant
(6) 4.3 Rights Agreement dated as of October 15, 1999 between
Laser Power Corporation and American Securities
Transfer & Trust, Inc.
(6) 4.4 Registrant's Certificate of Designation of Series A
Junior Participating Preferred Stock
(6) 4.5 Form of Rights Certificate
(1) 10.1 Form of Indemnity Agreement entered into between
Registrant and its directors and executive officers
(1)(3) 10.2 Registrant's Second Amended and Restated 1981 Stock
Option Plan (the "1981 Plan")
(1) 10.3 Incentive Stock Option Agreement Under Registrant's
1981 Plan
(1)(3) 10.4 Registrant's 1993 Stock Option Plan (the "1993 Plan")
(1) 10.5 Form of Incentive Stock Option Agreement under the
1993 Plan
(1) 10.6 Form of Nonstatutory Stock Option Agreement under the
1993 Plan
(1)(3) 10.7 Registrant's 1997 Equity Incentive Plan (the "1997
Plan")
(1) 10.8 Form of Incentive Stock Option Agreement under the
1997 Plan
(1) 10.9 Form of Nonstatutory Stock Option Agreement under the
1997 Plan
(1)(3) 10.10 Registrant's Employee Stock Purchase Plan
(1) 10.11 Form of Warrant issued by Registrant in favor of
certain directors of Registrant and attached schedule
19
<PAGE>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- -------- ------ -----------
(1)(2) 10.12 Cooperative Development and License Agreement between
Proxima Corporation and Registrant dated January 11,
1994
(1) 10.13 Registration Rights Agreement between Registrant,
Union Miniere Inc. and Proxima Corporation dated June
9, 1997
(1)(2) 10.14 Assignment Agreement between Registrant and ATx
Telecom Systems, Inc. dated September 30, 1996
(1)(3) 10.15 Form of Employment Agreement and attached schedule
(1) 10.16 Lease dated August 30, 1984 between the Registrant
and Highlands Park Partnership and amendments thereto
(4) 10.17 Building Lease dated October 25, 1991, as amended,
between Exotic Materials, Inc. and Reisung
Enterprises, Inc.
(4)(3) 10.18 Employment Agreement between Exotic Materials, Inc.
and Dick Sharman dated December 5, 1997.
(4)(3) 10.19 Employment Agreement between Exotic Materials, Inc.
and Robert N. Haro dated December 5, 1997.
(5) 10.20 Credit Agreement dated February 1, 1999 between the
Company and Wells Fargo Bank and related promissory
notes
10.21 Credit Agreement dated November 24, 1999 between the
Company and Wells Fargo Business Credit and related
promissory notes
(1) 21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney. Reference is made to page 39
27.1 Financial Data Schedule
- ------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
SB-2 (No. 333-24421) or amendments thereto and incorporated herein by
reference.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933, as amended, and Rule 406
thereunder respecting Confidential Treatment dated June 12, 1997.
(3) Indicates management or compensatory plan or arrangement required to be
identified pursuant to item 14(a)(3).
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-43415) or amendments thereto and incorporated herein by
reference.
(5) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
quarter ending March 28, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's current report on Form 8-K on October
19, 1999 and incorporated herein by reference.
(7) The attachments listed in the index to the Asset Purchase Agreement were
omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant hereby
undertakes to furnish supplementally a copy of any omitted attachment to
the Commission upon request.
20
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................... 22
Consolidated Balance Sheets at September 30, 1999 and September 30, 1998................ 23
Consolidated Statements of Operations for the years ended September 30, 1999,
September 30, 1998 and August 31, 1997 and the one month ended September 30, 1997....... 24
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999,
September 30, 1998 and August 31, 1997 and the one month ended September 30, 1997....... 25
Consolidated Statements of Cash Flows for the years ended September 30, 1999,
September 30, 1998 and August 31, 1997 and the one month ended September 30, 1997....... 26
Notes to Consolidated Financial Statements.............................................. 27
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Laser Power Corporation
We have audited the accompanying consolidated balance sheets of Laser Power
Corporation at September 30, 1999 and September 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years ended September 30, 1999, September 30, 1998 and August 31,
1997 and the one month ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Laser Power
Corporation at September 30, 1999 and September 30, 1998, and the consolidated
results of its operations and its cash flows for the years ended September 30,
1999, September 30, 1998 and August 31, 1997 and the one month ended September
30, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
ERNST & YOUNG LLP
San Diego, California
December 4, 1999
22
<PAGE>
LASER POWER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 859,927 $ 2,412,327
Restricted cash..................................................... - 1,000,000
Accounts receivable, net............................................ 4,488,460 4,760,828
Inventories, net.................................................... 6,499,710 6,134,525
Other current assets................................................ 329,709 521,254
Net current assets of discontinued operations....................... 570,027 880,610
------------ ------------
Total current assets............................................ 12,747,833 15,709,544
Property and equipment, net............................................. 7,094,233 6,096,847
Intangibles and other assets, net....................................... 418,907 442,354
Net non-current assets of discontinued operations....................... 1,647,208 2,369,468
------------ ------------
Total assets.................................................... $21,908,181 $24,618,213
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 2,023,763 $ 1,939,636
Accrued compensation and related expenses........................... 1,529,649 1,106,641
Other current liabilities........................................... 1,732,680 2,931,470
Allowance for operating losses of discontinued operations........... 450,000 -
Current portion of long-term debt................................... 1,083,778 4,427,811
------------ ------------
Total current liabilities....................................... 6,819,870 10,405,558
Long-term liabilities................................................... 420,120 1,032,472
Long-term debt.......................................................... 3,082,809 286,838
Subordinated convertible debentures..................................... 1,660,000 1,660,000
Stockholders' equity:
Common stock, par value $.001:
Authorized -- 15,000,000 shares
Issued and outstanding 8,579,987 shares in 1999, and 8,398,455
shares in 1998................................................ 8,580 8,398
Additional paid-in capital.......................................... 19,573,531 19,416,298
Accumulated deficit................................................. (9,638,986) (8,152,304)
Accumulated other comprehensive loss................................ (17,743) (39,047)
------------ ------------
Total stockholders' equity.......................................... 9,925,382 11,233,345
------------ ------------
Total liabilities and stockholders' equity...................... $21,908,181 $24,618,213
============ ============
See accompanying notes.
</TABLE>
23
<PAGE>
<TABLE>
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
ONE MONTH
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, AUGUST 31,
1999 1998 1997 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product sales.............................. $ 31,278,196 $ 30,034,601 $ 2,531,442 $ 29,117,915
Contract research and development.......... 2,731,981 81,274 36,240 622,514
-------------- -------------- -------------- --------------
Total revenues.......................... 34,010,177 30,115,875 2,567,682 29,740,429
Costs and expenses:
Cost of product sales...................... 23,059,310 22,176,606 1,517,015 19,372,937
Contract research and development.......... 1,820,026 239,402 36,488 418,076
Internal research and development......... 619,752 869,518 48,561 915,926
Selling, general and administrative........ 6,519,791 6,479,216 725,298 5,814,390
Merger and integration..................... - 3,778,000 - -
-------------- -------------- -------------- --------------
Total costs and expenses................. 32,018,879 33,542,742 2,327,362 26,521,329
-------------- -------------- -------------- --------------
Income (loss) from operations................. 1,991,298 (3,426,867) 240,320 3,219,100
Interest expense, net...................... 341,798 186,893 5,962 254,077
-------------- -------------- -------------- --------------
Income (loss) before income taxes............. 1,649,500 (3,613,760) 234,358 2,965,023
Income taxes............................... 10,547 248,642 129,800 184,758
-------------- -------------- -------------- --------------
Income (loss) continuing operations........... 1,638,953 (3,862,402) 104,558 2,780,265
Loss from discontinued operations............. (2,475,635) (3,169,210) (178,116) (505,049)
Loss on disposal, including estimated
loss during disposal period of $450,000... (650,000) - - -
-------------- -------------- -------------- --------------
Net income (loss)............................. $ (1,486,682) $ (7,031,612) $ (73,558) $ 2,275,216
============== ============== ============== ==============
Basic earnings (loss) per share:
Income (loss) from continuing operations.... $ .19 $ (.47) $ .01 $ .50
Loss from discontinued operations........... (.37) (.38) (.02) (.09)
-------------- -------------- -------------- --------------
Net income (loss)......................... $ (.18) $ (.85) $ (.01) $ .41
============== ============== ============== ==============
Diluted earnings (loss) per share:
Income (loss) from continuing operations.... $ .19 $ (.47) $ .01 $ .39
Loss from discontinued operations........... (.37) (.38) (.02) (.07)
-------------- -------------- -------------- --------------
Net income (loss)......................... $ (.18) $ (.85) $ (.01) $ .32
============== ============== ============== ==============
Average common shares outstanding:
Basic....................................... 8,454,000 8,263,000 8,099,000 5,592,000
============== ============== ============== ==============
Diluted..................................... 8,454,000 8,263,000 8,099,000 7,196,000
============== ============== ============== ==============
</TABLE>
See accompanying notes.
24
<PAGE>
<TABLE>
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, SEPTEMBER 30, 1998 AND AUGUST 31, 1997
AND ONE MONTH ENDED SEPTEMBER 30, 1997
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Other
---------------------- ---------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income/(Loss) Total
----------- ---------- ----------- ---------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996....... 1,610,891 $ 201,361 5,049,259 $ 5,049 $ 10,290,004 $ (3,093,617) $ 123,222 $ 7,526,019
Issuance of common stock...... - - 95,373 95 117,405 - - 117,500
Issuance of common stock in
initial public offering...... - - 1,897,500 1,898 8,121,868 - - 8,123,766
Conversion of preferred
stock........................ (1,610,891) (201,361) 1,193,252 1,193 200,168 - - -
Repurchase of common stock..... - - (161,642) (161) (186,672) - - (186,833)
Comprehensive income (loss):
Net income.................. - - - - - 2,275,216 - 2,275,216
Foreign currency
translation adjustment..... - - - - - - (173,798) (173,798)
Comprehensive income..... - - - - - - 2,101,418
----------- ---------- ----------- ---------- ------------- ------------- ----------- ------------
Balance at August 31, 1997....... - - 8,073,742 8,074 18,542,773 (818,401) (50,576) 17,681,870
Transition period (Note 1)..... - - - - (13,216) (302,291) 13,385 (302,122)
----------- ---------- ----------- ---------- ------------- ------------- ----------- ------------
Balance at September 30, 1997.... - - 8,073,742 8,074 18,529,557 (1,120,692) (37,191) 17,379,748
Issuance of common stock
for exercised options......... - - 291,142 291 718,213 - - 718,504
Employee stock
purchase plan................. - - 33,571 33 111,528 - - 111,561
Issuance of warrants for services - - - - 57,000 - - 57,000
Comprehensive loss:
Net loss..................... - - - - - (7,031,612) - (7,031,612)
Foreign currency
translation adjustment...... - - - - - - (1,856) (1,856)
Comprehensive loss....... - - - - - - - (7,033,468)
----------- ---------- ----------- ---------- ------------- ------------- ----------- ------------
Balance at September 30, 1998.... - - 8,398,455 8,398 19,416,298 (8,152,304) (39,047) 11,233,345
Employee stock
purchase plan................. - - 181,532 182 157,233 - - 157,415
Comprehensive income (loss):
Net loss..................... - - - - - (1,486,682) - (1,486,682)
Foreign currency
translation adjustment...... - - - - - - 21,304 21,304
Comprehensive loss....... - - - - - - - (1,465,378)
----------- ---------- ----------- ---------- ------------- ------------- ----------- ------------
Balance at September 30, 1999.... - $ - 8,579,987 $ 8,580 $ 19,573,531 $ (9,638,986) $ (17,743) $ 9,925,382
=========== ========== =========== ========== ============= ============= =========== ============
</TABLE>
See accompanying notes.
25
<PAGE>
<TABLE>
LASER POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
ONE MONTH
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED
------------------------------- SEPTEMBER 30, AUGUST 31,
1999 1998 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ 1,638,953 $ (3,862,402) $ 104,558 $ 2,780,265
Adjustment to income (loss) to account for
overlapping periods (Note 1).............................. - - (228,733) -
Adjustments to reconcile income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 1,276,779 1,582,785 93,038 1,053,211
Loss on disposal of property and equipment and
impairment of long-lived assets........................ - 1,250,505 - -
Long-term liabilities................................... (612,352) 803,548 (5,871) (70,452)
Warrants issued for services............................ - 57,000 - -
Changes in operating assets and liabilities:
Restricted cash....................................... 1,000,000 (1,000,000) - -
Accounts receivable................................... 272,368 408,122 355,289 (613,503)
Inventories........................................... (365,185) (637,568) (181,632) (1,061,258)
Other current assets.................................. 191,545 (13,595) (41,439) (153,761)
Accounts payable...................................... 84,127 (471,499) 77,104 418,245
Accrued compensation and related expenses............. 423,008 (403,841) 47,006 414,404
Other current liabilities............................. (1,198,790) 1,832,686 30,778 56,285
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities
of continuing operations.................................. 2,710,453 (454,259) 250,098 2,823,436
Net cash used in operating
activities of discontinued operations..................... (1,871,621) (4,055,785) (77,935) (599,317)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities........ 838,832 (4,510,044) 172,163 2,224,119
INVESTING ACTIVITIES
Additions to property and equipment......................... (2,226,006) (2,852,776) (92,341) (3,144,787)
Changes in intangibles and other assets..................... (3,408) (7,202) 500 4,923
------------- ------------- ------------- -------------
Net cash used in investing activities
of continuing operations.................................. (2,229,414) (2,859,978) (91,841) (3,139,864)
Net cash provided by (used in) investing activities
of discontinued operations................................ 228,829 (316,097) (89,411) (417,797)
------------- ------------- ------------- -------------
Net cash used in investing activities....................... (2,000,585) (3,176,075) (181,252) (3,557,661)
FINANCING ACTIVITIES
Proceeds from borrowings.................................... 1,349,097 3,504,476 - 1,354,835
Payments on borrowings...................................... (1,897,159) (2,435,446) (30,845) (801,623)
Net proceeds from issuance of stock in conjunction
with initial public offering.............................. - - - 8,123,766
Net proceeds from issuance and repurchase of stock.......... 157,415 830,065 (13,216) (69,333)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities
of continuing operations.................................. (390,647) 1,899,095 (44,061) 8,607,645
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents........ (1,552,400) (5,787,024) (53,150) 7,274,103
Cash and cash equivalents at beginning of the period........ 2,412,327 8,199,351 8,252,501 978,398
------------- ------------- ------------- -------------
Cash and cash equivalents at end of the period.............. $ 859,927 $ 2,412,327 $ 8,199,351 $ 8,252,501
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.................... $ 574,000 $ 619,000 $ 17,000 $ 548,000
============= ============= ============= =============
Cash paid during period for income taxes.................... $ 9,000 $ 241,000 $ - $ 48,000
============= ============= ============= =============
</TABLE>
See accompanying notes.
26
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Laser Power Corporation ("Laser Power" or the "Company") designs,
manufactures and markets high performance optics for industrial, medical and
military applications. The Company's laser optics products are sold to laser
system OEMs and end users as original and replacement components in high power
CO2 and other lasers. The Company's infrared optics products are sold to various
government agencies and to prime contractors of these agencies, and are used
primarily in infrared imaging systems. The company also provides thin film
design and coating services for industrial and military applications.
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Laser Power Corporation (the
"Company") and its subsidiaries, EMI Acquisition Corp. ("EMI"), Laser Power
Optics de Mexico S.A. de C.V. ("Laser Power Mexico") and Laser Power Europe N.V.
("LPE"). EMI operates through its subsidiary Exotic Materials, Inc. (doing
business as Exotic Electro-Optics - "Exotic"). Exotic manufactures infrared
optic products principally for the aerospace and defense markets in the United
States. LPE operates primarily as the European sales and distribution center for
the Company. Laser Power Mexico performs a portion of the laser optic
manufacturing and does not sell products to unaffiliated customers. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
DISCONTINUED OPERATIONS
During fiscal 1999, the Company's Board of Directors adopted a plan to sell
its microlaser operations and to phase out certain contract research operations.
Operations to be sold or phased out are reported as discontinued operations. The
Company expects to conclude a transaction for the sale of a majority of the
assets of discontinued operations by December 31, 1999.
<TABLE>
The results of discontinued operations were as follows:
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, AUGUST 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales....................... $ 2,217,204 $ 1,034,830 $ 277,796
Contract research and development... 1,821,431 3,411,997 5,533,280
------------ ------------ ------------
Total revenues.................. 4,038,635 4,446,827 5,811,076
Costs and expenses:
Cost of product sales............... 2,117,178 1,189,054 705,013
Contract research and development... 1,466,620 3,088,957 4,431,107
Internal research and development... 1,319,457 1,930,230 461,250
Selling, general and administrative. 1,392,489 1,288,307 556,313
----------- ---------- ----------
Total costs and expenses........ 6,295,744 7,496,548 6,153,683
----------- --------- ----------
Loss from operations................... (2,257,109) (3,049,721) (342,607)
Interest expense, net............... 218,526 119,489 162,442
------------ ------------ ------------
Income (loss) before income taxes...... (2,475,635) (3,169,210) (505,049)
Income taxes........................ - - -
------------ ------------ ------------
Net loss from discontinued operations.. (2,475,635) (3,169,210) (505,049)
Loss on disposal, including estimated
loss during disposal period of $450,000 (650,000) - -
------------ ------------ ------------
Net loss............................... $(3,125,635) $(3,169,210) $ (505,049)
============ ============ ============
</TABLE>
Corporate overhead expenses, historically allocated and charged to
discontinued operations, were reversed and allocated back to continuing
operations because those expenses were not considered to be directly
attributable to discontinued operations. Expenses allocated back to continuing
operations totaled $219,000, $119,000 and $162,000 in fiscal 1999, 1998 and
1997, respectively.
27
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest expense attributable to discontinued operations includes an
allocation of interest on general corporate credit facilities. Interest is
allocated to discontinued operations based on the expected reduction in interest
expense that should occur upon the sale of any of the discontinued operations
and the use of proceeds from such sale to repay debt, and is representative of
projected future interest expense. The Company believes this approach is
substantially the same as if the buyer assumed this debt.
Assets and liabilities of discontinued operations have been reflected in the
consolidated balance sheets as current or non-current assets based on the
original classification of the accounts, except that current liabilities are
netted against current assets and non-current liabilities are netted against
non-current assets. Net non-current assets also reflect a valuation allowance of
$200,000 to recognize the estimated loss on disposal. The summary of assets and
liabilities of discontinued operations are presented in the "Selected Balance
Sheet Detail" footnote.
The accrual for the estimated pre-tax losses to be incurred during the
expected disposal period of $450,000 is presented separately in the accompanying
consolidated balance sheet for fiscal 1999. Such amount excludes corporate
overhead and interest allocation.
CHANGE IN FISCAL YEAR
The Company changed its fiscal year end from August 31 to September 30
effective for the fiscal year ended September 30, 1998.
ACQUISITION OF EMI
In February 1998, the Company merged with EMI. The Company issued 2,021,178
shares of its common stock based on a 1.8511 ratio of exchange. The Company has
accounted for the merger as a pooling-of-interests; accordingly, the
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's August 31, 1997 financial statements include
the EMI financial statements for the year ended September 30, 1997.
The consolidated results of operations of EMI for the three months ended
December 31, 1996 were utilized in the 1997 fiscal period. Summarized
information for the three months ended December 31, 1996 is as follows
(unaudited, in thousands):
Total revenues.................................................. $ 3,122
Operating expenses.............................................. $ 2,697
Income before extraordinary item................................ $ 384
The consolidated financial statements for the year ended August 31, 1997
include the year ended September 30, 1997 for EMI. The consolidated financial
statements for the one month ended September 30, 1997 include EMI's net income
as follows:
Laser Power.................................................. $ (302,291)
EMI.......................................................... 228,733
-----------
Net loss..................................................... $ (73,558)
===========
Total revenues and income (loss) of Laser Power and EMI from continuing
operations for the periods preceding the acquisition were as follows (in
thousands):
<TABLE>
<CAPTION>
LASER POWER EMI COMBINED
----------- --- --------
<S> <C> <C> <C>
Five months ended February 28, 1998 (unaudited):
Total revenues............................................ $ 6,969 $ 5,474 $ 12,443
Income (loss) from continuing operations.................. $ (1,225) $ 469 $ (756)
Year ended August 31, 1997:
Total revenues............................................ $ 17,541 $12,199 $ 29,740
Income from continuing operations......................... $ 1,233 $ 1,521 $ 2,754
</TABLE>
28
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MERGER AND INTEGRATION CHARGE
During 1998, the Company recorded a merger and integration charge of
approximately $3.8 million related to the Company's merger with EMI and plan to
move its laser optics operations from San Diego, California to Temecula,
California. This charge included approximately $1.0 million related to an
abandonment of a portion of the San Diego facilities lease, $1.3 million related
to impairment of long-lived assets, $800,000 for acquisition costs and $700,000
related to severance for 26 employees, including three senior officers. The
remaining merger and integration accrual balance at September 30, 1999 amounts
to $1.0 million, which is for remaining employee severance and abandonment of a
portion of the San Diego facilities lease.
REVENUES
Product sales are recorded upon shipment. Revenue on long-term (generally
spanning more than twelve months) fixed price contracts is recognized utilizing
the units-of-delivery method of accounting. Under such method, revenues are
recognized as units are shipped. The costs attributable to units shipped are
based upon the actual cost of those units. Losses expected to be incurred on
long-term contracts in progress are charged to operations when identified.
Revenues from research and development contracts are recognized using the
percentage-of-completion method based on the ratio of costs incurred to date to
total estimated costs. Provisions are made to recognize any anticipated losses
on contracts when losses become evident.
Total product revenues from continuing operations from government contracts
and subcontracts were $16,905,000, $14,491,000, and $12,485,000 in 1999, 1998
and 1997, respectively. Total contract revenues from continuing operations from
government contracts and subcontracts were $2,638,000, $8,000, and $401,000 in
1999, 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
Market is based upon estimated net realizable value.
DEPRECIATION AND AMORTIZATION
Machinery, equipment and office furniture are depreciated over their
estimated useful lives (3 to 15 years) on the straight-line method and leasehold
improvements are amortized over the useful life of the asset or the lease term,
whichever is less.
Intangible assets consist primarily of goodwill and patents. Goodwill is
amortized over 20 years and patents are amortized over the shorter of the
estimated useful life or the legal life. Amortization of patents is initiated
when the related technology is ready for commercial release.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
29
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to industrial and medical equipment
companies, and to U.S. government agencies and their prime contractors.
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade receivables. The Company
invests in a variety of financial instruments and limits exposure with any one
issuer. The Company performs periodic credit evaluations of its customers and
has not experienced significant losses with respect to its accounts receivable.
As of September 30, 1999, the carrying value of cash equivalents and trade
receivables approximated estimated fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected the current intrinsic value-based method and the pro forma effect of
using the fair value-based method to account for stock-based compensation in its
financial statements.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using "Basic EPS" and "Diluted EPS"
as required by Statement of Financial Accounting Standards No. 128, Earnings per
Share ("SFAS 128"), which supersedes APB Opinion 15. Basic EPS includes no
dilution and is based on weighted-average common shares outstanding for the
period. Diluted EPS reflects the potential dilution of stock options,
convertible preferred stock and warrants to purchase common stock. For loss
periods, these common equivalent shares are excluded from the Diluted EPS
computation as their effect would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are carried at cost, which management
believes approximate fair value because of the short-term maturity of these
instruments. Long term debt bears interest at a variable rate, and therefor is
carried at fair value.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes rules for the reporting and
display of comprehensive income and its components; the company has disclosed
its comprehensive income as a component of its statement of stockholders'
equity.
SEGMENT REPORTING
As of January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. The Company has determined that its continuing operations are
only in one segment and has disclosed information related to its discontinued
operations elsewhere in these Notes to Consolidated Financial Statements.
Accordingly, the adoption of this statement has no impact on the Company's
financial statements.
30
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which will be
effective January 1, 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company believes
the adoption of SFAS No. 133 will not have a material effect on the financial
statements.
2. SELECTED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Accounts receivable:
Trade..........................................................................$ 4,895,642 $ 5,159,103
Reserves....................................................................... (407,182) (398,275)
------------- -------------
$ 4,488,460 $ 4,760,828
============= =============
Inventories:
Raw materials..................................................................$ 3,404,834 $ 2,231,389
Work in progress............................................................... 3,008,989 3,257,916
Finished goods................................................................. 1,483,003 1,260,040
------------- -------------
7,896,826 6,749,345
Reserves....................................................................... (1,397,116) (614,820)
------------- -------------
$ 6,499,710 $ 6,134,525
============= =============
Property and equipment, at cost:
Machinery and equipment........................................................$ 10,647,510 $ 10,541,369
Leasehold improvements......................................................... 2,040,634 683,348
Office furniture and equipment................................................. 497,629 929,481
------------- -------------
13,185,773 12,154,198
Less accumulated depreciation and amortization................................. (6,091,540) (6,057,351)
------------- -------------
$ 7,094,233 $ 6,096,847
============= =============
Intangibles and other assets:
Goodwill in foreign subsidiary.................................................$ 549,100 $ 549,100
Other.......................................................................... 365,379 361,967
------------- -------------
914,479 911,067
Less accumulated amortization.................................................. (495,572) (468,713)
------------- -------------
$ 418,907 $ 442,354
============= =============
Net current assets of discontinued operations:
Accounts receivable, net......................................................$ 922,586 $ 898,891
Inventories, net.............................................................. 484,739 738,953
Other current assets.......................................................... 24,197 25,842
Accounts payable.............................................................. (306,279) (294,122)
Accrued compensation and related expenses..................................... (327,243) (198,436)
Other current liabilities..................................................... (227,973) (290,518)
------------- -------------
$ 570,027 $ 880,610
============= =============
Net non-current assets of discontinued operations:
Property and equipment, net...................................................$ 1,452,263 $ 1,991,451
Patents and licenses.......................................................... 394,945 378,017
Reserve for valuation......................................................... (200,000) -
------------- -------------
$ 1,647,208 $ 2,369,468
============= =============
</TABLE>
31
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Promissory note...............................................................$ 39,015 $ 57,058
Term note payable to bank..................................................... 2,846,134 2,814,877
Note payable to bank.......................................................... 840,743 -
Equipment line of credit from bank............................................ - 1,504,466
Other equipment financing..................................................... 436,115 330,328
Other......................................................................... 4,580 7,920
------------- ------------
4,166,587 4,714,649
Less current portion.......................................................... (1,083,778) (4,427,811)
------------- -------------
$ 3,082,809 $ 286,838
============= ============
</TABLE>
In November 1999, the Company entered into a new credit agreement with a
unit of Wells Fargo Bank. The credit agreement provides for a revolving line of
credit of $4,000,000, subject to a borrowing base limitation, with an annual
interest rate of 1.5% above the bank's prime rate. The credit agreement includes
a term loan of $1,950,000 amortized over 60 months commencing October 31, 1999
with interest at 1.5% above the bank's prime rate, and a $750,000 equipment
financing facility with interest at 2% above the bank's prime rate. The credit
agreement expires on October 31, 2002 unless renewed. In connection with the new
agreement, the Company paid in full the existing term note payable and note
payable with the bank amounting to approximately $3,642,000. The agreement
includes a .25% facility fee. The agreement provides for a reduction in the
interest rate applied to amounts outstanding under the line of credit and the
term loan of 0.5% in the event that the net proceeds from the sale of
discontinued operations received prior to June 30, 2000 is at least $2,000,000.
All borrowings under the new credit agreement are secured by accounts
receivable, inventory, and property and equipment. The agreement contains
restrictive covenants, which include limitations on losses, maintenance of
minimum tangible net worth, debt equity and cash flow ratios, as well as
restrictions on capital and lease expenditures, additional borrowings and
payments of dividends. In addition, penalties are due on a declining scale in
the event that the Company terminates the agreement prior to the expiration of
its term.
Other equipment financing agreements are payable in monthly installments of
principal and interest through April 2004. Borrowings under these financing
agreements are secured by specific equipment, with interest at rates ranging
from 9.75% to 12.00% at September 30, 1999.
In November 1987, the Company obtained debt and equity financing from Union
Miniere ("Union"). The Company issued 483,333 shares of common stock for
$1,053,000 cash (net of stock issuance costs of $107,000) and subordinated
convertible debentures amounting to $1,340,000. In December 1988, the Company
issued an additional $320,000 of subordinated convertible debentures to Union.
In March 1997, the maturity date of the debentures was extended to November 2,
2000 and the conversion rate for which the debentures are convertible into
common stock was set at $4.625 per share (358,918 shares). The debentures are
subordinated to all bank borrowings and interest is payable semi-annually at an
annual rate equal to 1% above a bank's prime rate (9.25% at September 30, 1999)
subject to a minimum rate of 5 -1/2% and a maximum rate of the lesser of 11.5%
or the maximum rate permitted by law. The debentures provide for restrictive
covenants similar to those of the bank borrowings. At September 30, 1999, the
Company was not in compliance with one of these covenants; however, a waiver has
been obtained from Union.
32
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
All subordinated convertible debentures and long-term debt of the Company
bear an adjustable interest rate and are carried at the principal value of the
liability, which approximates fair value. Principal maturities on the
subordinated convertible debentures and long-term debt, for each of the years
ending subsequent to September 30, 1999 are as follows:
2000....................................................... $ 1,084,000
2001....................................................... 2,723,000
2002....................................................... 906,000
2003....................................................... 1,087,000
2004....................................................... 27,000
Thereafter................................................. -
------------
$ 5,827,000
============
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Valuation allowances are
established when the realization of deferred tax assets is uncertain. The
components of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Tax basis operating loss and credit carryforwards.... $ 4,693,000 $ 4,817,000
Impairment loss...................................... 1,141,000 -
Accrued expenses and reserves........................ 1,004,000 -
Other................................................ - 518,000
------------ ------------
Total deferred tax assets.............................. 6,838,000 5,335,000
------------ ------------
Deferred tax liability:
Depreciation......................................... (866,000) (55,000)
Intangibles.......................................... (181,000) (243,000)
------------ ------------
Total deferred tax liabilities......................... (1,047,000) (298,000)
------------ ------------
Net deferred tax assets................................ 5,791,000 5,037,000
Valuation allowance.................................... (5,791,000) (5,037,000)
------------ ------------
Net deferred tax accounts.............................. $ - $ -
============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------- YEAR ENDED
1999 1998 AUGUST 31, 1997
------------- ------------- ------------------
<S> <C> <C> <C>
Pretax income (loss):
United States............. $ (1,557,457) $ (6,983,277) $ 2,289,323
Foreign................... 81,322 200,307 170,651
------------- ------------- -------------
$ (1,476,135) $ (6,782,970) $ 2,459,974
============= ============= =============
Significant components of the provision for income taxes are as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------- YEAR ENDED
1999 1998 AUGUST 31, 1997
------------- ------------- ---------------
Current:
Federal................... $ - $ 177,000 $ 139,500
Foreign................... - - 12,836
State..................... 10,547 71,642 32,422
------------- ------------- -------------
Total income tax provision... $ 10,547 $ 248,642 $ 184,758
============= ============= =============
</TABLE>
33
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the effective tax rates and the statutory federal income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------- YEAR ENDED
1999 1998 AUGUST 31, 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Tax at U.S. statutory rate.............. (35.0%) (35.0%) 35.0%
State income taxes, net of federal
benefit............................... .5% .7% .9%
Higher effective income
taxes of other countries.............. - - (.5%)
Change in valuation allowance........... 35.0% 38.0% (30.0%)
Other, net.............................. - - 1.1%
------------- ------------- ---------------
0.5% 3.9% 6.5%
============= ============= ================
</TABLE>
At September 30, 1999, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $11,442,000 and
$3,066,000, respectively, which may be applied against future taxable income.
The federal carryforwards will begin to expire in 2001 unless previously
utilized. The California carryforwards begin to expire in 2000.
The Company also has investment tax credit, research and development credit,
targeted jobs tax credit, alternative minimum tax credit and California
manufacturers investment credit carryforwards at September 30, 1999 aggregating
approximately $648,000 These tax credit carryforwards will begin to expire in
2000.
Due to the Tax Reform Act of 1986, the Company's ability to use the net
operating loss and tax credit carryforwards could be limited in the event of a
cumulative change in ownership of more than 50% occurring within a three year
period.
5. STOCKHOLDERS' EQUITY
COMMON STOCK WARRANTS
Periodically, the Company will issue warrants to purchase common stock to
outside directors and consultants in lieu of stock options. During the three
years ended September 30, 1999, 46,664 warrants at an exercise price of $4.50
per share were issued to outside directors, which are fully exercisable.
Warrants to purchase 324,996 shares of common stock at $3.00 to $7.33 per share
are outstanding at September 30, 1999 including 185,000 warrants at a price
range of $7.15 to $7.33 per share issued to representatives of the underwriters
in conjunction with the initial public offering and for periodic advisory
services. During 1999, 23,332 warrants were cancelled. The outstanding warrants
expire from June 2002 to December 2006.
STOCK OPTION PLANS
The Company's 1981 Stock Option Plan was approved by the Board of Directors
and stockholders in 1981, as amended (the "1981 Plan"). The Company's 1993 Stock
Option Plan (the "1993 Plan") was approved by the Board of Directors and
stockholders in September 1993. The exercise prices of options granted were not
less than fair market value of the stock on the date of grant. The options vest
over a five-year period commencing on the date of grant in annual increments of
twenty percent and are exercisable for a period of ten years after the date of
grant. The Board of Directors has terminated the 1981 and 1993 Plans and no
additional shares will be granted thereunder, but outstanding options remain
exercisable and continue to vest in accordance with their terms until they
terminate.
On March 25, 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"). The 1997 Plan provides for incentive stock options and stock
appreciation rights appurtenant thereto for employees (including officers and
employee directors), and nonstatutory stock options, stock appreciation rights
appurtenant thereto, stock bonuses and rights to purchase restricted stock for
employees (including officers and employee directors) and non-employee directors
and consultants. The 1997 Plan is administered by the Board of Directors, or a
Committee appointed by the Board, which determines the option awards to be
granted, including exercise prices, number of shares subject to the awards and
the exercisability thereof, provided that such terms comply with the provisions
of the plan.
34
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The term of stock options granted under the 1997 Plan may not exceed 10
years. The exercise price of options granted under the 1997 Plan is determined
by the Board of Directors, but in the case of an incentive stock option, cannot
be less than 100% of the fair market value of the common stock on the date of
grant and in the case of a non- statutory stock option, cannot be less than 85%
of the fair market value of the common stock on the date of grant. Options
granted under the plans vest at the rate specified in the option agreement. The
Board has authorized and reserved an aggregate of 1,000,000 shares of common
stock for issuance under the Plan.
On December 5, 1998 the Company repriced to $3.00 per share, which price was
above the closing market price per share on the date of the repricing, 267,329
options that had original exercise prices ranging from $3.50 to $7.00 per share.
The following table summarizes stock option and warrant activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
----------- ----------- ---------
<S> <C> <C> <C>
Outstanding at August 31, 1996................................ 1,278,497 $ .22-4.50 $ 3.40
Granted..................................................... 666,776 1.05-3.00 5.02
Exercised................................................... - - -
Canceled.................................................... (35,329) 3.00-4.50 3.37
----------- ----------- ---------
Outstanding at August 31, 1997................................ 1,909,944 .22-7.15 3.97
Granted..................................................... 502,000 3.25-7.33 4.39
Exercised................................................... (243,880) .22-3.00 2.67
Canceled.................................................... (275,524) 1.22-6.50 4.50
----------- ----------- ---------
Outstanding at September 30, 1998............................. 1,892,540 .56-7.33 4.17
Granted..................................................... 180,250 .75-2.00 1.65
Canceled.................................................... (261,537) 1.55-4.94 3.03
----------- ----------- ---------
Outstanding at September 30, 1999............................. 1,811,253 $.56-7.33 $ 3.61
=========== =========== =========
</TABLE>
At September 30, 1999, the weighted-average exercise price of outstanding
stock options and warrants is $3.18 and $5.56, respectively, and 1,351,026
options and warrants are exercisable.
Adjusted pro forma information regarding net income (loss) is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes method for option pricing with the following weighted-average
assumptions: volatility of 0.559; risk-free interest rate range from 5.4% to
6.2%; dividend yield of 0%; and a weighted average expected life of the options
of 6 years. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, AUGUST 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Adjusted pro forma net income (loss)................ $ (2,109,000) $ (7,683,000) $ 2,025,000
Adjusted pro forma diluted net income
(loss) per share.................................. $ (.25) $ (.92) $ .28
</TABLE>
35
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EMPLOYEE STOCK PURCHASE PLAN
On March 25, 1997 the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the IRS Code. Under the Purchase Plan, the Board
has authorized participation by eligible employees, including officers, in
periodic offerings following the commencement of the Purchase Plan. The initial
offering under the Purchase Plan commenced on the closing of the Company's
initial public offering and terminated on February 28, 1998. Sequential
six-month offerings have occurred since that date. The Purchase Plan permits the
purchase of shares of common stock at the end of each offering period at 85% of
the lesser of the price of the common stock on the first day of the offering
period and the last day of the offering period. During 1999, 181,532 shares were
issued to employees under this Plan at an average price of $.87 per share.
The Company does not have sufficient shares reserved to satisfy the expected
requirement for the offering period ending February 29, 2000. The Board of
Directors has authorized an increase in the number of shares reserved for
issuance under the Purchase Plan of 100,000 shares, subject to stockholder
approval at the next annual meeting of stockholders. In the event the increase
in shares authorized is not approved, or approval occurs after the end of the
offering period, the Company will allocate shares to the participants. The
Purchase Plan would then become inactive until such time as stockholders approve
an increase in shares reserved for issuance.
Effective October 15, 1999, the Company designated 150,000 shares of
Preferred Stock as Series A Junior Participating Preferred Stock and declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock. Each Right entitles a Stockholder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $10.00, subject to adjustment. The Rights are only exercisable
when a person or group of affiliated or associated persons (an Acquiring Person)
acquires or obtains the right to acquire 15% or more of the Company's
outstanding Common Stock or announces a tender or exchange offer that would
result in an Acquiring Person beneficially owning more than 15% or more of the
Company's outstanding shares. In the event any person becomes an Acquiring
Person, each holder of a Right, other than Rights beneficially owned by the
Acquiring Person, will thereafter have the right to receive on exercise that
number of shares of common stock of the Company, or, in certain business
combinations, of the acquiring company, having a market value of two times the
exercise price of the Right. The Rights expire on October 15, 2009 unless
extended prior thereto by the Board, or earlier redeemed or exchanged by the
Company.
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance at
September 30, 1999:
Subordinated convertible debentures...................... 358,918
Stock options:
Granted and outstanding................................ 1,486,257
Reserved for future grants............................. 543,852
Warrants................................................. 324,996
Stock Purchase Plan...................................... 34,897
-----------
2,748,920
===========
36
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, AUGUST 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share --
income (loss) available to common stockholders......... $ (1,487) $ (7,032) $ 2,275
============ ============ ============
Denominator:
Denominator for basic earnings per share --
weighted-average shares................................ 8,454 8,263 5,592
Effect of dilutive securities:
Stock options and warrants............................ - - 634
Convertible preferred stock........................... - - 970
------------ ------------ ------------
Dilutive potential common shares......................... - - 1,604
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions............................................ 8,454 8,263 7,196
============ ============ ============
Basic earnings per share................................... $ (.18) $ (.85) $ .41
============ ============ ============
Diluted earnings per share................................. $ (.18) $ (.85) $ .32
============ ============ ============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its operating, office and other facilities as well as
certain vehicles and equipment under non-cancellable operating leases. The
operating and office facilities leases contain escalation clauses and options
for renewal and extend through June 2007.
Future minimum rental payments (excluding common area maintenance charges)
required under the operating leases for each of the remaining fiscal years
ending subsequent to September 30, 1999 are as follows:
2000.............................................. $ 857,000
2001.............................................. 632,000
2002.............................................. 452,000
2003.............................................. 391,000
2004.............................................. 357,000
Thereafter........................................ 977,000
-----------
$ 3,666,000
===========
Rent expense was $1,191,000, $1,528,000, and $1,063,000 for the years ended
September 30, 1999, September 3, 1997 and August 31, 1997, respectively.
8. GEOGRAPHIC INFORMATION
The Company designs, manufactures and markets high performance optics for
industrial, processing, medical, aerospace and defense markets. Export sales
from U.S. continuing operations to unaffiliated customers located principally in
Europe and the Asia Pacific region amounted to 13%, 30%, and 33% of total
revenue in 1999, 1998 and 1997, respectively.
Information with respect to the Company's continuing operations by
significant geographic area is set forth below. Transfers between geographic
areas have been shown at the agreed upon transfer price. All transactions
denominated in foreign currency have been translated at the average exchange
rates during the period.
37
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The identifiable assets located in the United States include assets located
in Mexico, which are not considered significant.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers......................... $ 29,270,046 $ 4,740,131 $ - $ 34,010,177
Transfers between geographic areas...................... 2,037,483 - (2,037,483) -
--------------- --------------- --------------- ---------------
Total revenue........................................... $ 31,307,529 $ 4,740,131 $ (2,037,483) $ 34,010,177
=============== =============== =============== ===============
Income (loss) before income taxes....................... $ 1,586,605 $ 81,322 $ (18,427) $ 1,649,500
=============== =============== =============== ===============
Identifiable assets..................................... $ 26,556,347 $ 2,146,119 $ (6,794,285) $ 21,908,181
=============== =============== =============== ===============
YEAR ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
--------------- --------------- --------------- ---------------
Sales to unaffiliated customers......................... $ 25,759,723 $ 4,356,152 $ - $ 30,115,875
Transfers between geographic areas..................... 2,192,342 - (2,192,342) -
--------------- --------------- --------------- ---------------
Total revenue........................................... $ 27,952,065 $ 4,356,152 $ (2,192,342) $ 30,115,875
=============== =============== =============== ===============
Income (loss) before income taxes....................... $ (3,762,730) $ 200,307 $ (51,337) $ (3,613,760)
=============== =============== =============== ===============
Identifiable assets..................................... $ 23,965,886 $ 2,387,980 $ (1,735,653) $ 24,618,213
=============== =============== =============== ===============
YEAR ENDED AUGUST 31, 1997
-------------------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
--------------- --------------- --------------- ---------------
Sales to unaffiliated customers......................... $ 26,020,906 $ 3,719,523 $ - $ 29,740,429
Transfers between geographic areas...................... 1,391,125 - (1,391,125) -
--------------- --------------- --------------- ---------------
Total revenue........................................... $27,412,031 $ 3,719,523 $ (1,391,125) $ 29,740,429
=============== =============== =============== ===============
Income before income taxes.............................. $ 2,780,753 $ 170,651 $ 13,619 $ 2,965,023
=============== =============== =============== ===============
Identifiable assets..................................... $ 27,763,976 $ 2,009,946 $ (1,655,280) $28,118,642
=============== =============== =============== ===============
</TABLE>
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "Plan") covering substantially
all employees that have been employed for at least 90 days and meet certain age
requirements. Employees may contribute up to 16% of their compensation per year
(subject to a maximum limit by federal tax law). The Company is obligated to
make matching contributions equal to 50% of the employee's contribution up to a
maximum of 6% of the employee's compensation. At the discretion of the Board of
Directors, the Company may make additional contributions. Prior to its merger
with the Company, EMI had a defined contribution plan with contributions based
on a profit-sharing formula. Subsequent to the merger, the EMI plan was
terminated and participant balances rolled over into the Company's plan. The
Company's contributions charged to continuing operations, which include
contributions to the EMI plan prior to its termination, were $197,000, $381,000
and $275,000 for the years ended September 30, 1999, September 30, 1998 and
August 31, 1997, respectively.
10. SUBSEQUENT EVENT
In October 1999, the Company and certain directors of the Company were sued by a
group of shareholders. The complaint asserts claims as a class action for
purported breaches of fiduciary duty in connection with the Company's rejection
of an acquisition proposal. The Company and a number of the individual
defendants have moved to dismiss, and no briefing schedule has been set for the
motion. No trial date has been scheduled. Management believes such claims are
without merit and intends to vigorously defend its position if required.
38
<PAGE>
LASER POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Diego, County of
San Diego, State of California, on the 29th day of December, 1999.
LASER POWER CORPORATION
By /s/ PAUL P. WICKMAN
--------------------------------------
Paul P. Wickman, Jr.
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dick Sharman and Paul P. Wickman, Jr., or any of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report, and to file the same,
with exhibits thereto and other documents in connections therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DICK SHARMAN Chief Executive Officer and Director December 29, 1999
- ---------------------------------------- (Principal Executive Officer)
Dick Sharman
/s/ PAUL P. WICKMAN Senior Vice President and Chief Financial Officer December 29, 1999
- ---------------------------------------- (Principal Financial and Accounting Officer)
Paul P. Wickman, Jr.
/s/ ROBERT G. KLIMASEWSKI Chairman of the Board December 29, 1999
- ----------------------------------------
Robert G. Klimasewski
/s/ DOUGLAS H. TANIMOTO Director December 29, 1999
- ----------------------------------------
Douglas H. Tanimoto, Ph.D.
/s/ WILLIAM G. FREDRICK Director December 29, 1999
- ----------------------------------------
William G. Fredrick
/s/ JOHN C. STISKA Director December 29, 1999
- ----------------------------------------
John C. Stiska
/s/ ROBERT P. PERKINS Director December 29, 1999
- ----------------------------------------
Robert P. Perkins
</TABLE>
39
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
MELLES GRIOT, INC.
AND
LASER POWER CORPORATION
December 16, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS..............................................1
Section 1.1 Definitions..............................................1
ARTICLE II SALE AND PURCHASE OF THE ASSETS..........................7
Section 2.1 Sale and Purchase of the Assets..........................7
Section 2.2 Assumption of Liabilities................................7
Section 2.3 Liabilities Not Assumed..................................8
Section 2.4 Purchase Price...........................................9
Section 2.5 Instruments of Conveyance and Transfer..................10
Section 2.6 Transfer of Permits.....................................11
Section 2.7 Further Assurances......................................11
Section 2.8 Diligence in Pursuing Sales of Products.................12
ARTICLE III CLOSING.................................................12
Section 3.1 Closing.................................................12
Section 3.2 Deliveries at Closing...................................12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER................13
Section 4.1 Corporate Existence.....................................13
Section 4.2 Seller's Authority Relative to this Agreement...........13
Section 4.3 Title to Properties, Etc................................13
Section 4.4 Equipment...............................................14
Section 4.5 Inventory...............................................14
Section 4.6 Customers...............................................14
Section 4.7 Suppliers...............................................14
Section 4.8 Customers and Suppliers.................................14
Section 4.9 Accounts Receivable.....................................14
Section 4.10 Intellectual Property...................................14
Section 4.11 Material Contracts......................................15
Section 4.12 Absence of Certain Changes..............................16
Section 4.13 Tax Matters.............................................17
Section 4.14 No Default; Compliance with Laws........................18
Section 4.15 Litigation..............................................18
Section 4.16 Product Liability.......................................18
Section 4.17 Insurance...............................................18
Section 4.18 Licenses, Permits, Etc..................................18
Section 4.19 Interest in Competitors, Suppliers, Customers, etc......19
Section 4.20 Questionable Payments...................................19
Section 4.21 Year 2000 Compliance....................................19
Section 4.22 At-Will Employees.......................................19
i
<PAGE>
Section 4.23 No Brokers..............................................19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER.................19
Section 5.1 Corporate Existence.....................................19
Section 5.2 Buyer's Authority Relative to this Agreement............19
Section 5.3 Absence of Litigation...................................20
Section 5.4 No Further Approval.....................................20
ARTICLE VI OTHER MATTERS...........................................20
Section 6.1 Retention Bonus Payments................................20
Section 6.2 American Laser Accounts Receivable......................20
Section 6.3 Balancing Payment.......................................21
ARTICLE VII COVENANTS OF SELLER.....................................21
Section 7.1 Conduct of Business.....................................21
Section 7.2 Access to Information...................................21
Section 7.3 Preservation of Business Organization...................22
Section 7.4 Trade Secrets...........................................22
Section 7.5 Consents of Third Parties...............................22
Section 7.6 Collection of Receivables...............................22
Section 7.7 Supply Contracts........................................22
Section 7.8 Royalties...............................................22
Section 7.10 Acknowledgments by Seller...............................23
Section 7.11 Confidential Information................................23
Section 7.12 Noncompetition Agreement of Seller......................24
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF BUYER......................25
Section 8.1 Seller's Representations and Warranties True at Closing.25
Section 8.2 Approval by Counsel.....................................26
Section 8.3 Opinion of Counsel for Seller...........................26
Section 8.4 No Damage or Destruction................................26
Section 8.5 Absence of Restraint....................................26
Section 8.6 Approvals...............................................26
Section 8.7 Employment Agreements...................................26
ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER.....................27
Section 9.1 Buyer's Representations and Warranties True at Closing..27
Section 9.2 Approval by Counsel.....................................27
Section 9.3 Opinion of Buyer's Counsel..............................27
ARTICLE X NATURE OF STATEMENTS; SURVIVAL..........................27
ii
<PAGE>
ARTICLE XI INDEMNITY..............................................28
Section 11.1 Indemnity by Seller....................................28
Section 11.2 Indemnity by Buyer.....................................28
Section 11.3 Third Party Claims.....................................28
Section 11.4 Indemnity Limits.......................................29
Section 11.5 Right of Set-Off.......................................30
ARTICLE XII DISPUTE RESOLUTION.....................................30
Section 12.1 Arbitration............................................30
Section 12.2 Jurisdiction...........................................31
Section 12.3 .......................................................31
ARTICLE XIII TERMINATION............................................31
Section 13.1 Termination............................................31
ARTICLE XIV MISCELLANEOUS..........................................32
Section 14.1 Notices................................................32
Section 14.2 Governing Law..........................................33
Section 14.3 Section Headings.......................................33
Section 14.4 Entire Agreement.......................................33
Section 14.5 Severability...........................................33
Section 14.6 Assignment; Successors and Assigns.....................33
Section 14.7 Amendment..............................................34
Section 14.8 Waiver.................................................34
Section 14.9 Counterparts...........................................34
Section 14.10 Buyer's Remedies for Seller's Breach of Confidentiality
and Noncompetition.....................................34
Section 14.11 Buyer's Right to Specific Performance..................34
Section 14.12 Bulk Sales.............................................34
Section 14.13 Fees and Expenses......................................35
Section 14.14 Prorations and Transfer Taxes..........................35
Section 14.15 Sales Tax..............................................35
Section 14.16 Announcements..........................................35
iii
<PAGE>
SCHEDULES AND EXHIBITS
- ----------------------
Schedule 1.1(a) Products
Schedule 2.1(a) Equipment
Schedule 2.1(b) Inventory
Schedule 2.1(c) Intellectual Property
Schedule 2.1(d) Accounts Receivable
Schedule 2.1(e) Acquired Contracts
Schedule 2.1(i) Permits
Schedule 4.3 Permitted Liens
Schedule 4.6 Customers of the Business
Schedule 4.7 Suppliers of the Business
Schedule 4.8 Adverse Changes in Customer and Supplier Relationships
Schedule 4.10(a) Licenses and Other Agreements in Respect of Intellectual
Property Listed at Schedule 2.1(c)
Schedule 4.10(a)(1) Intellectual Property Infringements
Schedule 4.10(b) Related Party Ownership of Patents and Inventions
Schedule 4.10(c) New Developments with Respect to Business or Products
Schedule 4.11(a) Material Contracts
Schedule 4.11(b) Non-Assignable Contracts
Schedule 4.12 Absence of Certain Changes
Schedule 4.12(b) Absence of Certain Employee Compensation Changes
Schedule 4.14 No Default; Compliance with Laws
Schedule 4.15(a) Litigation
Schedule 4.15(b) Continuing Orders
Schedule 4.16(a) Seller's Standard Warranties
Schedule 4.16(b) Product Liability Claims Not Covered by Insurance
Schedule 4.17 Insurance
Schedule 4.18 Licenses, Permits, Etc.
Schedule 4.19 Interest in Competitors, Suppliers, Customers, etc.
Schedule 5.6 No Inducement Employees
Schedule 6.1 Employees of the Business
Schedule 7.13 Release of Certain Liens
Schedule 8.7 Key Employees
Exhibit A Interim Balance Sheet
Exhibit B Bill of Sale
Exhibit C Assignment (Acquired Contracts and Accounts Receivable)
Exhibit D Assignment (Intellectual Property)
Exhibit D-1 Assignment (Registered Patents)
Exhibit F Seller's Opinion of Counsel
Exhibit G Buyer's Opinion of Counsel
iv
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") dated as of December
16, 1999, is made and entered into by and between Melles Griot, Inc., a Nevada
corporation ("Buyer"), and Laser Power Corporation, a Delaware corporation
("Seller").
RECITALS
WHEREAS, the parties hereto desire that Seller sell and Buyer purchase
certain operating assets (including fixed assets, inventory, accounts receivable
and intellectual property) of Seller used in and associated with the business of
Seller's Microcavity Laser Division, excluding the 1550 nm laser product line,
(the "BUSINESS"), all in accordance with and subject to the terms and provisions
of this Agreement; and
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the execution, delivery and performance of this Agreement.
NOW, THEREFORE, expressly incorporating the foregoing Recitals as part
of the consideration hereof and in further consideration of the premises and of
the mutual representations, warranties, covenants and agreements contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. The following terms, as used herein, have the
following meanings:
"ACCOUNTS RECEIVABLE" shall mean the accounts receivable of Seller
relating to the Business and remaining unpaid at the Closing Date as set forth
on the attached Schedule 2.1(d).
"ACQUIRED CONTRACTS" shall have the meaning ascribed to it in Section
2.1(e) hereof.
"ACQUIRED RECORDS" shall mean copies of all Records relating to the
Business or the Assets.
"ADJUSTMENT FUND" shall have the meaning ascribed to it in Section
2.4(a)(i) hereof.
"ADVANCED ROYALTY PAYMENT" shall have the meaning ascribed to it in
Section 2.4(b)(i) hereof.
"AFFILIATE" shall mean, with respect to any Person, any Person directly
or indirectly controlling, controlled by, or under common control with such
other Person.
1
<PAGE>
"ASSETS" shall have the meaning ascribed to it in Section 2.1 hereof.
"ASSUMED LIABILITIES" shall have the meaning ascribed to it in Section
2.2 hereof.
"BENEFIT PLAN" means any plan, program, trust, contract, policy or
arrangement which is sponsored by Seller or to which Seller contributes, and
that provides any pension, retirement, profit sharing, bonus, deferred or
incentive compensation, life, health, post-retirement, medical, disability,
accident, stock option, stock purchase, stock appreciation, severance payments,
fringe benefits, vacation pay, holiday pay, sick pay or similar benefit to
employees of the Business, whether or not such plan, program, trust, contract,
policy or arrangement is an "employee benefit plan" within the meaning of
Section 3(3) of ERISA.
"BUSINESS" shall have the meaning ascribed to it in the first Recital
to this Agreement.
"BUYER" shall have the meaning ascribed to it in the first paragraph of
this Agreement.
"CASH PAYMENT" shall have the meaning ascribed to it is Section 2.4
hereof.
"CLOSING" shall have the meaning ascribed to it in Section 3.1 hereof.
"CLOSING BALANCE SHEET" shall have the meaning ascribed to it in
Section 2.4(a)(ii).
"CLOSING DATE" shall have the meaning ascribed to it in Section 3.1
hereof.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" shall have the meaning ascribed to it in
Section 7.11 hereof.
"CONTRACT" shall mean any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"DAMAGES" shall have the meaning ascribed to it in Section 11.1 hereof.
"EMPLOYEES" shall mean employees of the Business as of the date of this
Agreement.
"EQUIPMENT" shall mean the machinery, equipment, computers, hardware,
computer software, furniture, fixtures, vehicles, tools, dies, supplies, and
other tangible personal property set forth on the attached Schedule 2.1(a).
"GAAP" shall mean generally accepted United States accounting
principles, applied on a basis consistent with the basis on which the Seller's
Audited Consolidated Financial Statements for the years ending August 31, 1997
and September 30, 1998 were prepared.
2
<PAGE>
"GOVERNMENTAL AUTHORIZATION" shall mean any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY" shall mean any (i) nation, state, county, city,
district, or other jurisdiction of any nature; (ii) federal, state, local,
municipal, foreign or other government; (iii) governmental or quasi-governmental
authority of any nature (including any governmental agency, branch, department,
official, or entity and any court or other tribunal); or (iv) multi-national
organization or body; exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"INTELLECTUAL PROPERTY" shall mean any patents, patent applications,
licenses, and Trademarks set forth on Schedule 2.1(c), as well as all patents,
patent applications, licenses, industrial design registrations, utility models,
mask works, mask work registrations, copyrights, copyright registrations,
applications for copyright registration, Trademarks, trade names, trade secrets,
processes, designs, formulas, rights to technology, inventions, licenses,
computer software, all product know-how, including engineering drawings,
engineering notebooks, specifications, designs, manufacturing procedures and
documentation, schematics, blueprints, files, records, notes or computer disks,
tapes or other storage media associated therewith, owned by Seller, licensed to
Seller, used or held for use in connection with the design, manufacture,
fabrication or production of any of the Products, owned by Seller, licensed to
Seller, used or held for use in connection with the Business, and approvals
owned, applied for, held or licensed to or by Seller, related to or in
connection with the Business or the Products.
"INTERIM BALANCE SHEET" shall mean the unaudited balance sheet of the
Assets, dated as of October 31, 1999, attached hereto as Exhibit A.
"INTERIM NET VALUE OF PURCHASED ASSETS" shall mean the net value of
purchased assets set forth on the Interim Balance Sheet.
"INVENTORY" shall mean the inventories of raw materials,
work-in-process and finished Products held for sale, and general stores, spare
parts and other items relating to the Products set forth on the attached
Schedule 2.1(b), including, without limitation, Seller's rights in and to raw
materials previously ordered and currently in transit to the Business, but
excluding any finished products shipped to customers on or before the Closing
Date.
"IRS" shall mean the United States Internal Revenue Service or any
successor agency, and, to the extent relevant, the United States Department of
the Treasury.
"KEY EMPLOYEES" shall have the meaning ascribed to it in Section 8.8.
"KNOWLEDGE" Seller will be deemed to have "Knowledge" of a particular
fact or other matter if Dick Sharman, Paul Wickman, Dean Hodges, or David
Hargis:
(a) is actually aware of such fact or other matter; or
3
<PAGE>
(b) could be expected to discover or otherwise become aware of
such fact or other matter in the course of conducting a reasonably comprehensive
investigation concerning the existence of such fact or other matter.
"LEGAL ACTION" shall have the meaning ascribed to it in Section 11.3(b)
hereof.
"LEGAL REQUIREMENT" shall mean any federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty.
"LIENS" shall mean any liabilities, security interests, claims,
charges, conditions, equitable interests, liens, options, mortgages, pledges,
title defects, conditional sales or other title retention agreements,
obligations, commitments or other encumbrances of any nature whatsoever.
"MONTHLY ROYALTY AMOUNTS" shall have the meaning ascribed to it in
Section 2.4(b)(ii).
"NET VALUE OF PURCHASED ASSETS" shall mean that portion of the Purchase
Price which is set forth on the Closing Balance Sheet, as adjusted by the
parties in accordance with Section 2.4(a) of this Agreement.
"OCCUPATIONAL SAFETY AND HEALTH LAW" shall mean any Legal Requirement
designed to provide safe and healthful working conditions and to reduce
occupational safety and health hazards, and any program, whether governmental or
private (including those promulgated or sponsored by industry associations and
insurance companies), designed to provide safe and healthful working conditions.
"ORDER" shall mean any award, decision, injunction, judgment, order,
ruling, subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" shall mean an action taken by a Person
will be deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such
Person and is taken in the ordinary course of the normal day-to-day operations
of such Person;
(b) such action is not required to be authorized by the board
of directors of such Person (or by any Person or group of Persons exercising
similar authority); and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of business as such Person.
4
<PAGE>
"ORGANIZATIONAL DOCUMENTS" shall mean (a) the articles or certificate
of incorporation and the bylaws of a corporation; (b) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (c) any amendment to any of the foregoing.
"PERMITS" shall mean the licenses, permits, approvals and
authorizations of any Governmental Body which are necessary to the conduct of
the Business and which are transferable, set forth on the attached Schedule
2.1(i).
"PERMITTED LIENS" shall mean, (i) liens for taxes not yet due and
payable or being contested in good faith by appropriate proceedings and for
which an adequate reserve has been set aside; (ii) inchoate liens of materialmen
and suppliers and other like liens which have not yet been asserted and which
are incurred in the ordinary course of business securing obligations that are
not overdue; and (iii) those Liens set forth on Schedule 4.3 hereto.
"PERSON" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, labor union,
other legal or commercial entity or Governmental Body.
"PROCEEDING" shall mean any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"PRODUCTS" shall mean the products listed or described on the attached
Schedule 1.1(a).
"PURCHASE PRICE" shall have the meaning ascribed to it in Section 2.4
hereof.
"REASONABLE BEST EFFORTS" shall mean the reasonable efforts that a
prudent Person desirous of achieving a result would use in similar circumstances
to achieve such result as expeditiously as possible.
"RECORDS" shall mean books, files, and records including any accounting
reports, data processing or computer reports and information used therewith, and
vendor lists, customer lists, mailing lists, personnel records, copies of
business records, computer disks, computer tapes or other storage media,
operating data, property records, production data, royalty statements,
manufacturing and quality control records and other data and databases.
"RETAINED LIABILITIES" shall have the meaning ascribed to it in Section
2.3 hereof.
"ROYALTY PERIOD" shall have the meaning ascribed to it in Section
2.4(b)(ii).
"SELLER" shall have the meaning ascribed to it in the first paragraph
of this Agreement.
"SYSTEMS" shall have the meaning ascribed to it in Section 4.21 hereof.
5
<PAGE>
"TAX" shall mean any tax (including any income tax, capital gains tax,
value added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency, or other fee,
and any related charge or amount (including any fine, penalty, interest, or
addition to tax), imposed, assessed, or collected by or under the authority of
any Governmental Body or payable pursuant to any tax-sharing agreement or any
other Contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee.
"TAX RETURN" shall mean any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance with any Legal Requirement relating to any Tax.
"THREATENED" shall mean a claim, Proceeding, dispute, action, or other
matter will be deemed to have been "Threatened" if any demand or statement has
been made (orally if made to Dick Sharman, Paul Wickman, Dean Hodges, or David
Hargis, or in writing) or any notice has been given (orally if made to Dick
Sharman, Paul Wickman, Dean Hodges, or David Hargis, or in writing), or if
Seller has Knowledge of any other event or circumstances that would lead a
prudent Person to conclude that such a claim, Proceeding, dispute, action, or
other matter is likely to be asserted, commenced, taken, or otherwise pursued in
the future.
"TERRITORY" shall have the meaning ascribed to it in Section 7.10(c)
hereof.
"TRADEMARKS" shall mean trademarks and service marks, including the
goodwill associated therewith, trademark and service mark registrations, and
applications for trademark and service mark registrations.
"YEAR 2000 COMPLIANT" shall have the meaning ascribed to it in Section
4.21 hereof.
6
<PAGE>
ARTICLE II
SALE AND PURCHASE OF THE ASSETS
Section 2.1 SALE AND PURCHASE OF THE ASSETS. Seller, at the Closing,
will sell, convey, transfer or assign and deliver to Buyer, free and clear of
all Liens, except Permitted Liens and Buyer will purchase from Seller, all
Seller's right, title and interest in and to the Assets (as hereinafter
defined). As used herein, "ASSETS" shall mean the following assets:
(a) the Equipment;
(b) the Inventory;
(c) the Intellectual Property;
(d) the Accounts Receivable;
(e) all rights under any contracts listed in Schedule 2.1(e)
("ACQUIRED CONTRACTS"), except to the extent related to Retained Liabilities;
(f) all rights, claims, commitments and warranties relating to
the Business, and all other rights relating to the Assets;
(g) all prepaid expenses and deposits of the Business having
an ongoing value to Buyer for use in the Business;
(h) the Acquired Records;
(i) the Permits; and
(j) all sales literature, catalogues, art work, promotional
literature and other selling material associated with, used or employed by
Seller in connection with the Business (the "SALES LITERATURE").
Section 2.2 ASSUMPTION OF LIABILITIES.
(a) Subject to the terms and conditions of this Agreement, and
in further consideration for the transfer and delivery of the Assets to the
Buyer, and in reliance on the representations and warranties of Seller herein
contained, Buyer, from and after the Closing Date, shall:
(i) assume and agree to observe, perform and fulfill the
terms and conditions of the Acquired Contracts transferred pursuant to Section
2.1 hereof; provided, however, that there shall exist no default or condition
that, with notice or the passage of time, or both, might constitute a default
with respect to such agreements, and no default will exist upon assignment of
any such agreement to Buyer; and
7
<PAGE>
(ii) assume and agree to pay and discharge all debts,
liabilities and obligations arising out of the Buyer's conduct of the Business
and the ownership of the Assets (except as provided in Section 2.2(a)(i) above)
of any kind, character or description, whether accrued, absolute, contingent or
otherwise including any and all Product warranty obligations for repairs to
Products (the "Product Repair Claims") that arise before or after the Closing
Date, or any obligations under any of the Permits that arise after the Closing
Date.
(b) The obligations and liabilities which are required to be
assumed by the Buyer under this Section 2.2 are herein referred to as the
"ASSUMED LIABILITIES." The undertakings of the Buyer referred to in this Section
2.2 shall not in any way limit the Buyer's right of recourse for any breach of
the covenants, representations or warranties of the Seller contained in this
Agreement. Nothing contained in this Agreement shall be deemed or construed to
foreclose the Buyer from contesting in good faith the duties and liabilities to
third parties which are assumed by the Buyer pursuant to this Agreement.
Section 2.3 LIABILITIES NOT ASSUMED. Except as specifically provided in
this Agreement (including, without limitation, the terms of Section 2.2 hereof),
regardless of when asserted or claimed, Buyer shall not assume or be bound by
and Seller shall retain and shall be solely responsible for all obligations and
liabilities of Seller and the Business (all such liabilities and obligations
being herein referred to as the "RETAINED LIABILITIES") including, but not
limited to:
(a) any and all liabilities and obligations, whether civil or
criminal in nature, arising out of, relating to or involving the Business and
existing before the Closing or any violation by Seller of any term or provision
of any Legal Requirements, except for warranty obligations provided for in
Section 2.2(a)(ii) hereof;
(b) any and all obligations or liabilities relating to the
Business, the existence of which constitutes a breach of Seller's
representations or warranties under this Agreement;
(c) any and all product liability of Seller (whether or not
asserted on or before or after the Closing Date, but excluding the Product
Repair Claims) in connection with the Business or the Products manufactured,
sold or serviced prior to the Closing Date by Seller or Seller's agents or
produced by any third party and sold or serviced by Seller or Seller's agents
prior to the Closing Date;
(d) any and all Proceeding(s) arising from the conduct of the
Business before the Closing, including any liability arising from any
environmental condition either existing before the Closing or arising from the
conduct of the Business before the Closing;
(e) any income tax liability of Seller and any penalties and
interest related thereto;
(f) any debt or liability for borrowed funds;
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(g) any liability arising out of or related to the sponsorship
of, the responsibility for, contributions to, or any liability in connection
with any Benefit Plan maintained or contributed to by Seller; without limiting
the foregoing, Seller shall be liable for any continuation coverage (including
any penalties, excise taxes or interest resulting from the failure to provide
continuation coverage) required by law due to qualifying events which occur on
or before the Closing Date;
(h) any obligation or liability of Seller or arising from the
Seller's conduct of the Business before the Closing which is not specifically
assumed by the Buyer pursuant to Section 2.2 hereof;
(i) any obligation or liability for increased Worker's
Compensation premiums relating to the period prior to Closing.
Section 2.4 PURCHASE PRICE. Subject to the terms and conditions of this
Agreement, in reliance upon the representations and warranties of Seller
contained herein, and in consideration of the transfer of the Assets described
in Section 2.1 as herein provided, on the Closing Date, Buyer agrees to purchase
the Assets for an aggregate purchase price (the "PURCHASE PRICE") equal to: (i)
the Net Value of Purchased Assets (the "CASH PAYMENT"), plus (ii) royalty
payments as required by Section 2.4(b) hereof.
(a) CASH PAYMENT.
(i) An amount equal to ninety percent (90%) of the Interim
Net Value of Purchased Assets shall be paid to Seller by wire transfer at
Closing. An amount equal to ten percent (10%) of the Interim Net Value of
Purchased Assets shall be held by Buyer pending agreement of the parties on the
Closing Balance Sheet (the "ADJUSTMENT FUND").
(ii) Within ten (10) days following the Closing, Seller
shall provide Buyer with a balance sheet reflecting the Net Value of Purchased
Assets as of the Closing Date ("CLOSING BALANCE SHEET"). Buyer shall have
fifteen (15) days to review the Closing Balance Sheet and to provide Seller with
any proposed adjustments to the Closing Balance Sheet. Seller shall then have
five (5) days thereafter to accept or reject such proposed adjustments.
(iii) Upon agreement of the parties on the Closing Balance
Sheet, and any adjustments thereto pursuant to Section 2.4(a)(ii) above, the
Adjustment Fund shall be distributed as follows:
(1) If the Net Value of Purchased Assets is equal to
the Interim Net Value of Purchased Assets, then the Adjustment Fund shall be
paid to Seller immediately by wire transfer;
(2) If the Net Value of Purchased Assets is greater
than the Interim Net Value of Purchased Assets, then the Adjustment Fund, plus
the difference between the Net Value of Purchased Assets and the Interim Net
Value of Purchased Assets, shall be paid to Seller immediately by wire transfer;
or
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(3) If the Net Value of Purchased Assets is less
than the Interim Net Value of Purchased Assets, then the difference between the
Net Value of Purchased Assets and the Interim Net Value of Purchased Assets
shall be subtracted from the Adjustment Fund and the balance of the Adjustment
Fund, if any, paid to Seller immediately by wire transfer. In the event that the
Adjustment Fund is reduced below $0, then the Seller shall immediately repay to
Buyer any negative balance by wire transfer.
(iv) In the event the parties cannot agree within fifteen
(15) days of Seller's receipt of Buyer's proposed adjustments to the Closing
Balance Sheet, then the parties agree to submit the matter to arbitration
pursuant to Section 12 of this Agreement.
(b) ROYALTY PAYMENT
(i) ADVANCED ROYALTY PAYMENT. Buyer shall pay a portion of
the royalty payment ("ADVANCED ROYALTY PAYMENT") on November 1, 2000, in the
amount of US $920,000.
(ii) ADDITIONAL ROYALTY PAYMENTS. During the period
October 1, 2000 through September 30, 2003 (the "ROYALTY PERIOD"), royalties of
nine and two tenths percent (9.2 %) of the Net Sales Proceeds of the sales of
microcavity laser products invoiced by Buyer in a given month shall accrue,
PROVIDED, HOWEVER, that the sales price of microcavity laser products invoiced
to Affiliates of Buyer during the Royalty Period shall be increased by twelve
percent (12%) for purposes of this royalty calculation ("ROYALTY AMOUNTS") and
shall be paid to Seller, in arrears, in monthly installments by wire transfer to
an account designated by Seller ("MONTHLY ROYALTY AMOUNTS"). Notwithstanding
anything contained herein to the contrary, no Monthly Royalty Amounts shall be
made until the full amount of the Advanced Royalty Payment has been fully offset
by the Royalty Amounts, and PROVIDED FURTHER, that in no event shall the sum of
the Advanced Royalty Payment, and the Monthly Royalty Amounts exceed
US$2,668,000. For purposes of this Agreement, "Net Sales Proceeds" shall mean,
with respect to any microcavity laser products sold by Buyer, the gross amount
billed or invoiced by Buyer to a third party for sales of such products, less
the following items, as allocable to such sales: (i) trade discounts, credits or
allowances, (ii) credits or allowances additionally granted upon returns,
rejections or recalls (except where any such recall arises out of Buyer's or its
Affiliate's gross negligence, willful misconduct or fraud), (iii) freight,
shipping and insurance charges, (iv) taxes, duties or other governmental tariffs
(other than income taxes), and (v) government mandated rebates, if any.
Section 2.5 INSTRUMENTS OF CONVEYANCE AND TRANSFER.
(a) At the Closing, as contemplated hereby, Seller will
execute, acknowledge and deliver to Buyer:
(i) duly executed bills of sale substantially in the forms
attached hereto as Exhibit B transferring the Equipment, Inventory and certain
of the other Assets;
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(ii) a duly executed assignment in the form attached
hereto as Exhibit C transferring the Acquired Contracts and Accounts Receivable,
together with such Uniform Commercial Code financing statements as may be
required in connection with the transfer of the Accounts Receivable;
(iii) duly executed instruments of assignment, transfer or
license in the forms attached hereto as Exhibit D, transferring the Intellectual
Property;
(iv) all Sales Literature and true and complete copies of
all Records; and
(v) such other documents, instruments, certificates and
writings, in form and substance satisfactory to Buyer's counsel, for the
conveyance, sale, transfer and assignment of the Assets as shall be required to
effectively vest in Buyer good and marketable title to the Assets free and clear
of all Liens except Permitted Liens and Seller shall take all such steps as may
be required to put the Buyer in actual possession and operating control of the
Assets as contemplated hereby.
(b) To the extent that the assignment of any lease, license,
Contract, commitment or right shall require the consent of any other party
thereto, this Agreement shall not constitute an agreement to assign the same if
an attempted assignment would constitute a breach thereof; and to the extent
that the transfer of any Permit shall require the consent of the Governmental
Body which issued such Permit, this Agreement shall not constitute an agreement
to transfer any such Permit if an attempted transfer would invalidate such
Permit. Other than with respect to the Intellectual Property, if any lease,
license, Contract, commitment, right, Permit or other asset or property which is
part of the Assets cannot, in the opinion of the Buyer's counsel, be transferred
effectively to the Buyer without the consent of a third party, the Seller shall
thereafter be obligated to use its Reasonable Best Efforts to assure the Buyer
of the benefits of such lease, license, Contract, commitment, right, Permit, or
other asset or property.
Section 2.6 TRANSFER OF PERMITS. The Seller and the Buyer shall, before
and after the Closing, take all reasonable action as may be necessary or
appropriate, in the opinion of the Buyer, to transfer to the Buyer all of the
Permits set forth on Schedule 2.1(i), to the end that the Buyer shall be
substituted for the Seller as the approved party under such Permits.
Section 2.7 FURTHER ASSURANCES. The Seller shall, at the Closing and at
any time and from time to time at the Buyer's request and without further
consideration, execute, acknowledge and deliver such further instruments of
conveyance, sale, transfer, assignment and confirmation in addition to those
delivered pursuant to Section 3.2, and shall take such other action as Buyer may
reasonably request to more effectively (i) convey, sell, transfer and assign to
and vest in Buyer any of the Assets, (ii) confirm the title of Buyer thereto,
(iii) deliver the Assets to Buyer, (iv) assist Buyer in exercising rights with
respect thereto, and (v) put Buyer in actual possession and operating control of
any of the Assets.
Section 2.8 DILIGENCE IN PURSUING SALES OF PRODUCTS. Buyer shall use
Reasonable Best Efforts to market and sell the microcavity laser products during
the Royalty Period at prices competitive in the microcavity laser market.
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ARTICLE III
CLOSING
Section 3.1 CLOSING. The closing of the transactions contemplated by
this Agreement (referred to herein as the "CLOSING") shall take place at the
offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego,
California 92121-2128 at [______] [__].m. on December ___, 1999, or such other
place, time and date to which the parties may agree. The date of the Closing is
referred to herein as the "CLOSING DATE." Failure to consummate the transactions
contemplated hereby on the Closing Date shall not result in a termination of
this Agreement or relieve any party hereto of any obligation hereunder.
Section 3.2 DELIVERIES AT CLOSING.
(a) At the Closing, Buyer shall deliver the following to
Seller:
(i) ninety percent (90%) of the Interim Net Value of
Purchased Assets as provided for in Section 2.4(a)(i);
(ii) the opinion of counsel, agreements, documents, and
certificates required in Article 9 of the Agreement;
(iii) certified copies of the resolutions duly adopted by
the Board of Directors of Buyer constituting all necessary corporate
authorization for the consummation by Buyer of the transactions contemplated
hereby; and
(iv) certificates of incumbency for all relevant officers
and directors of Buyer executing this Agreement and any other documents pursuant
to this Agreement.
(b) At the Closing, Seller shall deliver the following to
Buyer:
(i) such documents, instruments, certificates and writings
required to be delivered by Seller pursuant to Section 2.5;
(ii) the opinion of counsel, agreements, documents and
certificates required by Article 8 of this Agreement;
(iii) certified copies of the resolutions duly adopted by
the Board of Directors of Seller constituting all necessary corporate
authorization for the consummation by Seller of the transactions contemplated
hereby;
(iv) certificates of incumbency for all relevant officers
and directors of Seller executing this Agreement and any other documents
pursuant to this Agreement; and
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(v) such consents or other documents executed by Seller
and such third parties as may, in Buyer's opinion, be required to effectively
vest in Buyer good and marketable title to the Intellectual Property; and
(vi) such additional documents, instruments, certificates
and writings as Buyer may reasonably request to effect the transactions
contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
Section 4.1 CORPORATE EXISTENCE Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly authorized, qualified and licensed under all applicable laws,
regulations, ordinances and orders of public authorities to carry on its
business in the places and in the manner as now being conducted, except where
the failure to be so qualified or licensed would not reasonably be expected to
have a material adverse effect on the Seller or the Business.
Section 4.2 SELLER'S AUTHORITY RELATIVE TO THIS AGREEMENT. Seller has
full corporate power and authority to execute, deliver and perform this
Agreement, and the transactions contemplated hereby. The execution, delivery and
performance by Seller of this Agreement and the consummation and performance of
the transactions contemplated hereby have been duly authorized and approved and
no further corporate action is necessary on the part of Seller to make this
Agreement, and the transactions contemplated hereby, valid and binding upon
Seller in accordance with their terms. Neither the execution, delivery nor
performance of this Agreement nor the consummation and performance of the
transactions contemplated hereby by Seller will conflict with any provision of
the Organizational Documents of Seller, or result in a violation or breach of
any term or provision or constitute a default or accelerate the performance
required under any Lien or other Material Contract to which Seller is a party or
by which it or any of the Assets is bound, or violate any Order applicable to
Seller.
Section 4.3 TITLE TO PROPERTIES, ETC. Seller has good and marketable
title to, and is in possession of, all the Assets, free and clear of all Liens
except for liens to be removed prior to Closing and Permitted Liens as set forth
on Schedule 4.3 attached hereto. Seller has the right to transfer, sell, convey
and assign the Assets without the consent of any other party; and the
instruments of transfer, sale, conveyance and assignment to be executed and
delivered by Seller to Buyer at the Closing will be valid and binding
obligations of Seller and sufficient to transfer, sell, convey and assign to
Buyer all right, title and interest of Seller, in and to the Assets.
Section 4.4 EQUIPMENT. Schedule 2.1(a) attached hereto sets forth an
accurate description of all items of Equipment, including the book value of the
items listed thereon. The Equipment being transferred as a portion of the Assets
is in good operating condition, is in a state of reasonable maintenance and
repair, ordinary wear and tear excepted, and is fit for the ordinary purposes
for which such Equipment is used. All of the Equipment conforms in all material
respects to all applicable laws.
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Section 4.5 INVENTORY. Schedule 2.1(b) attached hereto sets forth an
accurate description of all Inventory of Seller as of October 31, 1999,
including the book value of the items listed thereon. The Inventory consists of
items of raw materials and work in process as indicated, and are of good and
standard quality, fit for their intended purpose and, in the case of goods
covered by a customer or distributor purchase order, of specifications and in
quantities corresponding to the customer orders to which they relate. Any of the
Inventory that is obsolete, excessive, slow-moving or unsaleable is valued in
accordance with GAAP in the books and records of Seller. The values at which the
Inventory is carried on Seller's books and records reflect Seller's normal
valuation policy as consistently applied.
Section 4.6 CUSTOMERS. Schedule 4.6 sets forth a complete and accurate
list of all of the customers of the Business during the period beginning
December 1, 1998 and ending on the date of this Agreement.
Section 4.7 SUPPLIERS. Schedule 4.7 sets forth a complete and accurate
list of all of the suppliers of the Business during the period beginning
December 1, 1998 and ending on the date of this Agreement.
Section 4.8 CUSTOMERS AND SUPPLIERS. There have been no material
adverse changes in the relationships between Seller and Seller's customers and
suppliers of the Business since December 1, 1998 through the date of this
Agreement. Except as and to the extent set forth on Schedule 4.8, Seller has not
been provided with any notice that any significant supplier or customer of the
Business intends to cease doing business with Seller.
Section 4.9 ACCOUNTS RECEIVABLE. The accounts receivable related to the
Business owed to Seller as of October 31, 1999 are listed on the attached
Schedule 2.1(d). To Seller's Knowledge, all such accounts receivable are
collectible in the amounts shown on Schedule 2.1(d).
Section 4.10 INTELLECTUAL PROPERTY. The attached Schedule 2.1(c) sets
forth a list of all Intellectual Property, together with a summary description
and full information in respect of the filing, registration, issuance or status
thereof. No Intellectual Property will be adversely affected by the transactions
contemplated hereby. Except as set forth on attached Schedule 4.10(a), no
licenses, sublicenses, covenants, Contracts, agreements or legally enforceable
commitments have been granted or entered into by Seller in respect of such
Intellectual Property. Except as set forth on attached Schedule 4.10(a)(1),
Seller has no Knowledge of: (i) any infringement or claimed infringement by
Seller or its customers of any patent rights, copyrights, trademarks, service
marks, trade names, trade secrets, mask work rights or other intellectual
property rights of others, (ii) any infringement of rights in and to the
Intellectual Property, or of any pending, existing or Threatened Proceedings
relating to the Intellectual Property, or (iii) any Threatened or contemplated
cancellation or revocation of any Contract granting to the Seller any copyright,
or patent or trademark, license or other Intellectual Property right. Except as
set forth on attached Schedule 4.10(b), to Seller's Knowledge, no present or
past parent or Affiliate, director, officer, employee, stockholder, or
consultant of Seller: (i) owns, directly or indirectly, in whole or in part, any
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interest in and to any Intellectual Property or inventions or patents, or
copyrights or applications therefor which Seller is presently using in
connection with the Business or related to the Business or Products, or (ii) has
made any invention not assigned to Seller which is necessary or desirable for
the operation of the Business. Except as set forth on Schedule 4.10(c), as of
the date hereof, the Seller has no Knowledge of any new developments with
respect to the Business or the Products which are commercially available or any
new or improved materials, products, processes, methods or services useful in
connection with the Business or the Products which are commercially available
and which may adversely affect the sales, properties, Assets, liabilities or
condition (financial or otherwise) of the Business.
Section 4.11 MATERIAL CONTRACTS.
(a) Schedule 4.11(a) is a list of certain material contracts,
agreements and other documents to which the Seller is a party or by which it, or
the Assets, is bound in connection with the Business and which may involve
payments or receipts in excess of $25,000 (the "Material Contracts"). Except for
contracts, agreements and other documents listed on Schedule 4.11(a), the Seller
is not a party in connection with the Business, nor are any of the Assets in any
way bound or obligated by any written or oral:
(i) Contracts, agreements or commitments in respect of the
sale of products or services, including any existing written warranties given by
Seller in connection with the sale of products of the Business that are in force
at Closing Date, or for the future purchase of raw materials, supplies,
equipment, or other products or utilities;
(ii) sales agency or distributorship agreements or
franchise agreements, or any legally enforceable commitments or obligations with
respect thereto;
(iii) collective bargaining agreements, union agreements,
employment contracts, consulting agreements or any agreements providing for the
services of an independent contractor;
(iv) profit-sharing, pension, stock option, severance pay,
retirement, bonus, deferred compensation, group life and health insurance or
other employee benefit plans, agreements, arrangements or commitments, whether
or not legally binding, applicable to any employee employed by Seller in
connection with the Business;
(v) loan or credit agreements, indentures, guarantees
(other than an endorsement made for collection), mortgages, pledges, conditional
sales or other title retention agreements, or any equipment financing
obligations, leases or lease-purchase agreements; or
(vi) Contracts, agreements or legally enforceable
commitments, other than those of the types covered by paragraphs (a) through (e)
above and as otherwise listed on Schedule 4.11(a), which might materially affect
the sales, properties, Assets, liabilities or condition (financial or otherwise)
of the Business.
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(b) A true and complete copy of each Contract, agreement or
other document (or, in the case of oral commitments, a description of the
material terms thereof) which is listed on Schedule 4.11(a), including all
amendments, supplements and modifications thereto, has heretofore been furnished
to Buyer. Each such Contract, agreement or other document is in full force and
effect and is the binding obligation of the parties thereto. No event or
condition has occurred or exists, or, is alleged by any of the other parties to
such Contracts, agreements or other documents to have occurred or existed which
constitutes, or as a result of the consummation of the transactions contemplated
hereby or with the lapse of time or giving of notice or both might constitute a
material default or a basis for acceleration of any obligation, force majeure,
or other claim of excusable delay or non-performance thereunder or in respect
thereof, whether on the part of Seller or any other party. Except as noted on
Schedule 4.11(b), each such Contract, agreement or other document may be
assigned or otherwise transferred pursuant to this Agreement without consent of
any third party.
Section 4.12 ABSENCE OF CERTAIN CHANGES. Except as disclosed on
Schedule 4.12, since June 30, 1999, the Seller has not:
(a) experienced any material adverse change in the Business,
or in the prospects or conditions (financial or otherwise) of the Business;
(b) (i) except for customary raises granted its Employees in
accordance with its past practices, increased or agreed to increase the rate of
compensation payable or to become payable by it to any of its Employees, or (ii)
made, directly or indirectly, any accrual or arrangement for or payment of
bonuses or special compensation of any kind or any severance or termination pay
to any present or former Employees other than as described on Schedule 4.12(b)
hereto, or (iii) adopted any new, or made any increase in any existing, profit
sharing, bonus, deferred compensation, savings, insurance, group life, health
insurance, pension, retirement or other employee benefit plan, payment or
arrangement made to, for or with any of such Employees;
(c) changed accounting methods or practices followed by Seller
as it relates to the Business or changed depreciation or amortization policies
or rates heretofore adopted in connection with the Assets;
(d) borrowed or agreed to borrow any funds or incurred, or
become subject to, any obligations or liability (absolute or contingent, whether
or not outstanding at present) which materially and adversely affects the
Business or any of the Assets except: (i) current liabilities (other than for
borrowed money or the deferred purchase price of any assets) incurred in the
Ordinary Course of Business and obligations under agreements entered into in the
Ordinary Course of Business; and (ii) obligations or liabilities entered into or
incurred in connection with the execution of this Agreement;
(e) experienced any actual or Threatened employment dispute,
demand for recognition, strike, walkout, lockout, slowdown, labor grievance or
arbitration, unfair labor practice charge or complaint, labor organizational
activity or requests by Employees for union representation, charge of
discrimination or unfair employment practice, or any other occurrence, event or
condition of any similar character affecting the Employees, directly or
indirectly, which may have a material adverse effect on the condition, continued
operation or prospects of the Business or on the Assets;
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(f) granted any powers of attorney or comparable delegations
of authority outstanding in connection with the Business which may be binding on
Seller;
(g) suffered any damage, destruction, loss, waiver of rights
or other decreases in the value of any of the Assets of whatever form, whether
or not covered by insurance, which individually or in the aggregate is material;
(h) canceled or agreed to cancel any debt or claims or entered
or agreed to enter into any Contract, agreement or arrangement granting any
preferential rights to purchase any of the Assets or requiring the consent of
any party to the transfer or assignment of any of the Assets of the Business;
(i) learned of any planned or proposed Legal Requirement which
has or would have a material and adverse effect on the continued operation,
Assets, business condition (financial or otherwise) or prospects of the
Business;
(j) amended or terminated, or agreed to amend, terminate or
permit any termination of, any Contract, agreement or license to which Seller is
a party and which affects the Business, if such amendment or termination is or
would have a material and adverse effect on the Buyer or the Business, is not at
arm's length or is other than in Ordinary Course of Business; or
(k) amended, terminated, allowed to lapse or failed to renew
any Permit, if such amendment, termination, lapse or failure to renew is or
would be material or has or would have an adverse effect on Buyer or the
Business.
Section 4.13 TAX MATTERS. All foreign, federal, state, county, local
and any other Tax, including, without limitation, income taxes, corporate
franchise taxes, payroll taxes, sales taxes and ad valorem taxes, due and
payable by Seller with respect to the Business on or before the date of this
Agreement have been paid and the Seller has filed all Tax Returns and reports
required to be filed by it.
Section 4.14 NO DEFAULT; COMPLIANCE WITH LAWS. Except as listed on
Schedule 4.14:
(a) there has been no default in any respect in any material
obligation to be performed by Seller under any Material Contract, nor has Seller
waived any material right under any such Material Contract; and
(b) the Seller has complied in all material respects with all
applicable Legal Requirements, including, without limitation, those imposing
taxes, in every applicable jurisdiction, in respect of the ownership of the
Assets used in connection with the Business and the conduct of the Business.
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Section 4.15 LITIGATION. Except as set forth on Schedule 4.15(a), there
are no Proceedings pending, Threatened or affecting the Seller in connection
with the Business or the Assets, including, but not limited to, any such action
(a) involving or concerning product liability of any Products designed,
produced, manufactured, sold or serviced by the Seller prior to the Closing Date
or (b) which question the validity or legality of the transactions contemplated
hereby. Seller is not, in connection with the Business, subject to any
continuing Order, applicable to it or to the Business or the Assets, and is not,
in violation of or in default with respect to any Order, except as set forth on
Schedule 4.15(b).
Section 4.16 PRODUCT LIABILITY. Seller has not given or made any
warranties to third parties with respect to any Products, except for Seller's
standard warranties and OEM warranties, true copies of which are attached as
Schedule 4.16(a), warranties imposed by the provisions of the applicable
commercial codes or for which it is indemnified by third parties. Except as set
forth on Schedule 4.16(b), to Seller's Knowledge there is no state of Seller's
affairs, nor has any event occurred which may form the basis of any present
claim against the Seller in connection with the Business not fully covered by
insurance for product liability.
Section 4.17 INSURANCE. Schedule 4.17 is a schedule setting forth a
list and brief description of all policies of insurance held by the Seller in
connection with the Business, copies of which policies have been heretofore
furnished to the Buyer. Such policies are (i) in full force and effect, (ii)
underwritten by financially sound and reputable insurers, (iii) sufficient for
all applicable requirements of law and (iv) in amount, and against such risks,
as are generally maintained for comparable businesses and properties in the
locality where such business and properties are located.
Section 4.18 LICENSES, PERMITS, ETC. Schedule 4.18 is a schedule
describing all licenses, product and establishment registrations, franchises,
Permits, easements, certificates, consents, rights and privileges necessary to
the conduct of the Business, all of which have been obtained by Seller and are
valid and in full force. Copies of all such items have heretofore been furnished
to the Buyer.
Section 4.19 INTEREST IN COMPETITORS, SUPPLIERS, CUSTOMERS, ETC. To
Seller's Knowledge, no officer or director of Seller or any spouse or child of
any such officer or director, as applicable, has any ownership interest in any
competitor, supplier or customer of Seller in connection with the Business, or
any property (tangible or intangible) used in the operation of the Business,
except as disclosed on Schedule 4.19.
Section 4.20 QUESTIONABLE PAYMENTS. To Seller's Knowledge, neither the
Seller nor any Employee, agent, or representative as applicable, of Seller has
made, directly or indirectly, in connection with the Business, any bribes,
kickbacks, illegal payments, political contributions with corporate funds,
payments from corporate funds not recorded on the books and records of Seller,
payments from corporate funds which were falsely recorded on the books and
records of the Seller, payments from corporate funds to governmental officials
for improper purposes or illegal payments from corporate funds to obtain or
retain business either within the United States or abroad.
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Section 4.21 YEAR 2000 COMPLIANCE. All computers, hardware, computer
software, databases and embedded control systems used by the Seller, to the
extent that they constitute part of the Assets (collectively, the "SYSTEMS") are
Year 2000 Compliant. As used herein, the term "YEAR 2000 COMPLIANT" means that
the Systems (i) accurately process date and time data (including calculating,
comparing, and sequencing) from, into and between the twentieth and twenty-first
centuries, the years 1999 and 2000, and leap year calculations and (ii) operate
accurately with other software and hardware that use standard date format (4
digits) for representation of the year.
Section 4.22 AT-WILL EMPLOYEES. It is Seller's published policy that
all Employees of the Business are employed "at will".
Section 4.23 NO BROKERS. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement arising out of any action
taken by Seller.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
Section 5.1 CORPORATE EXISTENCE. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada.
Buyer is duly qualified to do business and in good standing as a foreign
corporation in California.
Section 5.2 BUYER'S AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has
full corporate power and authority to execute, deliver and perform this
Agreement and the transactions contemplated hereby. The execution, delivery and
performance by Buyer of this Agreement and the consummation and performance of
the transactions contemplated hereby have been duly authorized and approved and
no further corporate action is necessary on the part of Buyer to make this
Agreement, and the transactions contemplated hereby, valid and binding upon
Buyer in accordance with their terms. Neither the execution, delivery nor
performance of this Agreement and consummation and performance of the
transactions contemplated hereby by Buyer will conflict with any provision of
the Organizational Documents of Buyer, or result in a violation or breach of any
term or provision or constitute a default or accelerate the performance required
under any Lien or other Contract or agreement to which Buyer is a party or by
which it or any of its assets and properties is bound, or violate any Order
applicable to Buyer.
Section 5.3 ABSENCE OF LITIGATION. There are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of any director or
officer of Buyer, threatened against or affecting the ability or right of Buyer
to execute and deliver this Agreement or to consummate and perform the
transactions contemplated hereby.
Section 5.4 NO FURTHER APPROVAL. No approval, authorization, order,
license, permit, franchise or consent of, or registration, declaration or filing
with, any governmental authority or other person is required in connection with
the execution, delivery and performance by Buyer of this Agreement and the
consummation of the transactions contemplated hereby.
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Section 5.5 NO BROKERS. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement arising out of any action
taken by Buyer.
Section 5.6 NO INDUCEMENT. For a period of three (3) years after the
Closing, Buyer will not, directly or indirectly, either for itself, its
subsidiary, an Affiliate, or any other Person, induce or attempt to induce any
employee of the Seller identified on Schedule 5.6 to leave the employ of the
Seller.
ARTICLE VI
OTHER MATTERS
Section 6.1 RETENTION BONUS PAYMENTS. Buyer shall reserve for certain
employees set forth on Schedule 6.1: (i) US $80,000, plus (ii) in the event that
the Royalty Amounts exceed $920,000, then eight tenths of one percent (.8%) of
the Net Sales Proceeds during the Royalty Period shall be distributed to such
employees (to the extent that such employee is an employee of Buyer at the time
such funds are to be distributed) in the form of a bonus. In no event shall such
bonus amounts exceed US $232,000.
Section 6.2 AMERICAN LASER ACCOUNTS RECEIVABLE. For each microcavity
laser that Buyer ships to American Laser Corporation, Buyer shall remit to
Seller the value of one microcavity laser. In the event American Laser pays to
Buyer any amounts unrelated to or independent from the shipment of microcavity
lasers, Buyer shall remit to Seller all of such payment. Notwithstanding the
foregoing, Buyer's obligation to remit such payments to Seller shall cease at
such time as all such remittances shall equal $98,910.00 (the "Remittance Cap").
Section 6.3 BALANCING PAYMENT. From the Closing Date until December 24,
1999, Buyer shall pay to the Seller the value of the gross margin on sales of
the Products shipped during such period, less any commissions or other payments
to a third party relative to theses shipments. Seller shall pay Buyer $4,000 per
day for each business day between the Closing Date and December 24, 1999. This
provision shall apply only to sales of the Products which are included on the
unshipped order backlog of the Seller as of the Closing Date.
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ARTICLE VII
COVENANTS OF SELLER
Seller covenants with the Buyer that:
Section 7.1 CONDUCT OF BUSINESS. From the date of this Agreement to the
Closing Date, Seller will operate the Business only in the Ordinary Course, and,
in particular, without the prior written consent of Buyer, Seller, in connection
with the Business, will not:
(a) commit any act or permit the occurrence of any event or
the existence of any condition of the type described in Section 4.12 in
connection with the Business or the Assets;
(b) enter into any Contract, agreement, commitment or
undertaking in connection with the Business or the Assets involving payments or
receipts of more than US $25,000, other than Contracts or commitments made
pursuant to this Agreement;
(c) cancel or permit any insurance maintained in connection
with the Business or the Assets to lapse or terminate, unless reviewed or
replaced by like coverage;
(d) be in material default under any Contract, agreement,
commitment or undertaking of any kind relating to the Business or the Assets;
(e) violate or fail to comply with all laws applicable to the
Assets or the Business;
(f) fail to maintain and repair the Assets in accordance with
good standards of maintenance and as required in any leases or other agreements
pertaining thereto; or
Section 7.2 ACCESS TO INFORMATION. From and after the date of this
Agreement, the Seller will give to Buyer and its representatives, full and free
access to all the properties, Records, contracts, and commitments of the
Business so that Buyer may have full opportunity to make such investigation as
it shall desire to make of the affairs of the Business. Without limiting the
foregoing, Seller shall cooperate with and give Buyer full access to such
information and Records as Buyer may deem necessary to facilitate the review of
the Closing Balance Sheet by Buyer. Any such investigation shall not affect the
representations and warranties of the Seller contained in this Agreement.
Section 7.3 PRESERVATION OF BUSINESS ORGANIZATION. Seller will use its
Reasonable Best Efforts to preserve the business organization of the Business
from the date of this Agreement to and including the Closing Date, and to
preserve for Buyer Seller's good relations with all licensors, suppliers,
customers and others having business relations with Seller in connection with
the Business.
Section 7.4 TRADE SECRETS. From and after the Closing Date, Seller will
not use or divulge to any competitor or unauthorized person, any Confidential
Information, and will use its Reasonable Best Efforts to insure that its
employees and agents do not use or divulge, any Confidential Information, trade
secrets, processes, formulae or know-how relating to the Business.
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Section 7.5 CONSENTS OF THIRD PARTIES. Seller will use all reasonable
and proper efforts to obtain, where required, the consents of all third parties,
including assisting Buyer in obtaining all Governmental Authorizations related
to the Business or Assets which require such consents.
Section 7.6 COLLECTION OF RECEIVABLES. Subject to Section 6.2, hereof,
after the Closing Date, Seller hereby authorizes Buyer to collect all
receivables and other items transferred to Buyer hereunder, and to endorse with
the name of Seller any checks or other instruments received on account of any
such receivable or other item. The Seller agrees that it will transfer or cause
to be transferred to Buyer any cash or other property that it may receive after
the Closing Date in respect of such receivables or other items. The Seller will
on and after the Closing Date, cooperate with Buyer in endeavoring to effect the
collection of all receivables and the pursuit of all other Proceedings involving
the Business based on Contracts, arrangements or acts of the Seller which were
in effect or occurred on or prior to the Closing Date and related to the
Business.
Section 7.7 SUPPLY CONTRACTS. As may be requested by Buyer, Seller
hereby agrees that it shall maintain any and all Contracts or agreements with
suppliers or vendors listed on Schedule 2.1(e) or other such Contracts or
arrangements which Seller is unable, for whatever reason, to transfer or assign
to Buyer. Seller shall for the duration of any such Contract, agreement or
arrangement, pass through the benefits of same to Buyer at Seller's cost of the
goods or services provided thereunder. Buyer shall pay Seller for such goods or
services in accordance with the terms of Seller's invoice for same.
Section 7.8 ROYALTIES. With respect to the license agreements set forth
on Schedule 4.18 Seller has paid or shall pay prior to the Closing Date any
royalties or other similar obligations associated with the Business due and
payable on or before the Closing Date.
Section 7.9 INSURANCE. Seller shall maintain valid policies of
insurance as set forth in Section 4.17 hereof which will be outstanding and duly
in force on the Closing Date.
Section 7.10 ACKNOWLEDGMENTS BY SELLER. Seller acknowledges that:
(a) Seller has occupied a position of trust and confidence in
connection to the Business prior to the date hereof and has become familiar with
the following, any and all of which constitute confidential information of the
Business, (collectively the "CONFIDENTIAL INFORMATION"): (i) any and all trade
secrets concerning the business and affairs of the Business, the Products,
product specifications, data, know-how, formulae, compositions, processes,
designs, sketches, photographs, graphs, drawings, samples, inventions and ideas,
past, current and planned research and development, current and planned
manufacturing and distribution methods and processes, customer lists, current
and anticipated customer requirements, price lists, market studies, business
plans, computer software and programs (including object code and source code),
computer software and database technologies, systems, structures and
architectures (and related processes, formulae, compositions, improvements,
devices, know-how, inventions, discoveries, concepts, ideas, designs, methods
and information of the Business and any other information, however documented,
of the Business that is a trade secret within the meaning of California Uniform
Trade Secrets Act, Section 3426, et seq. of the California Civil Code; (ii) any
and all information concerning the business and affairs of the Business (which
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includes historical financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and plans, the names
and backgrounds of key personnel, personnel training and techniques and
materials) however documented; and (iii) any and all notes, analysis,
compilations, studies, summaries, and other material prepared by or for the
Business containing or based, in whole or in part, on any information included
in the foregoing;
(b) the business of the Business is international in scope;
(c) its products and services are marketed worldwide (the
"TERRITORY");
(d) Buyer has required that Seller make the covenants set
forth in Section 7 of this Agreement as a condition to the Buyer's purchase of
the Assets owned by Seller;
(e) the provisions of Section 7 of this Agreement are
reasonable and necessary to protect and preserve the Business; and
(f) the Business would be irreparably damaged if Seller were
to breach the covenants set forth in Section 7 of this Agreement.
Section 7.11 CONFIDENTIAL INFORMATION.
(a) Seller acknowledges and agrees that all Confidential
Information known or obtained by Seller, whether before or after the date
hereof, is the property of the Business. Therefore, Seller agrees that Seller
will not, at any time, disclose and will use its Reasonable Best Efforts to
prevent any of its employees from disclosing to any unauthorized Person or use
for its own account (other than with respect to internal research or development
of products unrelated to the Business or to the Products) or for the benefit of
any third party any Confidential Information, which Seller has in its
possession, whether in memory, in writing or other physical form, without
Buyer's written consent, unless and to the extent that the Confidential
Information is or becomes generally known to and available for use by the public
other than as a result of Seller's fault or the fault of any other Person bound
by a duty of confidentiality to Buyer or the Business. Seller agrees to deliver
to Buyer at the time of execution of this Agreement, and at any other time Buyer
may request, all documents, memoranda, notes, plans, records, reports, and other
documentation, models, components, devices, or computer software, whether
embodied in a disk or in other form (and all copies of all of the foregoing),
relating to the businesses, operations, or affairs of the Business and any other
Confidential Information that Seller may then possess or have under its control.
(b) If, for any reason, the Closing of the transactions
contemplated by this Agreement fails to occur, each party shall maintain as
confidential all non-public information of the other received or learned by it
in the course of negotiations, due diligence and other actions undertaken in the
course of entering into and performing this Agreement, and Buyer shall return
all such information delivered by Seller to Seller.
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Section 7.12 NONCOMPETITION AGREEMENT OF SELLER. As an inducement for
Buyer to enter into this Agreement and as additional consideration for the
consideration to be paid to Seller hereunder,
(a) Seller agrees that:
(i) for a period of three (3) years after the Closing,
Seller will not, directly or indirectly, or individually or in partnership or
jointly in conjunction with any Person, as a principal, agent or shareholder, or
in any manner whatsoever engage or invest in, own, manage, operate, finance,
control, or participate in the ownership, management, operation, financing, or
control of, be associated with, or in any manner connected with, lend Seller's
name or any similar name to, lend Seller's credit to, or render services or
advice to, any business whose products or activities compete in whole or in part
with the products or activities of the Business anywhere within the Territory,
other than with respect to laser optics coating products; provided, however,
that Seller may purchase or otherwise acquire up to (but not more than) five
percent of any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such securities are
listed on any national or regional securities exchange or have been registered
under Section 12(g) of the Securities Exchange Act of 1934. Seller agrees that
this covenant is reasonable with respect to its duration, geographical area, and
scope;
(ii) for a period of three (3) years after the Closing,
Seller will not, directly or indirectly, either for itself, its subsidiary, an
Affiliate, or any other Person, (i) induce or attempt to induce any employee of
the Buyer in connection with the Business to leave the employ of the Buyer; (ii)
in any way interfere with the relationship between the Buyer and any employee of
the Buyer in connection with the Business; (iii) employ, or otherwise engage as
an employee, independent contractor, or otherwise, any employee of the Buyer in
connection with the Business; or (iv) induce or attempt to induce any customer,
supplier, licensee, or business relation of the Buyer in connection with the
Business to cease doing business with the Buyer, or in any way interfere with
the relationship between any customer, supplier, licensee, or business relation
of the Buyer in connection with the Business; and
(iii) for a period of three (3) years after the Closing,
Seller will not, directly or indirectly, either for itself, its subsidiary, an
Affiliate, or any other Person, solicit the business of any Person known to
Seller to be a customer of the Business, whether or not Seller, or any of
Seller's shareholders, directors, officers, employees or agents, had personal
contact with such Person, with respect to products or activities which compete
in whole or in part with the products or activities of the Business, other than
for the 1550 nm microlaser product line which is not part of the Business.
(b) In the event of a breach by Seller of any covenant set
forth in Subsection 7.12(a) hereof, the term of such covenant will be extended
by the period of the duration of such breach. Seller will not, at any time
during or after the three (3) year period, disparage Buyer or the Business, or
any of their shareholders, directors, officers, employees, or agents.
(c) It is the understanding and agreement of the parties that
the covenants not to compete contained in this Section 7.12, as to duration,
scope and geographical area are necessary to protect the rights of Buyer in and
to the Assets. In the event that the provisions of this Section 7.12 should ever
be deemed to exceed the duration, scope or geographic limitations permitted by
applicable laws, then such provisions shall be reformed to the maximum duration,
scope or geographic limitations permitted by applicable law.
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(d) In the event that Seller is acquired by, merged with or
into or sells all or substantially all of its assets to a competitor or an
affiliate of a competitor of Buyer, then the term of the covenants set forth in
Section 7.12 hereof, shall expire as of the date of the closing of such
acquisition, merger, or sale.
Section 7.13 RELEASE OF CERTAIN LIENS. The parties agree that the liens
set forth on the attached Schedule 7.13 will not be released prior to Closing.
Seller hereby agrees to effect a release of the Assets from the liens set forth
on Schedule 7.13 on or before sixty (60) days after Closing.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer hereunder shall be, at the option of Buyer, subject to
the satisfaction of the following conditions:
Section 8.1 SELLER'S REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING.
Buyer shall not have discovered any material error, misstatement or omission in
the representations and warranties made by Seller in Article 4 hereof; the
representations and warranties made by Seller herein shall be deemed to have
been made again at and as of the time of Closing and shall then be true in all
material respects, except to the extent that such representations and warranties
shall have been made as of a specified date; Seller shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing; and Buyer shall
have received a certificate of the President of Seller to the effect set forth
in this Section 8.1.
Section 8.2 APPROVAL BY COUNSEL. All actions, proceedings, instruments
and documents required to carry out the transactions contemplated by this
Agreement or incidental thereto and all other related legal matters shall have
been approved by Fulbright & Jaworski L.L.P., counsel for Buyer, and such
counsel shall have been furnished with such certified copies of actions and
proceedings and other such instruments and documents as it shall have reasonably
requested.
Section 8.3 OPINION OF COUNSEL FOR SELLER. Buyer shall have received
the legal opinion of Cooley Godward LLP, Counsel for Seller, within five (5)
business days of the Closing Date and dated the Closing Date, in the form of
Exhibit F attached hereto.
Section 8.4 NO DAMAGE OR DESTRUCTION. Prior to the Closing there shall
not have occurred any casualty to any Equipment or Inventory owned or used by
the Seller as a result of which the monetary amount of damage or destruction
aggregates more than $250,000 and such loss shall not be substantially covered
by valid, existing insurance underwritten by responsible insurers. Additionally,
there shall not have been any changes in the business, properties or operations
of the Business or of the Assets since the date hereof and continuing as of the
Closing Date which would have a material adverse effect on the value of the
Business or the Assets.
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Section 8.5 ABSENCE OF RESTRAINT. No Order to restrain, enjoin or
otherwise prevent the consummation of this Agreement or any transactions in
connection herewith shall have been entered and, on the Closing Date, there
shall not be any pending or Threatened Proceeding with a view to seeking to
restrain or prohibit consummation of the transactions contemplated hereby or in
which divestiture, rescission or significant damages are sought in connection
with the transactions contemplated hereby, and no investigation by any foreign
or domestic Governmental Body shall be pending or Threatened which might result
in any such Proceeding.
Section 8.6 APPROVALS. All consents and authorizations by third parties
and all Governmental Authorizations in form and substance reasonably
satisfactory to Buyer, the granting or making of which are necessary for the
consummation of the transactions contemplated hereby or for the prevention of
the termination of any right, privilege, lease, license, Contract, Permit or
agreement of Seller relating to the Business or any material loss or
disadvantage to Buyer upon the consummation of the transactions contemplated
hereby shall have been obtained or made.
Section 8.7 EMPLOYMENT AGREEMENTS. Buyer shall have received executed
employment agreements in the form of Exhibit E from the individuals listed on
Schedule 8.8 (the "Key Employees").
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder shall be, at the option of Seller, subject
to the satisfaction of the following conditions:
Section 9.1 BUYER'S REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING.
There shall have been no material error, misstatement or omission in the
representations and warranties made by Buyer in Article 5 hereof; the
representations and warranties made by Buyer herein shall be deemed to have been
made again at and as of the time of Closing and shall then be true in all
material respects, except to the extent that such representations and warranties
shall have been made at and as of a specific date; Buyer shall have performed
and complied with all agreements and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing; and Seller shall
have received a certificate, dated the Closing Date, of a senior officer of
Buyer to the effect set forth in this Section 9.1.
Section 9.2 APPROVAL BY COUNSEL. All actions, proceedings, instruments
and documents required to carry out the transactions contemplated by this
Agreement or incidental thereto and all other related legal matters shall have
been approved by counsel for Seller and such counsel shall have been furnished
with such certified copies of actions and proceedings of Buyer and other such
instruments and documents as they shall have reasonably requested.
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Section 9.3 OPINION OF BUYER'S COUNSEL. The Seller shall have received
an opinion of Fulbright & Jaworski, L.L.P., counsel for the Buyer, dated the
Closing Date, substantially in the form of Exhibit G attached hereto.
ARTICLE X
NATURE OF STATEMENTS; SURVIVAL
Except as otherwise set forth in Article 7 of this Agreement, all covenants,
representations and warranties made by Seller hereunder or pursuant hereto or in
connection with the transactions contemplated hereby (except such covenants,
agreements, representations and warranties relating to the Intellectual Property
which shall survive until December 16, 2002) shall survive until December 16,
2000, regardless of any investigation at any time made by or on behalf of Buyer,
or of any information Buyer may have in respect thereto. Except as otherwise set
forth in this Agreement, all covenants, agreements, representations and
warranties made by Buyer hereunder or pursuant hereto or in connection with the
transactions contemplated hereby shall survive until December 16, 2000,
regardless of any investigation at any time made by or on behalf of Seller, or
of any information Seller may have in respect thereto.
ARTICLE XI
INDEMNITY
Section 11.1 INDEMNITY BY SELLER. Subject to the limitations set out in
Section 11.4 hereof, Seller covenants and agrees to indemnify and save and hold
Buyer and its representatives, affiliates, shareholders, officers and directors,
harmless, at all times after the Closing Date, from and against any loss,
liability, claim, damage (including incidental and consequential damages),
expense (including costs of investigation and defense and reasonable attorneys'
fees), or diminution of value, whether on or involving a third party claim
(collectively, "DAMAGES") arising out of or resulting from:
(a) any Retained Liabilities;
(b) any breach of any representation, warranty, or covenant
made by Seller in connection with the transactions contemplated hereby.
Section 11.2 INDEMNITY BY BUYER. In addition to Buyer's indemnity
obligations under Section 2.3 hereof, Buyer covenants and agrees to indemnify
and hold Seller, its directors, officers, employees and agents, harmless, at all
times after the Closing Date, from and against any damages arising or resulting
from:
(a) any breach of any representation, warranty, covenant or
agreement made by Buyer in connection with the transactions contemplated hereby,
including any inaccuracy in any written representation, list, schedule,
certificate or other agreement, instrument or document furnished or to be
furnished to Seller pursuant to the terms of this Agreement, or delivered in
contemplation of, or in connection with the transactions contemplated hereby;
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(b) product safety or liability claims (including, without
limitation, any based on a failure to warn), or claims in respect of any
personal injury or damage to the property of others, or any Occupational Safety,
Health or Welfare Law arising from or relating to acts, omissions, events or
conditions of or relating to the Business occurring after the Closing Date or
any claim otherwise arising out of the Business after the Closing Date;
(c) the Assumed Liabilities.
Section 11.3 THIRD PARTY CLAIMS. The obligations and liabilities of the
parties under this Article 11 with respect to claims resulting from the
assertion of liability by third parties (including governmental penalties, fines
and assessments) shall be subject to the following terms and conditions:
(a) NOTICE. The indemnified party shall give prompt written
notice to the indemnifying party of any assertion of liability by a third party
which might give rise to a claim by the indemnified party against the
indemnifying party based on the indemnity agreements contained in Section 11.
Such notice shall comply with the provisions of Section 14.
(b) DEFENSE. In the event any action, suit or proceeding (a
"LEGAL ACTION") is brought against an indemnified party, with respect to which
the indemnifying party may have liability under an indemnity agreement contained
herein, the Legal Action shall, upon the written agreement of the indemnifying
party that it is obligated to indemnify under such indemnity agreement, be
defended by the indemnifying party and such defense shall include all
proceedings on appeal or for review which counsel for the defendant shall deem
appropriate. The indemnified party shall have the right to be represented by
counsel and accountants, at its own expense, and shall be kept fully informed as
to such Legal Action at all stages thereof whether or not it is represented by
its own counsel. Until the indemnifying party shall have so assumed the defense
of any Legal Action, or if the indemnified party shall have reasonably concluded
that there are likely to be defenses available to the indemnified party that are
different from or in addition to those available to the indemnifying party (in
which case the indemnifying party shall not be entitled to assume the defense of
such Legal Action but shall have the right to be represented by counsel and
accountants, at its own expense, and shall be kept fully informed as to such
Legal Action at all stages thereof whether or not represented by its own
counsel), all legal or other expenses reasonably incurred by the indemnified
party shall be borne by the indemnifying party. The indemnifying party shall
make available to the indemnified party and its attorneys and accountants all
books and records of the indemnifying party relating to such Legal Action and
the parties hereto agree to render to each other such assistance as they may
reasonably require of each other in order to facilitate the proper and adequate
defense of any such Legal Action.
(c) SETTLEMENT OF CLAIMS. The indemnifying party shall not
make any settlement of any claim without the written consent of the indemnified
party, which consent shall not be unreasonably withheld. Without limiting the
generality of the foregoing, it shall not be deemed unreasonable to withhold
consent to a settlement involving injunctive or other equitable relief against
the indemnified party or its assets, employees or business.
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(d) Buyer and Seller agree that it, as applicable, shall
promptly pay to any indemnified party it is obligated to indemnify hereunder in
cash the amount of any damages to which such indemnified party may become
entitled by reason of the provisions of this Agreement.
Section 11.4 INDEMNITY LIMITS. The parties agree that no claims may be
made by Buyer under the indemnification provisions set forth in this Agreement
to the extent that the aggregate of all indemnity claims made by Buyer (as
indemnified party) as of the date of such claim exceeds the sum of the Cash
Payment and the Advanced Royalty Payment or to the extent that the aggregate of
all such indemnity claims does not exceed US $100,000. In addition, Seller shall
not be liable for the first $100,000 in Damages that would otherwise be included
in claims made under the indemnification provisions in this Agreement. Seller
shall not be liable for Damages that would otherwise be included in claims made
under the indemnification provisions of this Agreement in any amount exceeding
the sum of the Cash Payment and the Advanced Royalty Payment.
Section 11.5 RIGHT OF SET-OFF. Upon notice to the Seller specifying the
basis for such set-off, Buyer may set-off any amount to which it may be entitled
pursuant to this Agreement against any payments due Seller under this Agreement
and/or may give notice of a claim in such amount under the indemnification
provisions hereof. The exercise of such right of set-off by the Buyer in good
faith, whether or not ultimately determined to be justified, will not constitute
an event of default under this Agreement. Neither the exercise of nor the
failure to exercise such right of set-off or to give notice of a claim under the
indemnification provisions hereof will constitute an election of remedies or
limit the Buyer in any manner in the enforcement of any other remedies which may
be available to it.
ARTICLE XII
DISPUTE RESOLUTION
Section 12.1 ARBITRATION. (a) All disputes under this Agreement shall
be settled by binding arbitration at San Diego County, California, before a
single arbitrator pursuant to the Commercial Arbitration Rules of the American
Arbitration Association (the "RULES"). Any party may commence arbitration at any
time by giving written notice to the other party that such dispute has been
referred to arbitration under this Agreement. The arbitrator shall be selected
by the joint agreement of the parties, but, if they do not so agree, within
twenty (20) days following the notice referred to above, then the selection
shall be made pursuant to the Rules from the panel of arbitrators maintained by
such Association. The parties shall be entitled to conduct discovery in
connection with the dispute in accordance with the Federal Rules of Civil
Procedure.
(b) Within ten (10) days following the appointment of the
arbitrator each party shall furnish the arbitrator with a statement of the
matters in dispute. The arbitrator shall commence hearing the matter within
twenty (20) days of receiving such statement and shall complete the arbitration
and file his written decision within sixty (60) days following his appointment.
The costs of arbitration, including the arbitrator's fees and the fees and costs
of counsel shall be allocated by the arbitrator in his decision. If the
arbitrator determines that the dispute and arbitration, or either is not the
result of good faith on the part of any party, then the arbitrator may make an
additional award to the party aggrieved for such sum as the arbitrator may in
his or her discretion determine is a reasonable damage figure.
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(c) The award of the arbitrator shall be binding and
conclusive upon the parties and may be entered in any state or federal court
within San Diego County, California. There shall be no right of appeal from the
award of the arbitrator. The arbitrator may award attorneys fees and costs in
accordance with Section 12.3 below.
(d) To the extent that arbitration may not be legally
permitted hereunder, then any party to any dispute under this Agreement may
commence a civil action in accordance with Section 12.2, below.
(e) Nothing in this Agreement shall prevent the parties from
settling any dispute by mutual agreement or mutually agreed mediation.
Section 12.2 JURISDICTION. (a) The parties hereby irremovably submit to
the exclusive jurisdiction of the state and federal courts located in San Diego
County, California for the purpose of any action or proceeding arising out of or
relating to this Agreement. The parties irrevocably agree that all claims in
such action or proceeding may be heard and determined only in such courts. To
the extent permitted by law each of the parties hereby waives and hereby agrees
not to assert by way of motion as a defense or otherwise in any such action or
proceeding that it is not personally subject to the jurisdiction of such courts,
that the action or proceeding is brought in an inconvenient forum or that the
venue of the action or proceeding is improper; PROVIDED, HOWEVER, that nothing
herein shall prevent any party hereto from removing any case hereunder brought
in a state court to the United States District Court in San Diego County,
California. The parties further agree that a final judgment in any action or
proceeding hereunder shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment or in any other manner provided by law.
(b) Each of the parties irrevocably consents to the service of
the summons and complaint and any other process in such action or proceeding
relating to this Agreement on behalf of itself or its property by any means
permitted by California law and addressed to such party at the address set forth
in Section 14.1 hereof.
Section 12.3 If any legal action or arbitration or other proceeding is
brought by any party with respect to this Agreement or because of an alleged
dispute, breach, default or misrepresentation in connection with any other
provisions of this Agreement, then the court or arbitrator shall award the
successful or prevailing party, in addition to any other relief to which it may
be entitled, reasonable attorneys' fees and other costs incurred in that action
or proceeding, including fees and costs incurred on appeal and in collecting any
judgment or award, as equitably determined by the court or the arbitrator, and
the court or arbitrator shall so provide in its judgment or award.
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ARTICLE XIII
TERMINATION
Section 13.1 TERMINATION. This Agreement may be terminated by:
(a) the mutual written consent of the parties hereto;
(b) Buyer, if a material default shall be made by Seller in
the observance or in the due and timely performance by Seller of any of the
covenants of Seller herein contained, or if there shall have been a material
breach by Seller of any of the warranties and representations of Seller herein
contained, or if the conditions of this Agreement to be complied with or
performed by Seller at or before the Closing Date shall not have been complied
with or performed at the time required for such compliance or performance and
such noncompliance or nonperformance shall not have been waived by Buyer;
(c) Seller, if a material default shall be made by Buyer in
the observance or in the due and timely performance by Buyer of any covenants of
Buyer herein contained, or if there shall have been a material breach by Buyer
of any of the warranties and representations of Buyer herein contained, or if
the conditions of this Agreement to be complied with or performed by Buyer at or
before the Closing Date shall not have been complied with or performed at the
time required for such compliance or performance and such noncompliance and
nonperformance shall not have been waived by Seller; or
(d) either Buyer or Seller if the Closing has not occurred
(other than through the failure of any party seeking to terminate this Agreement
to comply fully with its obligations under this Agreement) on or before January
10, 2000, or such later date to which the parties may agree.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 NOTICES. Except as otherwise provided herein, all notices,
requests, demands and other communications required or permitted to be given
hereunder shall be in writing and shall be transmitted by telegram, telecopy or
personal delivery and shall be confirmed by first-class, postage prepaid,
registered or certified mail. All such communications shall be deemed received
when sent. All such communications shall be addressed, as applicable, to a party
at his or its address as shown below:
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(a) If to Buyer to:
Melles Griot, Inc.
2051 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Facsimile: (760) 804-0198
Attention: Michael J. Dorich
With a copy to:
Fulbright & Jaworski L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2615
Telecopy: (202) 662-4643
Attention: Steven B. Pfeiffer
(b) If to Seller to:
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130-2016
Facsimile: (619) 269-0956
Attention:
With a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121-2128
Facsimile: (619) 453-3555
Attention: D. Bradley Peck
or to such other address as it may by written notice, received by the other
party, have designated as its address for such purpose.
Section 14.2 GOVERNING LAW. This Agreement shall be governed by the
laws of California and of the United States of America, as applicable, in all
respects, including matters of construction, enforcement and performance,
without giving effect to the principles of conflicts of law thereof.
Section 14.3 SECTION HEADINGS. The section headings and underlining
contained herein are for purposes of convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning or interpretation
of this Agreement in any way.
Section 14.4 ENTIRE AGREEMENT. This Agreement, including the Exhibits,
and Schedules hereto, set forth the entire agreement and understanding of the
parties with respect to the transactions contemplated hereby, and supersede all
prior agreements, arrangements and understandings related to the subject matter
hereof. The Schedules to this Agreement, which have been provided by Seller are
an integral part of this Agreement and are incorporated herein by reference.
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Section 14.5 SEVERABILITY. If any provision of this Agreement is or
becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, such
provision shall be deemed amended to conform to applicable laws so as to be
valid and enforceable or, if it cannot be amended without materially altering
the intention of the parties, it shall be stricken and the remainder of this
Agreement shall remain in full force and effect.
Section 14.6 ASSIGNMENT; SUCCESSORS AND ASSIGNS. None of the parties
hereto may assign this Agreement or its rights hereunder, whether in whole or in
part, without the prior written consent of the other parties hereto; provided,
however, that either party may assign this Agreement and its rights and
obligations hereunder to any person by which it is acquired, with which or into
which it is merged, or to which it sells all or substantially all of its assets.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, heirs and
representatives, as applicable.
Section 14.7 AMENDMENT. This Agreement may not be released, discharged,
amended or modified in any manner except by an instrument in writing signed by
the parties or their duly authorized officers or agents.
Section 14.8 WAIVER. No waiver of any right under this Agreement shall
be deemed effective unless contained in writing signed by the party charged with
such waiver, and no waiver of any right arising from any breach or failure to
perform shall be deemed to be a waiver of any future such right or any other
right arising under this Agreement.
Section 14.9 COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
Section 14.10 BUYER'S REMEDIES FOR SELLER'S BREACH OF CONFIDENTIALITY
AND NONCOMPETITION. If Seller breaches the covenants set forth in Section 7 of
this Agreement, Buyer will be entitled, in addition to any right to damages and
any other rights it may have, to obtain injunctive or other equitable relief to
restrain any breach or threatened breach or otherwise to specifically enforce
the provisions of Section 7 of this Agreement, it being agreed that money
damages alone would be inadequate to compensate the Buyer and would be an
inadequate remedy for such breach. Nothing herein shall be construed as
prohibiting Buyer from pursuing any other remedies available to it at law or in
equity including recovery of damages.
Section 14.11 BUYER'S RIGHT TO SPECIFIC PERFORMANCE. The parties hereto
recognize that the Business is uniquely suited to Buyer's business requirements
and that it may be impossible to determine the amount of damages which would
result to Buyer from Seller's refusal to complete the sale of the Business as
required under the provisions of this Agreement. Seller therefore agrees that in
the event of the failure of Seller to complete the sale of the Business in
accordance with the provisions of this Agreement after the conditions precedent
to Seller's obligations to close have been fulfilled or waived, that Buyer will
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be entitled to enforce specific performance of this Agreement against Seller.
Seller and Buyer hereby consent to the right of Buyer to obtain a Decree of
Specific Performance against Seller in any court having jurisdiction over this
matter. Nothing herein shall be construed, however, as prohibiting Buyer from
pursuing any other available remedy at law or in equity for such breach
including recovery of damages.
Section 14.12 BULK SALES. Seller agrees to indemnify Buyer from and
against any loss, cost or expense (including expenses for investigations,
reasonable costs of employee time used in investigation and defense, and
attorneys' fees and expenses) arising out of the failure to comply with the laws
of the State of California as set forth in Division 6 of the California
Commercial Code and any similar law of any other jurisdiction which may be
applicable to the transactions set forth in this Agreement.
Section 14.13 FEES AND EXPENSES.
(a) Buyer agrees to pay all costs associated with or arising
out of moving the Assets.
(b) Each of Buyer and Seller shall pay its own expenses
incurred in connection with the preparation, negotiation, execution, delivery
and consummation of this Agreement and the transactions contemplated hereby.
Section 14.14 PRORATIONS AND TRANSFER TAXES. Personal property taxes,
utilities and other terms not included in the Assumed Liabilities shall be
adjusted ratably as of the Closing Date. All applicable state, federal and local
transfer taxes payable in connection with the transactions contemplated hereby
shall be paid by Seller.
Section 14.15 SALES TAX. Buyer shall pay, when due, all state and local
sales taxes due upon the sale of the Assets and shall hold Seller harmless from
and indemnify Seller against any liability thereon.
Section 14.16 ANNOUNCEMENTS. Except for announcements or filings
required by law, or securities regulation, each party shall promptly advise and
cooperate with the other prior to issuing any press release or other information
to the press or any third party with respect to this Agreement or the
transactions contemplated by this Agreement. In this regard, each party shall
provide to the other, prior to release, copies of all proposed public releases
with respect to the transactions and shall use its Reasonable Best Efforts to
accommodate the reasonable comments of the other party with respect to the text
of any such release.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MELLES GRIOT, INC.
By: /s/ Michael J. Dorich
Name: Michael J. Dorich
Title: COO
LASER POWER CORPORATION
By: /s/ Paul P. Wickman
Name: Paul P. Wickman
Title: CFO
35
CREDIT AND SECURITY AGREEMENT
Dated as of November 24, 1999
LASER POWER CORPORATION, a Delaware corporation ("LPC") and
EXOTIC MATERIALS, INC., a California corporation ("EMI") (collectively, jointly
and severally the "Borrower"), and WELLS FARGO CREDIT, INC., a Minnesota
corporation (the "Lender"), hereby agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.1 DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrower's accounts, as such term
is defined in the UCC, including without limitation the aggregate unpaid
obligations of customers and other account debtors to the Borrower arising out
of the sale or lease of goods or rendition of services by the Borrower on an
open account or deferred payment basis.
"Advance" means a Revolving Advance, a Term Advance or a
Capital Expenditures Advance.
"Affiliate" or "Affiliates" means EMI Acquisition Corp., Laser
Power Europe (fka Radius Engineering, NV) and Laser Power Optics de Mexico, S.A.
de C.V. and any other Person controlled by, controlling or under common control
with the Borrower, including (without limitation) any Subsidiary of the
Borrower. For purposes of this definition, "control," when used with respect to
any specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as
amended, supplemented or restated from time to time.
"Availability" means the positive difference, if any, between
(i) the Borrowing Base and (ii) the outstanding principal balance of the
Revolving Note.
"Banking Day" means a day other than a Saturday, Sunday or
other day on which banks are generally not open for business in Phoenix,
Arizona.
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"Book Net Worth" means the aggregate of the common and
preferred stockholders' equity in the Borrower, determined in accordance with
GAAP.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the
Lender's sole discretion, the sum of:
(i) the lesser of (A) 85% of Eligible Accounts
or (B) $4,000,000.00, plus
(ii) the lesser of (A) 50% of Eligible
Inventory or (B) $2,000,000.00.
"Capital Expenditures" for a period means any expenditure of
money for the lease, purchase or other acquisition of any capital asset, or for
the lease of any other asset whether payable currently or in the future.
"Capital Expenditures Advance" has the meaning specified in
Section 2.2(b).
"Capital Expenditures Floating Rate" means an annual rate equal
to the sum of the Prime Rate plus two percent (2.0%), which annual rate shall
change when and as the Prime Rate changes, provided however, if but only if, (i)
there is not a then existing Event of Default or Default Period and (ii) LPC
sells its microlaser division (the "Transaction") for a sales price which is not
less than $4,000,000.00 which includes a cash payment at closing of not less
than $2,000,000.00, then the Capital Expenditures Floating Rate shall be reduced
to an annual rate equal to the sum of the Prime Rate plus one and one-half
percent (1.5%) which rate shall change when and as the Prime Rate changes, said
reduction to be effective, if at all, on the later of (x) the closing of the
Transaction, or (y) March 31, 2000.
"Capital Expenditures Note" means the Borrower's promissory
note, payable to the order of the Lender in substantially the form of Exhibit
B-2 hereto and any note or notes issued in substitution therefore, as the same
may hereafter be amended, supplemented or restated from time to time.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, all sums on deposit in
any Lender Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii)
proceeds of any and all of the foregoing; (iii) in the case of all tangible
goods, all accessions; (iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with any
tangible goods; and (v) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods. Notwithstanding the
foregoing, the grant of a security interest as provided herein shall not extend
to, and the term "Collateral" shall not include, any general intangibles of
Borrower (whether owned or held as licensee or lessee, or otherwise), to the
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extent that (i) such general intangibles are not assignable or capable of being
encumbered as a matter of law or under the terms of the license, lease or other
agreement applicable thereto (but solely to the extent that any such restriction
shall be enforceable under applicable law), without the consent of the licensor
or lessor thereof or other applicable party thereto; (ii) such consent has not
been obtained, and (iii) such license, lease or other Agreement is otherwise
permitted by the terms of this Agreement.
"Commitment" means the Lender's commitment to make Advances to
or for the Borrower's account pursuant to Article II.
"Credit Facility" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II.
"Current Maturities of Long Term Debt" as of a given date means
the amount of the Borrower's long-term debt and capitalized leases which became
due during the applicable period ending on the designated date.
"Debt" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that Person
as at the date as of which Debt is to be determined. For purposes of determining
a Person's aggregate Debt at any time, "Debt" shall also include the aggregate
payments required to be made by such Person at any time under any lease that is
considered a capitalized lease under GAAP.
"Debt Service Coverage Ratio" means the ratio of (i) the sum of
(A) Funds from Operations and (B) Interest Expense MINUS (C) unfinanced Capital
Expenditures to (ii) the sum of (A) Current Maturities of Long Term Debt
actually paid during the period and (B) Interest Expense.
"Default" means an event that, with giving of notice or passage
of time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the day
on which an Event of Default has occurred and ending on the date the Lender
notifies the Borrower in writing that such Event of Default has been cured or
waived.
"Default Rate" means, with respect to the Revolving Advances,
an annual rate equal to three percent (3%) over the Revolving Floating Rate,
which rate shall change when and as the Revolving Floating Rate changes, with
respect to the Term Advance, an annual rate equal to three percent (3%) over the
Term Floating Rate, which rate shall change when and as the Term Floating Rate
changes, and with respect to the Capital Expenditure Advances, an annual rate
equal to three percent (3%) over the Capital Expenditure Floating Rate, which
rate shall change when and as the Capital Expenditures Floating Rate changes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Eligible Accounts" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
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(i) That portion of Accounts unpaid 90 days or more
after the invoice date;
(ii) That portion of Accounts that is disputed or
subject to a claim of offset or a contra account;
(iii) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as applicable, by the Borrower
to the customer;
(iv) Accounts owed by any unit of government, whether
foreign or domestic (provided, however, that there shall be included in Eligible
Accounts that portion of Accounts owed by such units of government for which the
Borrower has provided evidence satisfactory to the Lender that (A) the Lender
has a first priority perfected security interest and (B) such Accounts may be
enforced by the Lender directly against such unit of government under all
applicable laws);
(v) Accounts owed by an account debtor located outside
the United States which are not (A) backed by a bank letter of credit naming the
Lender as beneficiary or assigned to the Lender, in the Lender's possession and
acceptable to the Lender in all respects, in its sole discretion, (B) covered by
a foreign receivables insurance policy acceptable to the Lender in its sole
discretion;
(vi) Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone out of business;
(vii) Accounts owed by a shareholder, Subsidiary,
Affiliate, officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected
security interest in the Lender's favor or which are subject to any lien,
security interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
(ix) That portion of Accounts that has been
restructured, extended, amended or modified;
(x) That portion of Accounts that constitutes
advertising, finance charges, service charges or sales or excise taxes;
(xi) Accounts owed by an account debtor, regardless of
whether otherwise eligible, if 20% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii)or (ix) above;
(xii) Accounts owed by an account debtor (other than
Lockheed Martin Technical Operations Company) regardless of whether otherwise
eligible, in excess of 15% of total Accounts;
(xiii) Accounts owed by Lockheed Martin Technical
Operations Company, regardless of whether otherwise eligible, in excess of 35%
of total Accounts; and
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(xiv) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.
"Eligible Inventory" means all Inventory of the Borrower, at
the lower of cost or market value as determined in accordance with GAAP;
provided, however, that the following shall not in any event be deemed Eligible
Inventory:
(i) Inventory that is: in-transit; located at any
warehouse, job site or other premises not approved by the
Lender in writing; located outside of the states, or
localities, as applicable, in which the Lender has filed
financing statements to perfect a first priority security
interest in such Inventory; covered by any negotiable or
non-negotiable warehouse receipt, bill of lading or other
document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment unless
such consignee or bailee has executed an agreement with the
Lender;
(ii) Parts or sample Inventory;
(iii) Work-in-process Inventory;
(iv) Inventory that is damaged, obsolete, slow moving
or not currently saleable in the normal course of the
Borrower's operations;
(v) Inventory that the Borrower has returned, has
attempted to return, is in the process of returning or intends
to return to the vendor thereof;
(vi) Inventory that is in-transit;
(vii) Inventory manufactured by the Borrower pursuant
to a license unless the applicable licensor has agreed in
writing to permit the Lender to exercise its rights and
remedies against such Inventory;
(viii) Inventory that is subject to a security
interest in favor of any Person other than the Lender;
(ix) Consigned supplies and packaging Inventory; and
(x) Inventory otherwise deemed ineligible by the
Lender in its sole discretion.
"Environmental Laws" has the meaning specified in Section 5.12.
"Equipment" means all of the Borrower's equipment, as such term
is defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping equipment,
parts, tools, supplies, and including specifically (without limitation) the
goods described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower.
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"Event of Default" has the meaning specified in Section 8.1.
"Funding Date" has the meaning given in Section 2.1.
"Funds From Operations" for a given period means the sum of (i)
Net Income, (ii) depreciation and amortization, (iii) deferred income taxes, and
(iv) other non-cash items, each as determined for such period in accordance with
GAAP.
"GAAP" means generally accepted accounting principles, applied
on a basis consistent with the accounting practices applied in the financial
statements described in Section 5.5, except for any change in accounting
practices to the extent that, due to a promulgation of the Financial Accounting
Standards Board changing or implementing any new accounting standard, the
Borrower either (i) is required to implement such change, or (ii) for future
periods will be required to and for the current period may in accordance with
generally accepted accounting principles implement such change, for its
financial statements to be in conformity with generally accepted accounting
principles (any such change is herein referred to as a "Required GAAP Change"),
provided that (1) the Borrower shall fully disclose in such financial statements
any such Required GAAP Change and the effects of the Required GAAP Change on the
Borrower's income, retained earnings or other accounts, as applicable, and (2)
the Borrower's financial covenants set forth in Sections 6.12 through 6.15 and
7.10 shall be adjusted as necessary to reflect the effects of such Required GAAP
Change.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents, patent
applications, copyrights, trademarks, trade names, trade secrets, customer or
supplier lists and contracts, manuals, operating instructions, permits,
franchises, the right to use the Borrower's name, and the goodwill of the
Borrower's business.
"Hazardous Substance" has the meaning given in Section 5.12.
"Interest Expense" means, for a fiscal year-to-date period, the
Borrower's total gross interest expense during such period (excluding interest
income), and shall in any event include, without limitation, (i) interest
expensed (whether or not paid) on all Debt, (ii) the amortization of debt
discounts, (iii) the amortization of all fees payable in connection with the
incurrence of Debt to the extent included in interest expense, and (iv) the
portion of any capitalized lease obligation allocable to interest expense.
"Inventory" means all of the Borrower's inventory, as such term
is defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or materials,
whether acquired, held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located.
"Investment Property" means all of the Borrower's investment
property, as such term is defined in the UCC, whether now owned or hereafter
acquired, including but not limited to all securities, security entitlements,
securities accounts, commodity contracts, commodity accounts, stocks, bonds,
mutual fund shares, money market shares and U.S. Government securities.
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"Lender Account" has the meaning given in the Lockbox and
Collection Account Agreement.
"Loan Documents" means this Agreement, the Notes and the
Security Documents.
"Lockbox" has the meaning given in the Lockbox and Collection
Account Agreement.
"Lockbox and Collection Account Agreement" means the Lockbox
and Collection Account Agreement by and among the Borrower, Wells Fargo Bank,
N.A., Regulus West LLC and, the Lender, of even date herewith.
"Maturity Date" means October 31, 2002.
"Maximum Line" means $4,000,000.00 unless said amount is
reduced pursuant to Section 2.8, in which event it means the amount to which
said amount is reduced.
"Minimum Interest Charge" has the meaning given in Section
2.4(c).
"Net Income" means fiscal year-to-date after-tax net income
from continuing operations as determined in accordance with GAAP.
"Net Loss" means fiscal year-to-date after tax net loss from
continuing operations as determined in accordance with GAAP.
"Note" means the Revolving Note, the Term Note, or the Capital
Expenditures Note and "Notes" means the Revolving Note, the Term Note and the
Capital Expenditures Note.
"Obligations" means the Notes and each and every other debt,
liability and obligation of every type and description which the Borrower may
now or at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it arises in
a transaction involving the Lender alone or in a transaction involving other
creditors of the Borrower, and whether it is direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several, and including
specifically, but not limited to, all indebtedness of the Borrower arising under
this Agreement, the Notes or any other loan or credit agreement or guaranty
between the Borrower and the Lender, whether now in effect or hereafter entered
into.
"Permitted Lien" has the meaning given in Section 7.1.
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"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan or other plan maintained
for the Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without limitation) the
premises legally described in Exhibit D attached hereto.
"Prime Rate" means the rate of interest publicly announced from
time to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank
ceases to announce a rate so designated, any similar successor rate designated
by the Lender.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter arises,
whether such right to payment arises out of a sale, lease or other disposition
of goods or other property, out of a rendering of services, out of a loan, out
of the overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently transfers such
person's interest to the Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens and
security interests) which the Borrower may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles.
"Reportable Event" shall have the meaning assigned to that term
in Title IV of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Floating Rate" means an annual rate equal to the sum
of the Prime Rate plus one and one-half percent (1.5%), which annual rate shall
change when and as the Prime Rate changes, provided however, if but only if, (i)
there is not a then existing Event of Default or Default Period and (ii) LPC
closes the Transaction for a sales price which is not less than $4,000,000.00
which includes a cash payment at closing of not less than $2,000,000.00, then
the Revolving Floating Rate shall be reduced to an annual rate equal to the sum
of the Prime Rate plus one percent (1%) which annual rate shall change when and
as the Prime Rate changes, said reduction to be effective, if at all, on the
later of (x) the closing of the Transaction, or (y) March 31, 2000.
"Revolving Note" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form of Exhibit A
hereto and any note or notes issued in substitution therefor, as the same may
hereafter be amended, supplemented or restated from time to time.
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"Security Documents" means this Agreement, the Lockbox and
Collection Account Agreement, and any other document delivered to the Lender
from time to time to secure the Obligations, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Subordination Agreement" means the Debenture Subordination
Agreement of even date herewith, executed by Union Miniere in the Lender's favor
and acknowledged by the Borrower, and any other subordination agreement accepted
by the Lender from time to time, as the same may hereafter be amended,
supplemented or restated from time to time.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of such
corporation, irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency, is at the time directly or indirectly owned by the Borrower, by
the Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"Term Advance" has the meaning specified in Section 2.2(a).
"Term Floating Rate" means an annual rate equal to the sum of
the Prime Rate plus one and one-half percent (1.5%), which annual rate shall
change when and as the Prime Rate changes, provided however, if but only if, (i)
there is not a then existing Event of Default or Default Period and (ii) LPC
closes the Transaction for a sales price which is not less than $4,000,000.00
which includes a cash payment at closing of not less than $2,000,000.00, then
the Term Floating Rate shall be reduced to an annual rate equal to the sum of
the Prime Rate plus one percent (1%) which annual rate shall change when and as
the Prime Rate changes, said reduction to be effective, if at all, on the later
of (x) the closing of the Transaction, or (y) March 31, 2000.
"Term Note" means the Borrower's promissory note, payable to
the order of the Lender in substantially the form of Exhibit B-1 hereto and any
note or notes issued in substitution therefor, as the same may hereafter be
amended, supplemented or restated from time to time.
"Termination Date" means the earliest of (i) the Maturity Date,
(ii) the date the Borrower terminates the Credit Facility, or (iii) the date the
Lender demands payment of the Obligations after an Event of Default pursuant to
Section 8.2.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.14 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern this
Agreement or any portion hereof.
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"Wells Fargo Bank N.A." means Wells Fargo Bank, National
Association.
SECTION 1.2 CROSS REFERENCES. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
Amount and Terms of the Credit Facility
---------------------------------------
SECTION 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the "Funding Date") to the Termination Date, on the terms and
subject to the conditions herein set forth (the "Revolving Advances"). The
Lender shall have no obligation to make a Revolving Advance if, after giving
effect to such requested Revolving Advance, the sum of the outstanding and
unpaid Revolving Advances would exceed the Borrowing Base. The Borrower's
obligation to pay the Revolving Advances shall be evidenced by the Revolving
Note and shall be secured by the Collateral as provided in Article III. Within
the limits set forth in this Section 2.1, the Borrower may borrow, prepay
pursuant to Section 2.8 and reborrow. The Borrower agrees to comply with the
following procedures in requesting Revolving Advances under this Section 2.1:
(a) The Borrower shall make each request for a Revolving
Advance to the Lender before 11:00 a.m. (Arizona time) of the day of the
requested Revolving Advance. Requests may be made in writing or by telephone,
specifying the date of the requested Revolving Advance and the amount thereof.
Each request shall be by (i) any officer of the Borrower; or (ii) any person
designated as the Borrower's agent by any officer of the Borrower in a writing
delivered to the Lender; or (iii) any person whom the Lender reasonably believes
to be an officer of the Borrower or such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested Revolving
Advance by crediting the same to the Borrower's demand deposit account
maintained with Wells Fargo Bank, N.A. unless the Lender and the Borrower shall
agree in writing to another manner of disbursement. Upon the Lender's request,
the Borrower shall promptly confirm each telephonic request for an Advance by
executing and delivering an appropriate confirmation certificate to the Lender.
The Borrower shall repay all Advances even if the Lender does not receive such
confirmation and even if the person requesting an Advance was not in fact
authorized to do so. Any request for an Advance, whether written or telephonic,
shall be deemed to be a representation by the Borrower that the conditions set
forth in Section 4.2 have been satisfied as of the time of the request.
SECTION 2.2 TERM ADVANCES/CAPITAL EXPENDITURES ADVANCES.
(a) TERM ADVANCE. The Lender agrees, on the terms and subject
to the conditions herein set forth, to make a one time non-revolving advance to
the Borrower on the Funding Date (the "Term Advance"). The Lender shall have no
obligation to make the Term Advance under this Section 2.2 if the Term Advance
would exceed the lesser of (i) $1,950,000.00, (ii) 100% of the appraised auction
sale value of Borrower's equipment in which Lender has a perfected first
priority security interest (the "Equipment Collateral") or (iii) 80% of the
orderly liquidation value of the Equipment Collateral. The Borrower's obligation
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to pay the Term Advance shall be evidenced by the Term Note and shall be secured
by the Collateral as provided in Article III. Upon fulfillment of the applicable
conditions set forth in Article IV, the Lender shall deposit the proceeds of the
Term Advance by crediting the same to the Borrower's demand deposit account
specified in Section 2.1(b) unless the Lender and the Borrower shall agree in
writing to another manner of disbursement.
(b) CAPITAL EXPENDITURES ADVANCES. The Lender agrees, on the
terms and subject to the conditions herein set forth, to make advances to the
Borrower from time to time from the Funding Date to the Termination Date (the
"Capital Expenditures Advances"). The Lender shall have no obligation to make a
Capital Expenditures Advance under this Section 2.2 if all of the conditions
contained in Section 4.2 and 4.3 below have not been satisfied. The Borrower's
obligation to pay the Capital Expenditures Advance shall be evidenced by the
Capital Expenditures Note and shall be secured by the Collateral as provided in
Article III. The Borrower agrees to comply with the following procedures in
requested Capital Expenditures Advances:
(i) The Borrower shall make each request for a Capital
Expenditures Advance to the Lender before 11:00 a.m. (Phoenix time) three (3)
Banking Days before the day of the requested Capital Expenditures Advance. The
request may be made in writing or by telephone, specifying the date of the
Capital Expenditures Advance and the amount thereof.
(ii) Each Capital Expenditures Advance shall be in a
minimum amount of $100,000.00.
(iii) Each request shall be by an individual authorized
pursuant to Section 2.1(a).
Upon fulfillment of the applicable conditions set forth in Article IV, the
Lender, at its option, either shall deposit the proceeds of the Capital
Expenditures Advance by crediting the same to the Borrower's demand deposit
account specified in Section 2.1(b), or pay the proceeds of the requested
Capital Expenditures Advance directly to the applicable vendor, unless the
Lender and the Borrower shall agree in writing to another manner of
disbursement. Upon the Lender's request, the Borrower shall promptly confirm
each telephonic request for a Capital Expenditures Advance by executing and
delivering an appropriate confirmation certificate to the Lender. The Borrower
shall be obligated to repay all Capital Expenditures Advances notwithstanding
the Lender's failure to receive such confirmation and notwithstanding the fact
that the person requesting the same was not in fact authorized to do so. Any
request for a Capital Expenditures Advance, whether written or telephonic, shall
be deemed to be a representation by the Borrower that the conditions set forth
in Section 4.2 and 4.3 have been satisfied as of the time of the request.
SECTION 2.3 PAYMENT OF THE NOTES.
(a) PAYMENT OF TERM NOTE. The outstanding principal balance of
the Term Note shall be due and payable as follows:
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(i) Beginning on October 31, 1999, and on the last day of
each month thereafter, in equal monthly installments of an amount sufficient to
fully amortize the principal balance of the Term Note over an assumed term of
sixty (60) months; provided, however, that if Borrower shall make any prepayment
on the Term Note as a result of the Transaction, then beginning on the last day
of the calendar month during which such prepayment was made and on the last day
of each month thereafter, the monthly installments of principal on the Term Note
shall be made in a revised amount, which amount shall be sufficient to fully
amortize the remaining principal balance of the Term Note following such
prepayment over an assumed term of 60 months from the date of such prepayment;
and
(ii) On the Termination Date, the entire unpaid principal
balance of the Term Note, and all unpaid interest accrued thereon, shall in any
event be due and payable.
(b) PAYMENT OF CAPITAL EXPENDITURES NOTE. The outstanding
principal balance of the Capital Expenditures Note shall be due and payable as
follows:
(i) Beginning on the earlier of (i) September 30, 2000, or
(ii) the last day of the month in which the Capital Expenditure Advances have
been fully disbursed, and on the last day of each month thereafter, in equal
monthly installments of an amount sufficient to fully amortize the principal
balance of the Capital Expenditures Note over an assumed term of sixty (60)
months (the "Assumed Maturity Date"). If the Lender makes Capital Expenditures
Advances after the initial Capital Expenditures Advance, the amount of each
installment will be increased so that the remaining payments would fully
amortize the outstanding principal balance of the Capital Expenditures Note in
equal amounts by the Assumed Maturity Date; and
(ii) On the Termination Date, the entire unpaid principal
balance of the Capital Expenditures Note, and all unpaid interest accrued
thereon, shall in any event be due and payable.
SECTION 2.4 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST;
PARTICIPATIONS; USURY. Interest accruing on the Notes shall be due and payable
in arrears on the first day of each month.
(a) REVOLVING NOTE. Except as set forth in Sections 2.4(d), and
2.4(g), the outstanding principal balance of the Revolving Note shall bear
interest at the Revolving Floating Rate.
(b) TERM NOTE. Except as set forth in Sections 2.4(d) and
2.4(g), the outstanding principal balance of the Term Note shall bear interest
at the Term Floating Rate.
(c) CAPITAL EXPENDITURES NOTE. Except as set forth in Sections
2.4(d) and 2.4(g), the outstanding principal balance of the Capital Expenditures
Note shall bear interest at the Capital Expenditures Floating Rate.
(d) MINIMUM INTEREST CHARGE. Notwithstanding the interest
payable pursuant to Section 2.4(a) (b) and (c), the Borrower shall pay to the
Lender interest of not less than $20,000.00 per calendar month (which amount
shall be automatically reduced to $12,500.00 on the earlier of (i) the last day
of the month in which the Transaction closes or (ii) June 30, 2000) (the
"Minimum Interest Charge") during the term of this Agreement, and the Borrower
shall pay any deficiency between the Minimum Interest Charge and the amount of
interest otherwise calculated under Sections 2.4(a)(b) and (c) on the date and
in the manner provided in Section 2.6.
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(e) DEFAULT INTEREST RATE. At any time during any Default
Period, in the Lender's sole discretion and without waiving any of its other
rights and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods designated by
the Lender from time to time during that Default Period.
(f) PARTICIPATIONS. If any Person shall acquire a participation
in the Advances under this Agreement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under, along with all
other fees, charges and other amounts due under this Agreement, regardless if
such Person elects to accept interest with respect to its participation at a
lower rate than the Revolving Floating Rate or the Term Floating Rate, or
otherwise elects to accept less than its pro rata share of such fees, charges
and other amounts due under this Agreement.
(g) USURY. In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by law.
Notwithstanding anything to the contrary contained in any Loan Document, all
agreements which either now are or which shall become agreements between the
Borrower and the Lender are hereby limited so that in no contingency or event
whatsoever shall the total liability for payments in the nature of interest,
additional interest and other charges exceed the applicable limits imposed by
any applicable usury laws. If any payments in the nature of interest, additional
interest and other charges made under any Loan Document are held to be in excess
of the limits imposed by any applicable usury laws, it is agreed that any such
amount held to be in excess shall be considered payment of principal hereunder,
and the indebtedness evidenced hereby shall be reduced by such amount so that
the total liability for payments in the nature of interest, additional interest
and other charges shall not exceed the applicable limits imposed by any
applicable usury laws, in compliance with the desires of the Borrower and the
Lender. This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the
Borrower and the Lender, or their successors and assigns.
(h) SAVINGS CLAUSE. The Borrower agrees that the interest rate
contracted for includes the interest rate set forth herein plus any other
charges or fees set forth herein and costs and expenses incident to this
transaction paid by the Borrower to the extent that some are deemed interest
under applicable law.
SECTION 2.5 FEES.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable origination fee of $25,000.00, due and
payable upon the execution of this Agreement.
(b) UNUSED LINE FEE. For the purposes of this Section 2.5(b),
"Unused Amount" means the Maximum Line reduced by outstanding Revolving
Advances. The Borrower agrees to pay to the Lender an unused line fee at the
rate of one quarter of one percent (0.25%) per annum on the average daily Unused
Amount from the date of this Agreement to and including the Termination Date,
due and payable monthly in arrears on the first day of the month and on the
Termination Date.
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(c) AUDIT FEES. The Borrower hereby agrees to pay the Lender,
on demand, audit fees in connection with any audits or inspections conducted by
the Lender of any Collateral or the Borrower's operations or business at the
rates established from time to time by the Lender as its audit fees (which fees
are currently $75.00 per hour per auditor), together with all actual
out-of-pocket costs and expenses incurred in conducting any such audit or
inspection.
SECTION 2.6 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND
PAYABLE. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Interest shall be
payable in arrears on the first day of each month and on the Termination Date.
SECTION 2.7 CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change, such
Related Lender may require the Borrower to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule Change upon
not less than fifteen (15) days' written notice to the Borrower not less than
180 days after the effective date of the Applicable Rule Change. For purposes of
this Section 2.7:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or the
interpretation or administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not having the force of
law, that applies to any Related Lender. Such rules include rules requiring
financial institutions to maintain total capital in amounts based upon
percentages of outstanding loans, binding loan commitments and letters of
credit.
(b) "Return", for any period, means the return as determined by
such Related Lender on the Advances based upon its total capital requirements
and a reasonable attribution formula that takes account of the Capital Adequacy
Rules then in effect. Return may be calculated for each calendar quarter and for
the shorter period between the end of a calendar quarter and the date of
termination in whole of this Agreement.
(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the date of this Agreement, but the term does not include any
changes in applicable requirements that at the Closing Date are scheduled to
take place under the existing Capital Adequacy Rules or any increases in the
capital that any Related Lender is required to maintain to the extent that the
increases are required due to a regulatory authority's assessment of the
financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the
Lender, any parent corporation of the Lender and any assignee of any interest of
the Lender hereunder and any participant in the loans made hereunder.
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Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.7, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
SECTION 2.8 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM LINE;
TERMINATION OF THE CREDIT FACILITY BY THE BORROWER. The Borrower may prepay
(other than in accordance with Section 2.3) the Term Advance and the Capital
Expenditures Advances in whole at any time or from time to time in part without
penalty. Except as otherwise provided herein, the Borrower may prepay the
Revolving Advances in whole at any time or from time to time in part. The
Borrower may terminate the Credit Facility or reduce the Maximum Line at any
time if it (i) gives the Lender at least 20 days' prior written notice and (ii)
pays the Lender the termination or line reduction fees in accordance with
Section 2.9. Any prepayment of the Term Advance or the Capital Expenditures
Advances (other than in accordance with Section 2.3) or reduction in the Maximum
Line must be in an amount not less than $100,000.00 or an integral multiple
thereof. If the Borrower reduces the Maximum Line to zero, all Obligations shall
be immediately due and payable. Any partial prepayments of the Term Note and the
Capital Expenditures Note (other than in accordance with Section 2.3) shall be
applied to principal payments due and owing in inverse order of their
maturities. Upon termination of the Credit Facility and payment and performance
of all Obligations, the Lender shall release or terminate the Security Interest
and the Security Documents to which the Borrower is entitled by law.
SECTION 2.9 TERMINATION, LINE REDUCTION AND PREPAYMENT FEES; WAIVER OF
TERMINATION, PREPAYMENT AND LINE REDUCTION FEES.
(a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility
is terminated for any reason as of a date other than the Maturity Date, or the
Borrower reduces the Maximum Line, the Borrower shall pay to the Lender a fee in
an amount equal to a percentage of the Maximum Line (or the reduction, as the
case may be) as follows: (i) three percent (3.0%) if the termination or
reduction occurs on or before the first anniversary of the Funding Date; (ii)
one percent (1.0%) if the termination or reduction occurs after the first
anniversary of the Funding Date but on or before the second anniversary of the
Funding Date; and (iii) three-quarters of one percent (0.75%) if the termination
or reduction occurs after the second anniversary of the Funding Date.
(b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The Borrower
will not be required to pay the termination or line reduction fees otherwise due
under this Section 2.9 if such termination or line reduction is made because of
refinancing by an affiliate of the Lender. In addition, the Borrower may reduce
the Maximum Line at any time prior to the first anniversary of the Funding Date
by an amount not to exceed $1,000,000.00 without being required to pay the line
reduction fees otherwise due under this Section 2.9, if but only if, the line
reduction results from the closing of the Transaction.
SECTION 2.10 MANDATORY PREPAYMENT.
(a) Without notice or demand, if the outstanding principal
balance of the Revolving Advances shall at any time exceed the Borrowing Base,
the Borrower shall immediately prepay the Revolving Advances to the extent
necessary to eliminate such excess. Any payment received by the Lender under
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this Section 2.10 or under Section 2.8 may be applied to the Obligations, in
such order and in such amounts as the Lender, in its discretion, may from time
to time determine; provided that any prepayment under Section 2.8 which the
Borrower designates as a partial prepayment of the Term Note or the Capital
Expenditures Note shall be applied to principal installments of the Term Note or
the Capital Expenditures Note, as applicable, in inverse order of maturity. For
each day or portion thereof that the Revolving Advances shall exceed the
Borrowing Base, the Borrower shall pay to the Lender an overadvance charge
(which charge shall be in addition to and not in lieu of any other interest,
fees, or charges payable by Borrower hereunder) in the amount of $100.00;
provided, however, that if such day occurs during a Default Period, the
overadvance charge for such day shall be $200.00.
(b) In the event that the Transaction has not closed on or
before the first anniversary of the Funding Date, the Lender in its sole
discretion may elect to require that the Capital Expenditures Advances be
prepaid such that after such prepayment, the outstanding principal balance of
the Capital Expenditures Note shall not exceed 80% of the orderly liquidation
value of the Equipment purchased with the proceeds of the Capital Expenditures
Advances.
SECTION 2.11 PAYMENT. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations one Banking
Day after receipt by the Lender. The Lender may hold all payments not
constituting immediately available funds for three (3) additional days before
applying them to the Obligations. Notwithstanding anything in Section 2.1, the
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time without the Borrower's request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
SECTION 2.12 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
SECTION 2.13 USE OF PROCEEDS. The Borrower shall use the proceeds of
the Revolving Advances and the Terms Advance to (i) repay all indebtedness owed
to Wells Fargo Bank, N.A., (ii) to pay all accounts payable sixty days or more
past invoice date and (iii) for ordinary working capital purposes. The Borrower
shall use the proceeds of the Capital Expenditures Advances for Capital
Expenditures.
SECTION 2.14 LIABILITY RECORDS. The Lender may maintain from time to
time, at its discretion, liability records as to the Obligations. All entries
made on any such record shall be presumed correct until the Borrower establishes
the contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 60 days after
receipt.
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ARTICLE III
Security Interest; Occupancy; Setoff
------------------------------------
SECTION 3.1 GRANT OF SECURITY INTEREST. Each of LPC and EMI hereby
pledges, assigns and grants to the Lender a security interest (collectively
referred to as the "Security Interest") in the Collateral, as security for the
payment and performance of the Obligations.
SECTION 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. The
Lender may at any time (upon an Event of Default) notify any account debtor or
other person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender's
name or in the Borrower's name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept the
Borrower's mail, and receive, open and dispose of the Borrower's mail, applying
all Collateral as permitted under this Agreement and holding all other mail for
the Borrower's account or forwarding such mail to the Borrower's last known
address.
SECTION 3.3 ASSIGNMENT OF INSURANCE. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
SECTION 3.4 OCCUPANCY.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time during a Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of
goods that are Collateral and for other purposes that the Lender may in good
faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all such goods
to purchasers.
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(d) The Lender shall not be obligated to pay or account for any
rent or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises, the Borrower shall reimburse the Lender promptly for the full amount
thereof. In addition, the Borrower will pay, or reimburse the Lender for, all
taxes, fees, duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the provisions of
this Section 3.4.
SECTION 3.5 LICENSE. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.
SECTION 3.6 FINANCING STATEMENT. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of LPC:
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130
Federal Tax Identification No. 95-3423358
Name and address of EMI:
Exotic Materials, Inc.
36570 Briggs Road
Murrieta, CA 92563-2347
Federal Tax Identification No. 95-2120954
Name and address of Secured Party:
Wells Fargo Credit, Inc.
100 West Washington Street, 7th Floor
MAC S4101-076
Phoenix, AZ 85003
Federal Tax Identification No. 41-1237652
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SECTION 3.7 SETOFF. The Borrower agrees that the Lender may at any time
or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.
ARTICLE IV
Conditions of Lending
---------------------
SECTION 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE, TERM
ADVANCE AND THE CAPITAL EXPENDITURES ADVANCES. The Lender's obligation to make
the initial Revolving Advance, Term Advance and the Capital Expenditures Advance
hereunder shall be subject to the conditions precedent that (i) that after
giving effect to the initial Revolving Advance, there is not less than
$750,000.00 in excess Availability and (ii) the Lender shall have received all
of the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Notes, properly executed by the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.
(d) A true and correct copy of any and all mortgages pursuant
to which the Borrower has mortgaged the Premises, together with a mortgagee's
disclaimer and consent with respect to each such mortgage.
(e) A true and correct copy of any and all agreements pursuant
to which the Borrower's property is in the possession of any Person other than
the Borrower, together with, in the case of any goods held by such Person for
resale, (i) a consignee's acknowledgment and waiver of liens, (ii) UCC financing
statements sufficient to protect the Borrower's and the Lender's interests in
such goods, and (iii) UCC searches showing that no other secured party has filed
a financing statement against such Person and covering property similar to the
Borrower's other than the Borrower, or if there exists any such secured party,
evidence that each such secured party has received notice from the Borrower and
the Lender sufficient to protect the Borrower's and the Lender's interests in
the Borrower's goods from any claim by such secured party.
(f) An acknowledgment and waiver of liens from each warehouse
in which the Borrower is storing Inventory.
(g) A true and correct copy of any and all agreements pursuant
to which the Borrower's property is in the possession of any Person other than
the Borrower, together with, (i) an acknowledgment and waiver of liens from each
subcontractor who has possession of the Borrower's goods from time to time, (ii)
UCC financing statements sufficient to protect the Borrower's and the Lender's
interests in such goods, and (iii) UCC searches showing that no other secured
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party has filed a financing statement covering such Person's property other than
the Borrower, or if there exists any such secured party, evidence that each such
secured party has received notice from the Borrower and the Lender sufficient to
protect the Borrower's and the Lender's interests in the Borrower's goods from
any claim by such secured party.
(h) The Lockbox and Collection Account Agreement, properly
executed by the Borrower and all other parties thereto.
(i) The Subordination Agreement, properly executed by Union
Miniere and acknowledged by the Borrower.
(j) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect against
either LPC or EMI, (ii) no financing statements or assignments of patents,
trademarks or copyrights have been filed and remain in effect against either LPC
or EMI except those financing statements and assignments of patents, trademarks
or copyrights relating to Permitted Liens or to liens held by Persons who have
agreed in writing that upon receipt of proceeds of the Advances, they will
deliver UCC releases and/or terminations and releases of such assignments of
patents, trademarks or copyrights satisfactory to the Lender, and (iii) the
Lender has duly filed all financing statements necessary to perfect the Security
Interest, to the extent the Security Interest is capable of being perfected by
filing.
(k) A certificate of the Secretary or Assistant Secretary of
each of LPC and EMI certifying as to (i) the resolutions of the each of their
directors and, if required, shareholders, authorizing the execution, delivery
and performance of the Loan Documents, (ii) their articles of incorporation and
bylaws, and (iii) the signatures of each of their officers or agents authorized
to execute and deliver the Loan Documents and other instruments, agreements and
certificates, including Advance requests, on their behalf.
(l) A current certificate issued by the Secretary of State of
Delaware and California, certifying that LPC and EMI are in compliance with all
applicable organizational requirements of the State of Delaware and California,
as applicable.
(m) Evidence that each of LPC and EMI are duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary.
(n) A certificate of an officer of each of LPC and EMI
confirming, in his corporate capacity, the representations and warranties set
forth in Article V.
(o) An opinion of counsel to each of LPC and EMI, addressed to
the Lender.
(p) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
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(q) Payment of the fees and commissions due through the date of
the initial Advance under Section 2.5 and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section 9.7,
including all legal expenses incurred through the date of this Agreement.
(r) Such other documents as the Lender in its sole discretion
may require.
SECTION 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender's
obligation to make each Advance shall be subject to the further conditions
precedent that on such date:
(a) the representations and warranties contained in Article V
are correct on and as of the date of such Advance as though made on and as of
such date, except to the extent that such representations and warranties relate
solely to an earlier date; and
(b) no event has occurred and is continuing, or would result
from such Advance which constitutes a Default or an Event of Default.
SECTION 4.3 CONDITIONS PRECEDENT TO THE CAPITAL EXPENDITURES ADVANCES.
The Obligation of the Lender to make the Capital Expenditures Advances shall be
subject to the further conditions precedent that:
(a) There have been not more than three Capital Expenditures
Advances.
(b) Each request for a disbursement of the Capital Expenditures
Advance is an amount of not more than 75% of the "Hard" invoice cost of the
equipment which is the subject of the applicable Capital Expenditure. "Hard"
invoice costs shall in no event be deemed to include costs associated with
installation, taxes and freight charges.
(c) Each request for a disbursement of the Capital Expenditures
Advance is accompanied by all applicable invoices.
ARTICLE V
Representations and Warranties
------------------------------
The Borrower represents and warrants to the Lender as follows:
SECTION 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE
OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. LPC is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware and is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary. EMI is a corporation, duly organized, validly existing
and in good standing under the laws of the State of California and is duly
licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary. Each of LPC
and EMI has all requisite power and authority, corporate or otherwise, to
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conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents. During their
existence, each of LPC and EMI has done business solely under the names set
forth in Schedule 5.1 hereto. LPC's and EMI's respective chief executive office
and principal place of business is located at the address set forth in Schedule
5.1 hereto, and all of their records relating to their businesses or the
Collateral are kept at said locations. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Schedule 5.1 hereto.
Each of LPC and EMI's tax identification number is correctly set forth in
Section 3.6 hereto.
SECTION 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS. The execution, delivery and performance by LPC and EMI of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of their stockholders; (ii) require any authorization,
consent or approval by, or registration, declaration or filing with, or notice
to, any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
them or of their articles of incorporation or bylaws; (iv) result in a breach of
or constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which either of them is a party
or by which it or its properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance of any nature (other than
the Security Interest) upon or with respect to any of the properties now owned
or hereafter acquired by the Borrower.
SECTION 5.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due
execution by LPC and EMI, the other Loan Documents will constitute the legal,
valid and binding obligations of each of them, enforceable against the Borrower
in accordance with their respective terms except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to the
extent that availability of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding therefor may be
brought.
SECTION 5.4 SUBSIDIARIES. Except as set forth in Schedule 5.4 hereto,
LPC and EMI have no Subsidiaries.
SECTION 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. LPC has heretofore
furnished to the Lender its audited financial statements for its fiscal year
ended September 30, 1998, and its unaudited financial statements for the fiscal
year-to-date period ended August 29, 1999 and those statements fairly present
LPC's financial condition on the dates thereof and the results of its operations
and cash flows for the periods then ended and were prepared in accordance with
generally accepted accounting principles. Since the date of the most recent
financial statements, there has been no material adverse change in LPC's
business, properties or condition (financial or otherwise). EMI has heretofore
furnished to the Lender its audited financial statements for its fiscal year
ended September 30, 1998 and its unaudited financial statements for the fiscal
year-to-date period ended August 29, 1999 and those statements fairly present
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EMI's financial condition on the dates thereof and the results of its operations
and cash flows for the periods then ended and were prepared in accordance with
generally accepted accounting principles. Since the date of the most recent
financial statements, there has been no material adverse change in EMI's
business, properties or condition (financial or otherwise).
SECTION 5.6 LITIGATION. To the knowledge of Borrower, there are no
actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting either LPC or EMI or any of their Affiliates or
their properties or any of their Affiliates before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which, if determined adversely to them, would have a material adverse
effect on the financial condition, properties or operations of either of them or
any of their Affiliates.
SECTION 5.7 REGULATION U. LPC and EMI are not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
SECTION 5.8 TAXES. LPC and EMI and their Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them or to the extent that any such taxes are
being contested in good faith and adequate reserves have been established
therefor in accordance with GAAP. LPC and EMI and their Affiliates have filed
all federal, state and local tax returns which to the knowledge of the officers
of LPC and EMI or any Affiliate, as the case may be, are required to be filed,
and LPC and EMI and their Affiliates have paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
SECTION 5.9 TITLES AND LIENS. LPC and EMI have good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 5.5 and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for
Permitted Liens and liens for current taxes are not yet due. No financing
statement naming the Borrower as debtor is on file in any office except to
perfect only Permitted Liens.
SECTION 5.10 PLANS. Except as disclosed to the Lender in writing prior
to the date hereof, neither LPC nor EMI nor any of their Affiliates maintain or
has maintained any Plan. Neither LPC nor EMI nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither LPC nor EMI nor any of their
Affiliates have:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may become
payable to participants or beneficiaries of any such Plan).
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SECTION 5.11 DEFAULT. LPC and EMI are in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on their financial condition, properties or
operations.
SECTION 5.12 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions thereof, and all
other chemicals, wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in,
on or under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for either the Borrower or the Lender under
common law of any jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked, discharged, emitted
or released in, on or under the Premises in such a way as to create any such
liability.
(c) To the Borrower's best knowledge, the Borrower has not
disposed of Hazardous Substances in such a manner as to create any liability
under any Environmental Law.
(d) To the Borrower's best knowledge, there are not and there
never have been any requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation, relating in any way to the
Premises or the Borrower, alleging liability under, violation of, or
noncompliance with any Environmental Law or any license, permit or other
authorization issued pursuant thereto. To the Borrower's best knowledge, no such
matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses
are and have in the past always been conducted in accordance with all
Environmental Laws and all licenses, permits and other authorizations required
pursuant to any Environmental Law and necessary for the lawful and efficient
operation of such businesses are in the Borrower's possession and are in full
force and effect. No permit required under any Environmental Law is scheduled to
expire within 12 months and to the Borrower's best knowledge there is no threat
that any such permit will be withdrawn, terminated, limited or materially
changed.
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(f) To the Borrower's best knowledge, the Premises are not and
never have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or any
similar federal, state or local list, schedule, log, inventory or database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents known to the
Borrower describing or relating in any way to the Premises or Borrower's
businesses.
SECTION 5.13 SUBMISSIONS TO LENDER. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.
SECTION 5.14 FINANCING STATEMENTS. LPC and EMI have provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents to
the extent that such security interest can be perfected by filing of financial
statements. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral and all other collateral described in the Security Documents which is
capable of being perfected by filing financing statements. None of the
Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in effect
with respect thereto.
SECTION 5.15 RIGHTS TO PAYMENT. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditor's rights and except to the
extent that availability of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding therefor may be
brought.
SECTION 5.16 FINANCIAL SOLVENCY. Both before and after giving effect to
the transactions contemplated in the Loan Documents, neither LPC nor EMI nor any
of their Affiliates:
(a) was or will be insolvent, as that term is used and defined
in Section 101(32) of the United States Bankruptcy Code and Section 2 of the
Uniform Fraudulent Transfer Act;
(b) has unreasonably small capital or is engaged or about to
engage in a business or a transaction for which any remaining assets of the
Borrower or such Affiliate are unreasonably small;
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(c) by executing, delivering or performing its obligations
under the Loan Documents or other documents to which it is a party or by taking
any action with respect thereto, intends to, nor believes that it will, incur
debts beyond its ability to pay them as they mature;
(d) by executing, delivering or performing its obligations
under the Loan Documents or other documents to which it is a party or by taking
any action with respect thereto, intends to hinder, delay or defraud either its
present or future creditors; and
(e) at this time contemplates filing a petition in bankruptcy
or for an arrangement or reorganization or similar proceeding under any law any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any
actual, pending or threatened bankruptcy, insolvency or similar proceedings
under any law of any jurisdiction.
ARTICLE VI
Borrower's Affirmative Covenants
--------------------------------
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
SECTION 6.1 REPORTING REQUIREMENTS. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of each of LPC and EMI, their consolidated and
consolidating audited financial statements with the unqualified opinion of
independent certified public accountants selected by the Borrower and reasonably
acceptable to the Lender, which annual financial statements shall include the
Borrower's balance sheet as at the end of such fiscal year and the related
statements of the Borrower's income, retained earnings and cash flows for the
fiscal year then ended, prepared, if the Lender so requests, on a consolidating
and consolidated basis to include any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all management
letters prepared by such accountants; (ii) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or Event of
Default hereunder and all relevant facts in reasonable detail to evidence, and
the computations as to, whether or not the Borrower is in compliance with the
requirements set forth in Sections 6.12 through 6.15, and 7.10; and (iii) a
certificate of the Borrower's chief financial officer stating that such
financial statements have been prepared in accordance with GAAP and whether or
not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) as soon as available and in any event within 20 days after
the end of each month, a consolidated and consolidating unaudited/internal
balance sheet and statements of income and retained earnings of LPC and EMI as
at the end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and consolidated basis
to include any Affiliates, in reasonable detail and stating in comparative form
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the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments; and
accompanied by a certificate of the Borrower's chief financial officer,
substantially in the form of Exhibit C hereto stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end audit
adjustments, (ii) whether or not such officer has knowledge of the occurrence of
any Default or Event of Default hereunder not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect thereto, and
(iii) all relevant facts in reasonable detail to evidence, and the computations
as to, whether or not the Borrower is in compliance with the requirements set
forth in Sections 6.12 through 6.15, and 7.10;
(c) within 15 days after the end of each month or more
frequently if the Lender so requires, agings of LPC's and EMI's accounts
receivable and accounts payable, an inventory certification report, and a
calculation of their Accounts, Eligible Accounts, Inventory and Eligible
Inventory as at the end of such month or shorter time period;
(d) at least 30 days before the beginning of each fiscal year
of LPC and EMI, the projected consolidated and consolidating balance sheets and
income statements for each month of such year, each in reasonable detail,
representing the Borrower's good faith projections and certified by LPC's and
EMI's chief financial officers as being the most accurate projections available
and identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender
may in its discretion require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting either LPC or EMI of the type described in Section
5.12 or which seek a monetary recovery against either LPC or EMI in excess of
$100,000.00;
(f) as promptly as practicable (but in any event not later than
five business days) after an officer of either LPC or EMI obtains knowledge of
the occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default hereunder,
notice of such occurrence, together with a detailed statement by a responsible
officer of either LPC or EMI of the steps being taken by the Borrower to cure
the effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after
either LPC or EMI knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of LPC's and EMI's chief
financial officers setting forth details as to such Reportable Event and the
action which the Borrower proposes to take with respect thereto, together with a
copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
(h) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended,
the statement of the Borrower's chief financial officer setting forth details as
to such failure and the action which the Borrower proposes to take with respect
thereto, together with a copy of any notice of such failure required to be
provided to the Pension Benefit Guaranty Corporation;
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(i) promptly upon knowledge thereof, notice of (i) any disputes
or claims by either LPC's or EMI's customers; (ii) credit memos; (iii) any goods
returned to or recovered by either of them; and (iv) any change in the persons
constituting either of their key officers and key directors;
(j) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such other
collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which either LPC or EMI shall have sent
to its stockholders;
(l) promptly after the sending or filing thereof, copies of all
regular and periodic reports (including without limitation 10Q and 10K Reports)
which either LPC or EMI shall file with the Securities and Exchange Commission
or any national securities exchange;
(m) promptly upon knowledge thereof, notice of LPC's or EMI's
violation of any law, rule or regulation, the non-compliance with which could
materially and adversely affect LPC's or EMI's business or its financial
condition; and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment schedules,
copies of invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or information as the
Lender may request.
SECTION 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. LPC and EMI
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to their business and financial condition and such
other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of LPC and EMI at all times during ordinary business
hours, to send and discuss with account debtors and other obligors requests for
verification of amounts owed to LPC and EMI, and to discuss their affairs with
any of their directors, officers, employees or agents. LPC and EMI will permit
the Lender, or their employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Security Documents or
any other property of LPC and EMI at any time during ordinary business hours.
SECTION 6.3 ACCOUNT VERIFICATION. The Lender may at any time and from
time to time send or require LPC and EMI to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
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SECTION 6.4 COMPLIANCE WITH LAWS.
(a) LPC and EMI will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which would materially
and adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral, only
for lawful purposes, without violation of any federal, state or local law,
statute or ordinance.
(b) Without limiting the foregoing undertakings, each of LPC
and EMI specifically agrees that they will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and similar
approvals required by any Environmental Laws, and will not generate, use,
transport, treat, store or dispose of any Hazardous Substances in such a manner
as to create any liability or obligation under the common law of any
jurisdiction or any Environmental Law.
SECTION 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. Each of LPC and EMI will
pay or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of them; provided, that LPC and EMI shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made.
SECTION 6.6 MAINTENANCE OF PROPERTIES.
(a) LPC and EMI will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this Section 6.6 shall prevent LPC and EMI from discontinuing the operation
and maintenance of any of its properties if such discontinuance is, in the
Lender's judgment, desirable in the conduct of their business and not
disadvantageous in any material respect to the Lender.
(b) LPC and EMI will use commercially reasonable efforts to
defend the Collateral against all claims or demands of all persons (other than
the Lender) claiming the Collateral or any interest therein.
(c) LPC and EMI will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except Permitted Liens.
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SECTION 6.7 INSURANCE. LPC and EMI will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which LPC and EMI operates.
Without limiting the generality of the foregoing, LPC and EMI will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral insured against risks of fire (including
so-called extended coverage), theft, collision (for Collateral consisting of
motor vehicles) and such other risks and in such amounts as the Lender may
reasonably request, with any loss payable to the Lender to the extent of its
interest, and all policies of such insurance shall contain a lender's loss
payable endorsement for the Lender's benefit acceptable to the Lender. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.
SECTION 6.8 PRESERVATION OF EXISTENCE/SECURITIES AND EXCHANGE
COMMISSION. Each of LPC and EMI will preserve and maintain its existence and all
of its rights, privileges and franchises necessary or desirable in the normal
conduct of its business and shall conduct its business in an orderly, efficient
and regular manner. Each of LPC and EMI shall at all times remain in good
standing with the Securities and Exchange Commission.
SECTION 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender,
LPC and EMI will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by LPC and EMI.
SECTION 6.10 LENDER ACCOUNT.
(a) If, notwithstanding the instructions to debtors to make
payments to the Lockbox, LPC and EMI receives any payments on Receivables, they
shall deposit such payments into the Lender Account. Until so deposited, LPC and
EMI shall hold all such payments in trust for and as the property of the Lender
and shall not commingle such payments with any of its other funds or property.
(b) Amounts deposited in the Lender Account shall not bear
interest and shall not be subject to withdrawal by either LPC or EMI, except
after full payment and discharge of all Obligations.
(c) All deposits in the Lender Account shall constitute
proceeds of Collateral and shall not constitute payment of the Obligations. The
Lender from time to time at its discretion may, after allowing one (1)
collection day for Wells Fargo Bank, N.A. and one (1) Banking Day for Lender,
apply deposited funds in the Lender Account to the payment of the Obligations,
in any order or manner of application satisfactory to the Lender, by
transferring such funds to the Lender's general account.
(d) All items deposited in the Lender Account shall be subject
to final payment. If any such item is returned uncollected, LPC and EMI will
immediately pay the Lender, or, for items deposited in the Lender Account, the
bank maintaining such account, the amount of that item, or such bank at its
discretion may charge any uncollected item to the Borrower's commercial account
or other account. LPC and EMI shall be liable as an endorser on all items
deposited in the Lender Account, whether or not in fact endorsed by the
Borrower.
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SECTION 6.11 PERFORMANCE BY THE LENDER. If either LPC or EMI at any
time fails to perform or observe any of the foregoing covenants contained in
this Article VI or elsewhere herein, and if such failure shall continue for a
period of ten calendar days after the Lender gives either of them written notice
thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and
6.10, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of LPC and EMI (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and LPC and EMI shall thereupon
pay to the Lender on demand the amount of all monies expended and all costs and
expenses (including reasonable attorneys' fees and legal expenses) incurred by
the Lender in connection with or as a result of the performance or observance of
such agreements or the taking of such action by the Lender, together with
interest thereon from the date expended or incurred at the Revolving Floating
Rate. To facilitate the Lender's performance or observance of such covenants of
LPC and EMI, LPC and EMI hereby irrevocably appoint the Lender, or the Lender's
delegate, acting alone, as their attorney in fact (which appointment is coupled
with an interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of LPC and EMI any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by LPC and EMI under this Section 6.11.
SECTION 6.12 DEBT SERVICE COVERAGE RATIO. The Borrower covenants that
LPC and EMI shall, commencing on the fiscal quarter ending December 31, 1999,
and continuing on the last day of each fiscal quarter thereafter, maintain an
aggregate average minimum Debt Service Coverage Ratio (based upon the period
from the immediately preceding fiscal year end through the reporting date ) of
not less than the ratios set forth below:
------------------------------------- --------------------------------
Quarter Ending Requirement
-------------- -----------
------------------------------------- --------------------------------
December 31 of each year 1.00 to 1.00
------------------------------------- --------------------------------
March 31 of each year 1.05 to 1.00
------------------------------------- --------------------------------
June 30 of each year 1.15 to 1.00
------------------------------------- --------------------------------
September 30 of each year 1.25 to 1.00
------------------------------------- --------------------------------
SECTION 6.13 NET WORTH. The Borrower covenants that, as of September
30, 1999, LPC and EMI had an aggregate Book Net Worth of $9,888,000.00. The
Borrower covenants that commencing with the fiscal quarter ending December 31,
1999, and continuing each fiscal quarter thereafter, Borrower's aggregate Book
Net Worth as of the end of each fiscal quarter end shall increase by (or in the
event a decrease is allowed, decrease by not more than) the amounts set forth
below as measured from the immediately preceding fiscal year end.
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---------------------------------------- -------------------------------
Quarter Ending Net Worth Increase
-------------- ------------------
(Decrease)
----------
---------------------------------------- -------------------------------
December 31, 1999 (100,000.00)
---------------------------------------- -------------------------------
March 31 of each year $100,000.00
---------------------------------------- -------------------------------
June 30 of each year $300,000.00
---------------------------------------- -------------------------------
September 30 of each year $500,000.00
---------------------------------------- -------------------------------
December 31, 2000 and each
December 31 thereafter $0.00
---------------------------------------- -------------------------------
SECTION 6.14 NET INCOME. The Borrower covenants that beginning with the
fiscal quarter ending December 31, 1999, and continuing for each fiscal quarter
thereafter, LPC and EMI shall achieve an aggregate consolidated Net Income of
not less than (or in the event a Net Loss is permitted, a Net Loss of not more
than) the amounts set forth below, as measured from the immediately preceding
fiscal year end:
---------------------------------------- -------------------------------
Quarter Ending Net Income Increase
-------------- -------------------
(Decrease)
----------
---------------------------------------- -------------------------------
September 30, 1999 ($1,500,000.00)
---------------------------------------- -------------------------------
December 31, 1999 (100,000.00)
---------------------------------------- -------------------------------
March 31 of each year $100,000.00
---------------------------------------- -------------------------------
June 30 of each year $300,000.00
---------------------------------------- -------------------------------
September 30, 2000 and each
September 30 thereafter $500,000.00
---------------------------------------- -------------------------------
December 31, 2000 and each
December 31 thereafter $0.00
---------------------------------------- -------------------------------
SECTION 6.15 STOP LOSS. The Borrower covenants that beginning with the
month of October, 1999 and continuing for each month thereafter, LPC and EMI
shall not achieve an aggregate consolidated Net Loss in excess of $100,000.00 in
any one month.
ARTICLE VII
Negative Covenants
------------------
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
SECTION 7.1 LIENS. Neither LPC nor EMI will create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of their property which is not
Collateral or other collateral described in the Security Documents, covenants,
restrictions, rights, easements and minor irregularities in title which do not
materially interfere with the Borrower's business or operations as presently
conducted;
(b) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in Schedule
7.1 hereto, securing indebtedness for borrowed money permitted under Section
7.2;
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(c) the Security Interest and liens and security interests
created by the Security Documents;
(d) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrower not exceeding the lesser
of cost or fair market value thereof and so long as no Default Period is then in
existence and none would exist immediately after such acquisition; and
(e) landlords', mortgagees' and lessors' liens in respect of
rent not in default, to the extent landlord/mortgagee waivers shall have been
delivered to the Lender or liens in respect of pledges or deposits under
worker's compensation, unemployment insurance, social security laws, or similar
legislation (other than ERISA) or mechanics', laborers' and materialmens' and
similar liens, if the obligation secured by such liens are not then delinquent.
SECTION 7.2 INDEBTEDNESS. Neither LPC nor EMI will incur, create,
assume or permit to exist any indebtedness or liability on account of deposits
or advances or any indebtedness for borrowed money or letters of credit issued
on the Borrower's behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in Schedule 7.2 hereto;
(c) indebtedness relating to liens permitted in accordance with
Section 7.1;
(d) indebtedness in respect of current liabilities, other than
for borrowed money, of the Borrower incurred in the ordinary course of business
and of a type and magnitude consistent with past practices; and
(e) that subordinated indebtedness set forth in the
Subordination Agreement.
SECTION 7.3 GUARANTIES. Neither LPC nor EMI will assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower
for deposit or collection or similar transactions in the ordinary course of
business;
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in existence on
the date hereof and listed in Schedule 7.2 hereto; and
(c) investments permitted by Section 7.4.
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SECTION 7.4 INVESTMENTS AND SUBSIDIARIES.
(a) Neither LPC nor EMI will purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without limitation
any partnership or joint venture, except:
(i) investments in direct obligations of the United States
of America or any agency or instrumentality thereof whose obligations constitute
full faith and credit obligations of the United States of America having a
maturity of one year or less, commercial paper issued by U.S. corporations rated
"A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's
Investors Service or certificates of deposit or bankers' acceptances having a
maturity of one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of deposit or
bankers' acceptances are fully insured by the Federal Deposit Insurance
Corporation);
(ii) travel advances or loans to the Borrower's officers
and employees not exceeding at any one time an aggregate of $50,000.00; and
(iii) advances in the form of progress payments, prepaid
rent not exceeding three months or security deposits; and
(iv) subject to Lender's prior written consent, investments
pursuant to or arising under currency arrangements or interest rate agreements
entered into in the ordinary course of Borrower's business.
(b) Neither LPC nor EMI will create or permit to exist any
Subsidiary, other than the Subsidiar(y)(ies) in existence on the date hereof and
listed in Schedule 5.4.
SECTION 7.5 DIVIDENDS. Neither LPC nor EMI will declare or pay any
dividends (other than dividends payable solely in stock of LPC or EMI, as
applicable) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.
SECTION 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS. Except for the Transaction, neither LPC nor EMI will sell, lease,
assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii)
all or a substantial part of its assets, or (iii) any Collateral or any interest
therein (whether in one transaction or in a series of transactions) to any other
Person other than the sale of Inventory in the ordinary course of business and
will not liquidate, dissolve or suspend business operations. The Borrower will
not in any manner transfer any property without prior or present receipt of full
and adequate consideration.
SECTION 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. Neither LPC
nor EMI will consolidate with or merge into any Person, or permit any other
Person to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all the assets of any
other Person.
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SECTION 7.8 SALE AND LEASEBACK. Neither LPC nor EMI will enter into any
arrangement, directly or indirectly, with any other Person whereby either of
them shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
SECTION 7.9 RESTRICTIONS ON NATURE OF BUSINESS. Neither LPC nor EMI
will engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.
SECTION 7.10 CAPITAL EXPENDITURES. LPC and EMI will not, in the
aggregate, incur or contract to incur Capital Expenditures of more than
$1,500,000.00 in the aggregate during any fiscal year. In addition, LPC and EMI
will not, in the aggregate, incur or contract to incur unfinanced Capital
Expenditures of more than $1,000,000.00 during any fiscal year.
SECTION 7.11 ACCOUNTING. Neither LPC nor EMI will adopt any material
change in accounting principles other than as required by GAAP. Neither LPC nor
EMI will adopt, permit or consent to any change in its fiscal year.
SECTION 7.12 DISCOUNTS, ETC. Neither LPC nor EMI will, after notice
from the Lender, grant, other than in the ordinary course of business, any
discount, credit or allowance to any customer of either of them or accept any
return of goods sold, or at any time (whether before or after notice from the
Lender) modify, amend, subordinate, cancel or terminate the obligation of any
account debtor or other obligor of either of them.
SECTION 7.13 DEFINED BENEFIT PENSION PLANS. Neither LPC nor EMI will
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10.
SECTION 7.14 OTHER DEFAULTS. Neither LPC nor EMI will permit any
breach, default or event of default (subject to any applicable cure periods) to
occur under any note, loan agreement, indenture, lease, mortgage, contract for
deed, security agreement or other contractual obligation binding upon them.
SECTION 7.15 PLACE OF BUSINESS; NAME. Neither LPC nor EMI will, without
60 days prior written notice to Lender, transfer its chief executive office or
principal place of business, or move, relocate, close or sell any business
location. Neither LPC nor EMI will, without 60 days prior written notice to
Lender, permit any tangible Collateral or any records pertaining to the
Collateral to be located in any state or area in which, in the event of such
location, a financing statement covering such Collateral would be required to
be, but has not in fact been, filed in order to perfect the Security Interest.
Neither LPC nor EMI will, without 60 days prior written notice to Lender, change
its name.
SECTION 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS. Neither
LPC nor EMI will amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended.
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<PAGE>
SECTION 7.17 SALARIES. Neither LPC nor EMI will pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of the directors, officers and consultants, and any member of
their families in the aggregate, by more than 25% in any one year, either
individually or for all such persons in the aggregate, or pay any such increase
from any source other than profits earned in the year of payment.
SECTION 7.18 CHANGE IN OWNERSHIP. Neither LPC nor EMI will issue or
sell any stock.
ARTICLE VIII
Events of Default, Rights and Remedies
--------------------------------------
SECTION 8.1 EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become
due and payable;
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
(d) Either of LPC or EMI shall be or become insolvent, or admit
in writing its inability to pay its debts as they mature, or make an assignment
for the benefit of creditors; or either of LPC or EMI shall apply for or consent
to the appointment of any receiver, trustee, or similar officer for it or for
all or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of the
Borrower; or either of LPC or EMI shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise) against
either of LPC or EMI; or any judgment, writ, warrant of attachment or execution
or similar process shall be issued or levied against a substantial part of the
property of either of LPC or EMI;
(e) A petition shall be filed by or against either of LPC or
EMI under the United States Bankruptcy Code naming either of LPC or EMI as
debtor;
(f) Any representation or warranty made by either of LPC or EMI
in this Agreement, or by either of LPC or EMI (or any of their officers) in any
agreement, certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;
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(g) The rendering against either of LPC or EMI of a final
judgment, decree or order for the payment of money in excess of $50,000.00 and
the continuance of such judgment, decree or order unsatisfied and in effect for
any period of 30 consecutive days without a stay of execution;
(h) A default under any bond, debenture, note or other evidence
of indebtedness of either LPC or EMI owed to any Person other than the Lender,
or under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease of
any of the Premises, and the expiration of the applicable period of grace, if
any, specified in such evidence of indebtedness, indenture, other instrument or
lease;
(i) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the Borrower's assets in favor of the Plan;
(j) An event of default shall occur under any Security Document
or under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower hereunder
or under any Note;
(k) Either of LPC or EMI shall liquidate, dissolve, terminate
or suspend its business operations or otherwise fail to operate its business in
the ordinary course, or sell all or substantially all of its assets, without the
Lender's prior written consent;
(l) Either of LPC or EMI shall fail to pay, withhold, collect
or remit any tax or tax deficiency when assessed or due (other than any tax
deficiency which is being contested in good faith and by proper proceedings and
for which it shall have set aside on its books adequate reserves therefor) or
notice of any state or federal tax liens shall be filed or issued;
(m) Default in the payment of any amount owed by either of LPC
or EMI to the Lender other than any indebtedness arising hereunder;
(n) Either of LPC or EMI shall take or participate in any
action which would be prohibited under the provisions of any Subordination
Agreement or make any payment on the Subordinated Indebtedness (as defined in
the Subordination Agreement) that any Person was not entitled to receive under
the provisions of the Subordination Agreement;
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(o) Any event or circumstance with respect to either of LPC or
EMI shall occur such that the Lender shall believe in good faith that the
prospect of payment of all or any part of the Obligations or the performance by
either of LPC or EMI under the Loan Documents is impaired or any material
adverse change in the business or financial condition of either of LPC or EMI
shall occur.
(p) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the Lender.
SECTION 8.2 RIGHTS AND REMEDIES. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations shall
become and be forthwith due and payable, without presentment, notice of
dishonor, protest or further notice of any kind, all of which each of LPC and
EMI hereby expressly waives;
(c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower to
the payment of the Obligations;
(d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC, including,
without limitation, the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process (without a
prior hearing or notice thereof, which the Borrower hereby expressly waives) and
the right to sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, each of LPC and EMI will on demand assemble the
Collateral and make it available to the Lender at a place to be designated by
the Lender which is reasonably convenient to both parties;
(e) the Lender may exercise and enforce its rights and remedies
under the Loan Documents; and
(f) the Lender may exercise any other rights and remedies
available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (d) or (e) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
SECTION 8.3 CERTAIN NOTICES. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days before
the date of intended disposition or other action.
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ARTICLE IX
Miscellaneous
-------------
SECTION 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
SECTION 9.2 AMENDMENTS, ETC. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle either LPC or EMI to any other or further notice or demand in
similar or other circumstances.
SECTION 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed or telecopied to the party to whom notice is being given at
its address or telecopier number as set forth below:
If to the Borrower:
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130
Telecopier: 619/259-0956
Attention: Paul Wickman
Exotic Materials, Inc.
36570 Briggs Road
Murrieta, CA 92563-2347
Telecopier: 909/926-9026
Attention: Gary Mineo
If to the Lender:
Wells Fargo Credit, Inc.
100 West Washington Street, 7th Floor
MAC S4101-076
Phoenix, AZ 85003
Telecopier: 602/378-6215
Attention: Jill Fedoruk
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or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender. Any notice given to LPC shall be deemed
to have also been given to EMI. Any notice given to EMI shall be deemed to have
also been given to LPC. Any notice given to Lender on behalf of LPC shall be
deemed to have also been given on behalf of EMI. Any notice given to Lender on
behalf of EMI shall be deemed to have also been given on behalf of LPC.
SECTION 9.4 FURTHER DOCUMENTS. Each of LPC and EMI will from time to
time execute and deliver or endorse any and all instruments, documents,
conveyances, assignments, security agreements, financing statements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interest or the Lender's rights
under the Loan Documents (but any failure to request or assure that the Borrower
executes, delivers or endorses any such item shall not affect or impair the
validity, sufficiency or enforceability of the Loan Documents and the Security
Interest, regardless of whether any such item was or was not executed, delivered
or endorsed in a similar context or on a prior occasion).
SECTION 9.5 COLLATERAL. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
SECTION 9.6 COSTS AND EXPENSES. Each of LPC and EMI jointly and
severally agree to pay on demand all costs and expenses, including (without
limitation) attorneys' fees, incurred by the Lender in connection with the
Obligations, this Agreement, the Loan Documents, and any other document or
agreement related hereto or thereto, and the transactions contemplated hereby,
including without limitation all such costs, expenses and fees incurred in
connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.
SECTION 9.7 INDEMNITY. In addition to the payment of expenses pursuant
to Section 9.6 each of LPC and EMI, jointly and severally agree to indemnify,
defend and hold harmless the Lender, and any of its participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees,
attorneys and agents of the foregoing (the "Indemnitees") from and against any
of the following (collectively, "Indemnified Liabilities"); provided that the
40
<PAGE>
Borrower shall not have any obligation to any Indemnitee hereunder with respect
to the Indemnified Liabilities caused by or resulting from the willful
misconduct or gross negligence of such Indemnitee or the breach by such
Indemnitee of this Agreement or any other Loan Document:
(i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of the Loan Documents or the making of the Advances;
(ii) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.12 proves to
be incorrect in any respect or as a result of any violation of the covenant
contained in Section 6.4(b); and
(iii) any and all other liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements
of counsel) in connection with the foregoing and any other investigative,
administrative or judicial proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred by or asserted
against any such Indemnitee, in any manner related to or arising out of or in
connection with the making of the Advances and the Loan Documents or the use or
intended use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
SECTION 9.8 PARTICIPANTS. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
SECTION 9.9 EXECUTION IN COUNTERPARTS. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
SECTION 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING
INFORMATION. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
41
<PAGE>
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Norwest Corporation, and all direct and indirect
subsidiaries of Norwest Corporation, may exchange any and all information they
may have in their possession regarding the Borrower and its Affiliates, and the
Borrower waives any right of confidentiality it may have with respect to such
exchange of such information.
SECTION 9.11 SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
SECTION 9.12 HEADINGS. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
SECTION 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Arizona. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Arizona. The parties hereto
hereby (i) consents to the personal jurisdiction of the state and federal courts
located in the State of Arizona in connection with any controversy related to
this Agreement; (ii) waives any argument that venue in any such forum is not
convenient, (iii) agrees that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents shall be
venued in either the District Court of Maricopa County, Arizona, or the United
States District Court, District of Arizona; and (iv) agrees that a final
judgment in any such suit, action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
WELLS FARGO CREDIT, INC., a Minnesota
corporation
By /s/ Jill Fedoruk
---------------------------------------
Its Officer
--------------------------------
42
<PAGE>
LASER POWER CORPORATION, a Delaware
corporation
By /s/ Paul P. Wickmam
--------------------------------------
Its CFO
----------------------------------
EXOTIC MATERIALS, INC., a California
corporation
By /s/ Paul P. Wickmam
--------------------------------------
Its Treasurer
----------------------------------
43
<PAGE>
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B-1 Form of Term Note
Exhibit B-2 Form of Capital Expenditures Note
Exhibit C Compliance Certificate
Exhibit D Premises
-------------------
Schedule 5.1 Trade Names, Chief Executive Office,
Principal Place of Business, and
Locations of Collateral
Schedule 5.4 Subsidiaries
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
44
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$4,000,000.00 Phoenix, Arizona
__________, 1999
For value received, the undersigned, LASER POWER CORPORATION,
a Delaware corporation and EXOTIC MATERIALS, INC., a California corporation
(collectively, jointly and severally, the "Borrower"), hereby promise to pay on
the Termination Date under the Credit Agreement (defined below), to the order of
WELLS FARGO CREDIT, INC., a Minnesota corporation (the "Lender"), at its main
office in Phoenix, Arizona, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Four Million Dollars
($4,000,000.00) or, if less, the aggregate unpaid principal amount of all
Revolving Advances made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
LASER POWER CORPORATION, a Delaware
corporation
By _______________________________________
Its _____________________________________
A-1
<PAGE>
EXOTIC MATERIALS, INC., a California
corporation
By _______________________________________
Its _____________________________________
A-2
<PAGE>
Exhibit B-1 to Credit and Security Agreement
TERM NOTE
$1,950,000.00 Phoenix, Arizona
__________, 1999
For value received, the undersigned, LASER POWER CORPORATION,
a Delaware corporation, and EXOTIC MATERIALS, INC., a California corporation
(collectively, jointly and severally the "Borrower"), hereby promise to pay on
the Termination Date under the Credit Agreement (defined below), to the order of
WELLS FARGO CREDIT, INC., a Minnesota corporation (the "Lender"), at its main
office in Phoenix, Arizona, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of One Million Nine Hundred Fifty
Thousand Dollars ($1,950,000.00) or, if less, the aggregate unpaid principal
amount of all Term Advance made by the Lender to the Borrower under the Credit
Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Credit
and Security Agreement of even date herewith (as the same may hereafter be
amended, supplemented or restated from time to time, the "Credit Agreement") by
and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Term Note referred to in the Credit Agreement. This Note is secured,
among other things, pursuant to the Credit Agreement and the Security Documents
as therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
LASER POWER CORPORATION, a Delaware
corporation
By ______________________________________
Its __________________________________
B-1-1
<PAGE>
EXOTIC MATERIALS, INC., a California
corporation
By ______________________________________
Its __________________________________
B-1-1
<PAGE>
Exhibit B-2 to Credit and Security Agreement
CAPITAL EXPENDITURES NOTE
$750,000.00 Phoenix, Arizona
__________, 1999
For value received, the undersigned, LASER POWER CORPORATION,
a Delaware corporation, and EXOTIC MATERIALS, INC., a California corporation
(collectively, jointly and severally the "Borrower"), hereby promise to pay on
the Termination Date under the Credit Agreement (defined below), to the order of
WELLS FARGO CREDIT, INC., a Minnesota corporation (the "Lender"), at its main
office in Phoenix, Arizona, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Seven Hundred Fifty Thousand
Dollars ($750,000.00) or, if less, the aggregate unpaid principal amount of all
Term Advance made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Capital Expenditures Note referred to in the Credit Agreement. This
Note is secured, among other things, pursuant to the Credit Agreement and the
Security Documents as therein defined, and may now or hereafter be secured by
one or more other security agreements, mortgages, deeds of trust, assignments or
other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
LASER POWER CORPORATION, a Delaware
corporation
By ____________________________________
Its ________________________________
B-2-1
<PAGE>
EXOTIC MATERIALS, INC., a California
corporation
By ____________________________________
Its ________________________________
B-2-1
<PAGE>
Exhibit C to Credit and Security Agreement
COMPLIANCE CERTIFICATE
----------------------
To: _________________________________
Wells Fargo Credit, Inc.
Date: __________________, ______
Subject: Laser Power Corporation, and Exotic Materials, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as
of ____________, ____ (the "Credit Agreement"), attached are the financial
statements of Laser Power Corporation, and Exotic Materials, Inc. (collectively
the "Borrower") as of and for ________________, _____ (the "Reporting Date") and
the year-to-date period then ended (the "Current Financials"). All terms used in
this certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the Borrower's financial condition and the results of its operations as of the
date thereof.
EVENTS OF DEFAULT. (Check one):
------------------
|_| The undersigned does not have knowledge of the occurrence
of a Default or Event of Default under the Credit Agreement.
|_| The undersigned has knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to
thereto.
I hereby certify to the Lender as follows:
|_| The Reporting Date does not mark the end of one of the
Borrower's fiscal quarters, hence I am completing only
paragraph __ below.
|_| The Reporting Date marks the end of one of the Borrower's
fiscal quarters, hence I am completing all paragraphs below
except paragraph __.
|_| The Reporting Date marks the end of the Borrower's fiscal
year, hence I am completing all paragraphs below.
FINANCIAL COVENANTS. I further hereby certify that the
Borrower is in compliance with the covenants set forth in Sections 6.12 through
6.15, 7.10 and 7.17 of the Agreement, except as indicated below.
The calculations made to determine compliance are as follows:
<PAGE>
Covenant 6.12 Debt Service Coverage Ratio
------------------------------- ---------------------- ----------------
Quarter Ending Requirement Actual
------------------------------- ---------------------- ----------------
December 31 of each year 1.00 to 1.00
------------------------------- ---------------------- ----------------
March 31 of each year 1.05 to 1.00
------------------------------- ---------------------- ----------------
June 30 of each year 1.15 to 1.00
------------------------------- ---------------------- ----------------
September 30 of each year 1.25 to 1.00
------------------------------- ---------------------- ----------------
Covenant 6.13 Book Net Worth
----------------------------- ---------------------------- ----------------
Quarter Ending Requirement Actual
----------------------------- ---------------------------- ----------------
September 30, 1999 $9,888,000.00
----------------------------- ---------------------------- ----------------
December 31, 1999 An amount equal to the
Borrower's Book Net
Worth on the
immediately preceding
fiscal year end MINUS
$100,000.00
----------------------------- ---------------------------- ----------------
March 31 of each year An amount equal to the
Borrower's Book Net
Worth on the
immediately preceding
fiscal year end PLUS
$100,000.00
----------------------------- ---------------------------- ----------------
June 30 of each year An amount equal to the
Borrower's Book Net
Worth on the
immediately preceding
fiscal year end PLUS
$300,000.00
----------------------------- ---------------------------- ----------------
September 30 of An amount equal to the
each year Borrower's Book Net
Worth on the
immediately preceding
fiscal year end PLUS
$500,000.00
----------------------------- ---------------------------- ----------------
December 31, 2000 An amount equal to the
and each Borrower's Book Net
December 31 Worth on the
thereafter immediately preceding
fiscal year end
----------------------------- ---------------------------- ----------------
<PAGE>
Covenant 6.14 Net Income/Net Loss
----------------------------- ---------------------------- ----------------
Quarter Ending Requirement Actual
----------------------------- ---------------------------- ----------------
September 30, 1999 ($1,500,000.00) as
measured from the
immediately preceding
fiscal year end
----------------------------- ---------------------------- ----------------
December 31, 1999 ($100,000.00) as
measured from the
immediately preceding
fiscal year end
----------------------------- ---------------------------- ----------------
Each March 31 ($100,000.00) as
measured from the
immediately preceding
fiscal year end
----------------------------- ---------------------------- ----------------
Each June 30 $300,000.00 as measured
from the immediately
preceding fiscal year end
----------------------------- ---------------------------- ----------------
September 30, 2000 $500,000.00 as measured
and each from the immediately
September 30 preceding fiscal year end
thereafter
----------------------------- ---------------------------- ----------------
December 31, 2000 $0.00 as measured from
and each the immediately
December 31 preceding fiscal year end
thereafter
----------------------------- ---------------------------- ----------------
Covenant 6.15 Stop Loss
----------------------------- ---------------------------- ----------------
Month Ending Maximum Loss Actual
----------------------------- ---------------------------- ----------------
Each month $100,000.00
----------------------------- ---------------------------- ----------------
<PAGE>
Covenant 7.10 Capital Expenditures
------------------------- ----------------------- -------------------------
MAXIMUM ALLOWABLE
UNFINANCED CAPITAL ACTUAL UNFINANCED
FISCAL YEAR EXPENDITURE CAPITAL EXPENDITURES
------------------------- ----------------------- -------------------------
Each Fiscal Year $1,000,000.00
------------------------- ----------------------- -------------------------
------------------------- ----------------------- -------------------------
MAXIMUM ALLOWABLE ACTUAL CAPITAL
FISCAL YEAR CAPITAL EXPENDITURES EXPENDITURES
------------------------- ----------------------- -------------------------
Each Fiscal Year $1,500,000.00
------------------------- ----------------------- -------------------------
As of the Reporting Date, the Borrower ____ is ____ is not in compliance with
Section 7.17 of the Credit Agreement concerning salary increases not to exceed
25% per annum in the aggregate.
OFFICERS PERCENTAGE INCREASE
-------- -------------------
____________________________ _____________________________
____________________________ _____________________________
____________________________ _____________________________
(To be completed within 30 days of any salary increase)
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
LASER POWER CORPORATION, a Delaware
corporation
By _____________________________________
Its _________________________________
EXOTIC MATERIALS, INC., a California
corporation
By _____________________________________
Its _________________________________
<PAGE>
Exhibit D to Credit and Security Agreement
PREMISES
--------
The Premises referred to in the Credit and Security Agreement
are legally described as follows:
LASER POWER CORPORATION
- -----------------------
Highlands Plaza
Legal Description
LOT 15 OF EMPLOYMENT CENTER DEVELOPMENT UNIT NO. 2A, IN THE CITY OF
SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO
MAP THEREOF NO. 10394, FILED IN THE OFFICE OF THE COUNTY RECORDER OF
SAN DIEGO COUNTY, ON MAY 26, 1982.
EXCEPT THEREFROM THE FOLLOWING:
All Oil, Asphaltum, Petroleum, Natural Gas and other Hydrocarbons
and other valuable mineral substances and products, and all other
minerals, whether or not of the same character hereinbefore
generally described, in or under said land and lying and being at a
vertical depth of 500 or more feet below the present natural surface
of the ground, but without right of entry on the surface or within a
vertical depth of 500 feet below the present natural surface of the
ground.
PARCEL #304 101 01 00 08227
EXOTIC MATERIALS, INC.
- ----------------------
Highlands Plaza
Legal Description
That certain real property situated in the County of Riverside, State
of California, more particularly described as:
Parcels 8, 9 and 10 of Parcel Map No. 23199, on file in Book 170,
Pages 73 through 76, inclusive of Parcel Maps, Records of Riverside
County, California
<PAGE>
Schedule 5.1 to Credit and Security Agreement
Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral
TRADE NAMES
-----------
Laser Power Corporation
Laser Power Micro Laser(s)
Laser Power Research
Laser Power Optics
Exotic Electro-Optics
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
--------------------------------------------------
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130
Exotic Materials, Inc.
36570 Briggs Road
Murrieta, CA 92563-2347
OTHER INVENTORY AND EQUIPMENT LOCATIONS
---------------------------------------
Laser Power Corporation
12777 High Bluff Drive
San Diego, CA 92130
Exotic Materials, Inc.
36570 Briggs Road
Murrieta, CA 92563-2347
<PAGE>
Schedule 5.4 to Credit and Security Agreement
SUBSIDIARIES
------------
EMI Acquisition Corporation
Laser Power Europe
Laser Optics de Mexico, S.A. de C.V.
<PAGE>
Schedule 7.1 to Credit and Security Agreement
<TABLE>
PERMITTED LIENS
---------------
<CAPTION>
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Imperial Equipment CA at 0800 04/23/96 9611560973
Business
Credit, Inc.
Safeco Credit Voicemail System CA at 0800 09/27/95 9527260755
Co., Inc.
Scripps Bank Equipment CA at 0800 09/16/93 93189562
Continuation 04/22/98 93113c0177
ATX Telecom Patents CA at 1616 11/25/96 9633160864
Systems, Inc.
The CIT Group/ Equipment CA at 1545 12/13/96 96348c0358
Equipment
Financing, Inc.
The CIT Group/ Equipment CA at 1533 02/24/97 9705660157
Equipment
Financing, Inc.
Mitsui Vendor Equipment CA at 0800 Amended 08/16/96 9623360091
Leasing, Inc. 06/25/97 97177c0301
</TABLE>
<PAGE>
Schedule 7.2 to Credit and Security Agreement
<TABLE>
PERMITTED INDEBTEDNESS AND GUARANTIES
-------------------------------------
<CAPTION>
Indebtedness
------------
Creditor Principal Maturity Monthly Collateral
-------- --------- -------- ------- ----------
Amount Date Payment
------ ---- -------
<S> <C> <C> <C> <C>
Scripps Bank Equipment as listed in
recorded financing
statement
Safeco Credit Co., One (1) 8 Port 45 Hour
Inc. Voice Mail
Imperial Business $1,671.48 Equipment as listed in
Credit, Inc. recorded financing
statement
Rights under Agreement
ATX Telecom between the Board of
Systems, Inc. Trustees of the Leland
Stanford Junior University
& Asa ___ Corporation
Mitsui Vendor Equipment as listed in
Leasing, Inc. recorded financing
statement
The CIT Equipment as listed in
Group/Equipment recorded financing
Financing, Inc. statement
The CIT Equipment as listed in
Group/Equipment recorded financing
Financing, Inc. statement
</TABLE>
Guaranties
----------
Primary Obligor Amount and Description of Beneficiary of Guaranty
--------------- ------------------------- -----------------------
Obligation Guaranteed
---------------------
None
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1981 Stock Option Plan, the 1993 Stock Option Plan, the
1997 Equity Incentive Plan, the Employee Stock Purchase Plan, the Warrants to
purchase common stock, and the Options to purchase common stock of Laser Power
Corporation of our report dated December 4, 1999 with respect to the
consolidated financial statements of Laser Power Corporation included in its
Annual Report on Form 10-K for the year ended September 30, 1999.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND FOR
THE TWELVE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 860
<SECURITIES> 0
<RECEIVABLES> 4,895
<ALLOWANCES> (407)
<INVENTORY> 6,500
<CURRENT-ASSETS> 12,748
<PP&E> 13,186
<DEPRECIATION> (6,092)
<TOTAL-ASSETS> 21,908
<CURRENT-LIABILITIES> 6,820
<BONDS> 1,660
0
0
<COMMON> 9
<OTHER-SE> (18)
<TOTAL-LIABILITY-AND-EQUITY> 21,908
<SALES> 31,278
<TOTAL-REVENUES> 34,010
<CGS> 23,059
<TOTAL-COSTS> 24,879
<OTHER-EXPENSES> 7,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 342
<INCOME-PRETAX> 1,649
<INCOME-TAX> 10
<INCOME-CONTINUING> 1,639
<DISCONTINUED> (3,126)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,487)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
