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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 000-22625
LASER POWER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3423358
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12777 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 755-0700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of March 28, 1999, there were 8,477,288 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
LASER POWER CORPORATION
FORM 10-Q INDEX
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of Laser Power Corporation (the
"Company") could differ materially from those statements. Factors that could
cause or contribute to such differences include, but are not limited to,
uncertainties regarding competition, general economic conditions in the
Company's geographic markets, size and timing of individual orders, market
acceptance of new products and product enhancements, delays in the introduction
of new products or product enhancements, seasonality of revenues, and
developments with respect to the Company's contract research activities, as well
as those factors discussed in the Company's Annual Report on Form 10-K
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 28, 1999 (unaudited) and September 30, 1998........... 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended March 28, 1999 and
March 31, 1998............................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended March 28, 1999 and March 31, 1998. 5
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 6
ITEM 2. Management's Discussion And Analysis Of Results Of Operations And
Financial Condition.......................................... 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 15
ITEM 6. Exhibits and Reports on Form 8-K............................. 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
LASER POWER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
March 28, 1999 September 30, 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 969 $ 2,412
Restricted cash ................................. 1,036 1,000
Accounts receivable, net ........................ 6,745 5,660
Inventories, net ................................ 6,942 6,874
Other current assets ............................ 381 547
------------- -------------
Total current assets .................... 16,073 16,493
Property and equipment, net ....................... 7,907 8,088
Intangibles and other assets, net ................ 805 820
------------- -------------
Total assets ............................ $ 24,785 $ 25,401
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank ............................ $ 1,833 $ --
Accounts payable ................................ 2,955 2,234
Accrued compensation and related expenses ....... 1,251 1,305
Accrued acquisition and integration ............. 1,333 1,554
Accrued liabilities ............................. 701 1,668
Current portion of long-term debt ............... 1,041 4,428
------------- -------------
Total current liabilities ............... 9,114 11,189
Long-term liabilities ............................. 801 1,032
Long-term debt .................................... 2,685 287
Subordinated convertible debentures ............... 1,660 1,660
Stockholders' equity:
Convertible preferred stock, $.001 par value:
Authorized -- 3,000,000 shares
Issued and outstanding - None .............. -- --
Common stock, $.001 par value:
Authorized -- 15,000,000 shares
Issued and outstanding
8,398,455 shares at September 30, 1998
and 8,477,288 shares at March 28, 1999 ... 8 8
Additional paid-in capital ...................... 19,484 19,416
Foreign currency translation adjustment ......... (74) (39)
Accumulated deficit ............................. (8,893) (8,152)
------------- -------------
Total stockholders' equity .............. 10,525 11,233
------------- -------------
Total liabilities and stockholders' equity $ 24,785 $ 25,401
============= =============
</TABLE>
See accompanying notes.
3
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<TABLE>
LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
March 28, 1999 March 31, 1998 March 28, 1999 March 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product sales............................ $ 8,392 $ 8,287 $ 16,154 $ 16,065
Contract research and development........ 1,286 1,103 2,178 2,502
-------------- -------------- -------------- --------------
Total revenues................... 9,678 9,390 18,332 18,567
Costs and expenses:
Product sales............................ 6,264 5,973 12,125 11,732
Contract research and development........ 897 936 1,556 2,041
Internal research and development........ 462 623 997 1,335
Selling, general and administrative...... 1,981 1,927 4,134 3,878
Acquisition and related.................. - 2,000 - 2,000
-------------- -------------- -------------- --------------
Total costs and expenses......... 9,604 11,459 18,812 20,986
-------------- -------------- -------------- --------------
Income (loss) from operations.............. 74 (2,069) (480) (2,419)
Interest expense, net...................... 139 56 252 105
-------------- -------------- -------------- --------------
Loss before income taxes................... (65) (2,125) (732) (2,524)
Income taxes............................... 5 73 9 160
-------------- -------------- -------------- --------------
Net loss................................... $ (70) $ (2,198) $ (741) $ (2,684)
============== ============== ============== ==============
Basic loss per share....................... $ (0.01) $ (0.27) $ (0.09) $ (0.33)
============== ============== ============== ==============
Diluted loss per share..................... $ (0.01) $ (0.27) $ (0.09) $ (0.33)
============== ============== ============== ==============
Average common shares outstanding - Basic. 8,424 8,221 8,411 8,160
============== ============== ============== ==============
Average common shares outstanding - Diluted 8,424 8,221 8,411 8,160
============== ============== ============== ==============
</TABLE>
See accompanying notes.
4
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<TABLE>
LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Six Months Ended
-------------------------------
March 28, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from operations ........................... $ (740) $ (2,684)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 991 898
Other .......................................... (1,058) 2,723
Changes in operating assets and liabilities .... (521) (2,720)
-------------- --------------
Net cash used in operating activities ..... (1,328) (1,783)
INVESTING ACTIVITIES
Additions to property and equipment ................ (795) (2,213)
Changes in other assets and liabilities ............ (231) (81)
-------------- --------------
Net cash used in investing activities ..... (1,026) (2,294)
FINANCING ACTIVITIES
Payments on borrowings ............................. (1,287) (215)
Proceeds from borrowings ........................... 2,131 --
Net proceeds from issuance of stock ................ 67 823
-------------- --------------
Net cash provided by financing activities . 911 608
-------------- --------------
Net decrease in cash and cash equivalents .......... (1,443) (3,469)
Cash and cash equivalents at beginning of the period 2,412 8,199
-------------- --------------
Cash and cash equivalents at end of the period ..... $ 969 $ 4,730
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........... $ 210 $ 175
============== ==============
</TABLE>
See accompanying notes.
5
<PAGE>
LASER POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Laser Power Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, in the
opinion of management, contain all adjustments necessary to present fairly the
consolidated financial position as of March 28, 1999 and the consolidated
results of operations for the three and six months ended March 28, 1999 and
March 31, 1998.
Certain information and footnote disclosures normally included in financial
statements have been omitted or condensed. These condensed consolidated
financial statements should be read in conjunction with the financial
information included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the period
ended March 28, 1999 are not necessarily indicative of the results that may be
attained for the entire fiscal year.
The Company has adopted a policy to report the quarterly results using a
thirteen week reporting period, but the annual results will continue to be
reported based on a September 30 year-end.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income". This standard is effective for fiscal years
beginning after December 15, 1997. FAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. Comprehensive income is
not materially different than reported net income for the periods ended March
28, 1999 and March 31, 1998.
2. LOSS PER SHARE
The loss per share information was computed applying the requirements of
recently effective Statement of Financial Accounting Standards No. 128 and SEC
staff accounting bulletin No. 98. Basic loss per share considers the weighted
average number of common shares outstanding. Diluted loss per share considers
the shares included as basic shares outstanding, conversion of outstanding
preferred stock to common stock, and the dilutive effects of stock options and
warrants to purchase common stock, and other common stock equivalents.
3. FINANCING AGREEMENTS
In February 1999, the Company entered into a new credit agreement with its
bank. The credit agreement provides for a revolving line of credit of
$2,500,000, subject to a borrowing base limitation, with an annual interest rate
of 1.5% above the bank's prime rate. The line of credit expires on August 1,
1999. The Company has borrowed $1,833,000 against this line as of March 28,
1999.
The credit agreement also provides for two term loans. The first term loan
replaces an existing term loan of $1,583,000, at the same amount and with the
same remaining amortization period of 40 months. The second term loan converts a
$1,803,000 equipment line of credit to a loan paid over 48 months commencing on
March 1, 1999. Both term loans have an annual interest rate of 1.25% above the
bank's prime rate.
In connection with the new credit agreement, the Company paid in full a
third term loan of $946,000 during February 1999.
6
<PAGE>
All borrowings under the above credit agreements are secured by accounts
receivable, inventory, intangibles, and property and equipment. The agreements
contain restrictive covenants which include limitations on losses, maintenance
of minimum tangible net worth, debt to equity and cash flow ratios, as well as
restrictions on capital and lease expenditures, investment levels in the
Company's Belgian subsidiary, additional borrowings and payments of dividends.
At March 28, 1999, the Company was not in compliance with one of these
covenants; however, a waiver has been obtained from the bank. The Company has
pledged a $1,000,000 certificate of deposit as additional collateral for the two
term loans.
4. INVENTORIES (in thousands)
March 28, 1999 September 30, 1998
-------------- ------------------
(unaudited)
Raw materials....................... $ 3,032 $ 2,671
Work in progress.................... 3,603 3,525
Finished goods...................... 1,307 1,461
-------- --------
Subtotal....................... 7,942 7,657
Reserves............................ (1,000) (783)
-------- --------
Inventories, net.................... $ 6,942 $ 6,874
======== ========
5. SEGMENT INFORMATION
FAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in FAS No. 131, are components of an enterprise
for which separate financial information is required to be reported on the basis
that is used internally for evaluating the segment performance.
The revenues, net income (loss) and total assets of the Company's optics and
microlaser operations for the three and six months ended March 28, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months ended Reconciling
March 28, 1999 (unaudited) Optics Microlasers Items Combined
- ------------------------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues...................... $ 8,583 $ 1,255 $ (160) $ 9,678
Net income (loss)................... $ 962 $ (895) $ (137) $ (70)
</TABLE>
<TABLE>
<CAPTION>
Six Months ended Reconciling
March 28, 1999 (unaudited) Optics Microlasers Items Combined
- ------------------------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues...................... $16,294 $ 2,255 $ (217) $18,332
Net income (loss)................... $ 1,242 $(1,716) $ (267) $ (741)
Reconciling
March 28, 1999 (unaudited) Optics Microlasers Items Combined
- ------------------------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Total assets........................ $ - $ - $ - $24,785
</TABLE>
The Company does not prepare total asset information by segment.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Revenues
For the three and six months ended March 28, 1999, product sales were
$8,392,000 and $16,154,000 compared to $8,287,000 and $16,065,000 for the three
and six months ended March 31, 1998, an increase of $105,000 or 1% for the three
months and $89,000 or 1% for the six months ended March 28, 1999. Contract
research and development revenues were $1,286,000 and $2,178,000 for the three
and six months ended March 28, 1999 compared to $1,103,000 and $2,502,000 for
the three and six months ended March 31,1998, an increase of $183,000 or 17% for
the three months and a decrease of $324,000 or 13% for the six months ended
March 28, 1999. Sales of infrared optics increased primarily due to higher
delivery rates on long-term production contracts, and sales of microlasers
increased due to increased market share and resolution of production problems.
These increases were offset by a decline in sales of the Company's laser optics
for industrial and medical applications, primarily due to competition in
domestic markets and to lower demand related to the Asian economic situation.
The increases and decreases in contract revenues are due primarily to changing
levels of contract funding for development of microlaser-based display
technology.
A number of factors will determine whether the Company will be able to
sustain or increase the current level of product sales, including significant
competition in laser optics markets, uncertainties in foreign markets
(particularly Asia) and currency exchange rates, the impact of relocation and
consolidation of optics operations on customer service and employee retention,
the timing of exercise of customer options on long-term production contracts for
optics for military applications, and the Company's ability to improve the
manufacture and sale of microlaser products. Contract research and development
revenues are expected to fluctuate in the future due to timing of performance on
existing contracts and to uncertainties in the timing and amount of future
contract awards.
Gross Profit
Gross profit on product sales was $2,128,000 and $4,029,000 for the three
and six months ended March 28, 1999 compared to $2,314,000 and $4,333,000 for
the three and six months ended March 31, 1998, a decrease of $186,000 or 8% for
the three months and $304,000 or 7% for the six months ended March 28, 1999.
Gross profit on research and development revenues was $389,000 and $622,000 for
the three and six months ended March 28, 1999 compared to $167,000 and $461,000,
an increase of $222,000 or $133% for the three months and $161,000 or 35% for
the six months ended March 28, 1999. Gross margin on product sales was 25% for
the three and six months ended March 28, 1999 compared to 28% for the three
months and 27% for the six months ended March 31, 1998. The lower gross margin
on product sales was primarily due to lower margins in laser optics resulting
from competition and manufacturing disruptions associated with relocation of
the Company's laser optics business, partially offset by higher margins on
infrared optics due to favorable product mix and manufacturing efficiencies.
Gross margin on contract research and development revenues was 30% for the three
months and 29% for the six months ended March 28, 1999 compared to 15% for the
three months and 18% for the six months ended March 31, 1998. The increase in
gross margin was due primarily to a reduction in cost overruns and to overhead
cost reductions.
The Company's ability to maintain or improve its existing margins is
dependent on a number of factors, including competition, successful completion
of the relocation of its laser optics business, the ability to purchase raw
materials and purchased components at costs and prices lower than currently paid
by the Company, the successful implementation of automated fabrication processes
in its optics operations, and improvements in yield and growth in volume in its
microlaser operations. Gross margins on contract research and development
revenues are expected to fluctuate over time due to uncertainties inherent in
determining the amount of effort required to meet customer expectations.
8
<PAGE>
Internal Research and Development Expense
Internal research and development expense was $462,000 for the three months
and $997,000 for the six months ended March 28, 1999 compared to $623,000 for
the three months and $1,335,000 for the six months ended March 31, 1998, a
decrease of $161,000 or 26% for the three months and $338,000 or 25% for the six
months ended March 28, 1999. The decrease was due to a substantial reduction in
research and development on optics products and to a shift in microlaser
resources from research to manufacturing. The Company expects that internal
research and development expense will remain at or below current levels for the
remainder of the fiscal year.
Selling, General and Administrative Expense
Selling, general and administrative expense was $1,981,000 for the three
months and $4,134,000 for the six months ended March 28, 1999 compared to
$1,927,000 for the three months and $3,878,000 for the six months ended March
31, 1998, an increase of $54,000 or 3% for the three months and $256,000 or 7%
for the six months ended March 28, 1999. The increase was due to additional
staffing to strengthen certain administrative functions and to higher sales and
marketing expense for microlaser products. The Company has implemented cost
control measures during the most recent fiscal quarter. As a result, selling,
general and administrative expense is not expected to increase as a percentage
of sales in the near term.
Acquisition and Related Expense
During the three months ended March 31, 1998, the Company expensed
$2,000,000 of current and future costs in connection with its acquisition of EMI
Acquisition Corp. and a plan to integrate its existing optics operations with
EMI operations. There were no comparable expenses during the three and six
months ended March 28, 1999.
Interest Expense
Net interest expense was $139,000 for the three months and $252,000 for the
six months ended March 28, 1999 compared to $56,000 for the three months and
$105,000 for the six months ended March 31, 1998, an increase of $83,000 or 148%
for the three months and $147,000 or 140% for the six months ended March 28,
1999. The increase was due primarily to higher levels of borrowing to finance
capital additions and to revised credit terms with its bank which has resulted
in higher borrowing costs. The Company expects interest expense to increase at a
slower rate due to lower levels of planned investment in capital additions.
Income Taxes
Income taxes were $5,000 for the three months and $9,000 for the six months
ended March 28, 1999 compared to $73,000 for the three months and $160,000 for
the six months ended March 31, 1998, a decrease of $68,000 or 93% for the three
months and $151,000 or 94% for the six months ended March 28, 1999. The decrease
was due to the elimination of the requirement to file a separate tax return for
certain of the Company's subsidiaries. In the past, the Company's effective tax
rate has been reduced substantially by the utilization of federal and state tax
net operating loss carryforwards. The future availability of carryforwards for
any specific period will be limited by the application of rules relating to
change of control as a result of the recent issuances of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to its initial public offering (IPO) of common stock in 1997, the
Company has satisfied its liquidity requirements from the proceeds of the IPO
and bank debt. Prior to the IPO, the Company satisfied its liquidity
requirements primarily from cash generated from operating activities and the net
proceeds of private sales of preferred and common stock and, to a lesser extent,
the issuance of subordinated debentures and capital equipment leasing and bank
debt.
Cash used in operating activities was $1,328,000 for the six months ended
March 28, 1999 compared to $1,783,000 for the six months ended March 31, 1998, a
decrease in use of cash of $455,000. The primary reasons for the decrease were
the reduced operating loss in the current fiscal year, mostly offset by an
increase in accounts receivable primarily due to timing of shipments during the
quarter.
9
<PAGE>
Cash used in investing activities was $1,026,000 for the six months ended
March 28, 1999 compared to $2,294,000 for the three months ended March 31, 1998,
a decrease in use of cash of $1,268,000. The decrease is due primarily to
reduced requirements for new property and equipment for manufacturing
operations. The Company does not expect the rate of investment in capital
equipment to change significantly for the remainder of the fiscal year.
Cash provided by financing activities was $911,000 for the six months ended
March 28, 1999 compared to $608,000 for the six months March 31, 1998, an
increase in cash provided of $303,000. The increase in cash provided in the
current year is due to draws on a working capital line of credit, partially
offset by a paydown in long-term debt required by the Company's revised credit
agreement with its bank. For the remainder of the year, the Company expects the
primary source of cash from financing activities to be line of credit draws to
finance working capital.
The Company believes that its current cash balance together with other
sources of liquidity will satisfy its cash requirements for at least the next 12
months. The Company's current credit agreement with its bank limits its
investment in capital equipment and debt financing from other sources. The
Company's ability to obtain more favorable credit terms will depend in large
part on achieving profitability in the near term.
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 a material
exposure to the Year 2000 issue with respect to its own products. The Company
intends to ensure that its information systems are Year 2000 ready by
consolidation of information storage and processing on systems that have already
been determined to be Year 2000 ready. The Company has identified critical
operations dependent on microprocessors that might be impacted by the Year 2000
issue and is working with vendors to implement the necessary corrective action.
The Company also has developed plans to survey critical suppliers and customers
to determine the status of their Year 2000 readiness programs. 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. Although the Company does not believe
that it has a material exposure to the Year 2000 issue with respect to its own
products, there can be no assurance that failure of the Company to complete
consolidation of its information storage and processing on Year 2000 ready
systems, to implement corrective action for microprocessor software which
supports critical operations, or of its critical suppliers and customers to
adequately address the Year 2000 issue in a timely fashion, will not result in a
material adverse effect on the Company's business, financial condition or
operating results. The Company has not yet developed a contingency plan in the
event its business or operations are materially adversely affected by the Year
2000 issue.
10
<PAGE>
RISK FACTORS
History of Operating Losses and Accumulated Deficit
The Company has incurred operating losses in the past and, at March 28,
1999, had an accumulated deficit of $8.9 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.
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.
Development Risks Relating to Microlaser Technologies
The Company has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of the Company's
microlasers have been limited to low level production quantities and evaluation
units. Other microlasers and microlaser based products are still in the early
stages of development. There can be no assurance that the Company's microlasers
will be successfully designed into customers' products or that the Company's
microlasers will achieve widespread market acceptance. There also can be no
assurance that the Company will successfully develop additional microlasers or
microlaser based products or that any of the Company's products under
development will achieve commercial sales volumes. The Company believes that it
will be necessary to continue to reduce the cost of manufacturing and to broaden
the variety of wavelengths provided by its microlasers to achieve commercial
acceptance. If the Company is unable to successfully gain market acceptance of
its microlasers and microlaser based products, its business, operating results
and financial condition will be materially and adversely affected.
Dependence On New Products and Processes
To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
significant investments in research and development and to consider from time to
time the strategic acquisition of businesses, products, or technologies
complementary to the Company's business. The success of the Company in
developing, introducing and selling new and enhanced products depends upon a
variety of factors, including product selection, timely and efficient completion
of product design and development, timely and efficient implementation of
manufacturing and assembly processes, effective sales and marketing and product
performance in the field. There can be no assurance that the Company will be
able to develop and introduce new products or enhancements to its existing
products and processes in a manner that satisfies customer needs or achieves
market acceptance. The failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
11
<PAGE>
Limited Microlaser Manufacturing Experience; Scale-up Risk
The Company has no experience in producing microlasers other than in low
level production quantities. The Company's microlasers are assembled from
component parts at the Company's San Diego facility. The Company purchases
component parts for its microlasers, including laser crystals, nonlinear
crystals and diode lasers, from various sources around the world. However, none
of the Company's suppliers of microlaser component parts has experience in
supplying components with the Company's specifications at increased volumes. The
Company does not have long term or volume purchase agreements with any of its
suppliers and currently purchases components on a purchase order basis. There
can be no assurance that these suppliers will be able to provide components to
the Company in the quantities, with the quality or at the prices necessary for
production quantities of the Company's products and products under development.
Future increases in the Company's manufacturing capacity to polish and coat
crystals and to perform the required complex assembly steps could require
significant scale-up expenditures and additions to the Company's facilities. In
the event the Company is unable to locate sufficient sources of microlaser
component parts, or is unable to expand its manufacturing capacity to produce
microlasers and microlaser based products, the Company will not be able to
manufacture its products on commercially reasonable terms, if at all, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Limited Microlaser Sales, Marketing and Distribution Experience
The Company has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products in
large quantities. The Company sells its microlasers and microlaser based
products through a direct sales force in North America and a direct sales force
and distributors in Europe. In Asia, the Company intends to sell its microlasers
and microlaser based products primarily through agreements with distributors or
representatives, although the Company has not entered into any such agreements
or arrangements to date. To the extent that the Company enters into distribution
or representation arrangements for the sale of its microlasers and microlaser
based products, the Company will be dependent upon the efforts of third parties.
There can be no assurance that the Company will be able to build a direct sales
force or marketing organization for microlasers or microlaser based products,
that establishing such a direct sales force or marketing organization will be
cost effective, or that the Company's sales and marketing efforts will be
successful. There can be no assurance that the Company will be able to enter
into agreements with distributors or representation arrangements on a timely
basis, if at all, or that such distributors or representatives will devote
adequate resources to selling the Company's microlasers and microlaser based
products. Failure to build an effective sales and marketing organization or to
establish effective distribution or representation arrangements for the
Company's microlaser products would have a material adverse effect on the
Company's business, financial condition and results of operations.
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 require 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.
12
<PAGE>
Uncertainty of Nasdaq National Market Listing
The Company's common stock is currently listed on the Nasdaq National
Market. Nasdaq has certain requirements that a company must meet to remain
listed on the Nasdaq National Market. Based on the Company's history of
operating losses and recent minimum bid prices for its common stock, it may not
be able to maintain the standards for continued listing of its common stock on
the Nasdaq National Market. If the common stock is delisted from the Nasdaq
National Market, any trading might then be conducted on the Nasdaq SmallCap
Market, which is a significantly less active market than the Nasdaq National
Market. As a result, stockholders could find it more difficult to dispose of
their Laser Power common stock.
Fluctuations in Quarterly Performance
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures, especially in connection with its
microlasers and microlaser based products. If significant variations were to
occur between forecasts and actual orders with respect to its optics businesses
or microlaser and microlaser based products, the Company may not be able to
reduce its expenses proportionately and in a timely manner, and operating
results could be adversely affected. Such variations have occurred in the past
and could occur again in the future as a result of increases in development
expenditures for proposed new products, product introductions by competitors,
changes in customer ordering patterns and other factors. In addition, the
Company's ability to fill orders in a timely and responsive manner is dependent
upon maintaining adequate manufacturing capacity and significant inventories of
raw material and finished optics for replacement orders. The Company has
experienced capacity constraints in the past which have resulted in delays in
order fulfillment and reduced gross margins. Future delays in order fulfillment
could lead to declines in product sales. If product sales or prices were to
decline substantially, inventory writedowns could occur. Price reductions or
increases in material costs could also have an adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with International Sales
International sales accounted for approximately 28% and 39% of the Company's
total revenues in the six months ended March 28, 1999 and March 31, 1998,
respectively, and the Company expects that international sales will continue to
account for a substantial portion of total revenues. The Company may continue to
expand its operations outside of the United States and to enter additional
international markets, both of which will require significant management
attention and financial resources. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other trade barriers, political and 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.
13
<PAGE>
Exposure to Government Markets
Approximately 48% of the Company's product sales in the six months ended
March 28, 1999 were derived from customers in the defense industry. These
customers in turn generally contract with a governmental entity, typically the
U.S. government. In addition, over 50% of the Company's contract research and
development revenues were derived from contracts with various U.S. government
agencies. Many times, governmental programs are subject to funding approval and
can be modified or terminated with no warning upon the determination of a
legislative or administrative body. The loss or failure to obtain certain
contracts could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, the loss of a major
government customer or any significant reduction or delay in orders by such
customer, could have a material adverse effect on the Company's business,
financial condition and operating results.
Exposure to Major Customer
Approximately 27% of the Company's sales in the six months ended March 28,
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.
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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company (the "Annual Meeting")
was held on February 5, 1999 in San Diego, California.
PROPOSAL I - ELECTION OF DIRECTORS
Each of the candidates listed below was duly elected to the Board of
Directors at the Annual Meeting by the tally indicated.
Candidate Votes in favor Votes withheld
--------- -------------- --------------
Douglas H. Tanimoto, Ph.D. 6,636,700 622,272
William G. Frederick 6,685,710 573,262
Robert G. Klimasewski 6,685,710 573,262
Richard C. Laird 6,685,710 573,262
John C. Stiska 6,664,792 594,180
Dick Sharman 6,685,710 573,262
Robert P. Perkins 6,685,710 573,262
PROPOSAL II - RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Votes in favor Votes against Votes abstained
-------------- ------------- ---------------
7,024,008 232,742 2,222
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
10.1 Credit Agreement dated February 1, 1999 between the Company
and Wells Fargo Bank and related promissory notes.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LASER POWER CORPORATION
Date: May 12, 1999 /s/ Paul P. Wickman, Jr.
--------------------------------------------
Paul P. Wickman, Jr.
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
16
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of February 1, 1999, by and between
LASER POWER CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described
below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as
follows:
ARTICLE I
---------
THE CREDITS
-----------
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including August 1, 1999, not to exceed at any time the aggregate
principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00)
("Line of Credit"), the proceeds of which shall be used for working capital
purposes. Borrower's obligation to repay advances under the Line of Credit shall
be evidenced by a promissory note substantially in the form of Exhibit A
attached hereto ("Line of Credit Note"), all terms of which are incorporated
herein by this reference.
(b) LIMITATION ON BORROWINGS. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of eighty percent (80%) of Borrower's eligible accounts
receivable, plus fifty percent (50%) of the value of Borrower's eligible raw
material inventory and thirty-five percent (35%) of the value of Borrower's
finished goods (exclusive of work in process and inventory which is obsolete,
unsaleable or damaged), with value defined as the lower of cost or market value.
All of the foregoing shall be determined by Bank upon receipt and review of all
collateral reports required hereunder and such other documents and collateral
information as Bank may from time to time require. Borrower acknowledges that
said borrowing base was established by Bank with the understanding that, among
other items, the aggregate of all returns, rebates, discounts, credits and
allowances for the immediately preceding three (3) months at all times shall be
less than five percent (5%) of Borrower's gross sales for said period. If such
dilution of Borrower's accounts for the immediately preceding three (3) months
at any time exceeds five percent (5%) of Borrower's gross sales for said period,
or if there at any time exists any other matters, events, conditions or
contingencies which Bank reasonably believes may affect payment of any portion
of Borrower's accounts, Bank, in its sole discretion, may reduce the foregoing
advance rate against eligible accounts receivable to a percentage appropriate to
reflect such additional dilution and/or establish additional reserves against
Borrower's eligible accounts receivable.
<PAGE>
As used herein, "eligible accounts receivable" shall consist solely of
trade accounts created in the ordinary course of Borrower's business, upon which
Borrower's right to receive payment is absolute and not contingent upon the
fulfillment of any condition whatsoever, and in which Bank has a perfected
security interest of first priority, and shall not include:
(i) any account which is past due more than twice Borrower's
standard selling terms;
(ii) that portion of any account for which there exists any
right of setoff, defense or discount (except regular discounts allowed
in the ordinary course of business to promote prompt payment) or for
which any defense or counterclaim has been asserted;
(iii) any account which represents an obligation of any state
or municipal government or of the United States government or any
political subdivision thereof (except accounts which represent
obligations of the United States government and for which the
assignment provisions of the Federal Assignment of Claims Act, as
amended or recodified from time to time, have been complied with to
Bank's satisfaction);
(iv) any account which represents an obligation of an account
debtor located in a foreign country other than an account debtor
located in the Canadian provinces of Alberta, British Columbia,
Manitoba, Ontario, Saskatchewan or the Yukon Territory so long as, in
Bank's determination, such Canadian jurisdictions recognize Bank's
first priority security interest in and right to collect such account
as a consequence of any security agreements and UCC filings in favor
of Bank;
(v) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of, an
employee, affiliate, partner, member, parent or subsidiary of
Borrower;
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<PAGE>
(vi) that portion of any account which represents interim or
progress billings or retention rights on the part of the account
debtor;
(vii) any account which represents an obligation of any account
debtor when twenty percent (20%) or more of Borrower's accounts from
such account debtor are not eligible pursuant to (i) above;
(viii) that portion of any account from an account debtor which
represents the amount by which Borrower's total accounts from said
account debtor exceeds twenty--five percent (25%) of Borrower's total
accounts;
(ix) any account deemed ineligible by Bank when Bank, in its
sole discretion, deems the creditworthiness or financial condition of
the account debtor, or the industry in which the account debtor is
engaged, to be unsatisfactory.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
SECTION 1.2. TERM LOAN I
(a) TERM LOAN I. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount
of One Million Five Hundred Eighty-three Thousand Three Hundred Thirty-three and
36/100 Dollars ($1,583,333.36) ("Term Loan I"), the proceeds of which shall be
used for debt consolidation. Borrower's obligation to repay Term Loan I shall be
evidenced by a promissory note substantially in the form of Exhibit B attached
hereto ("Term Note I"), all terms of which are incorporated herein by this
reference. Bank's commitment to grant Term Loan I shall terminate on February
26, 1999. Term Note I replaces and supersedes the Term Note dated May 15, 1998
in the principal amount of $1,900,000.00 payable by Borrower to the order of
Bank.
(b) REPAYMENT. The principal amount of Term Loan I shall be repaid in
accordance with the provisions of Term Note I.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan I solely in
accordance with the provisions of Term Note I.
-3-
(a) TERM LOAN II. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount
of One Million Eight Hundred Two Thousand Seven Hundred Ninety-one and 37/100
Dollars ($1,802,791.37) ("Term Loan II"), the proceeds of which shall be used to
finance equipment. Borrower's obligation to repay Term Loan II shall be
evidenced by a promissory note substantially in the form of Exhibit C attached
hereto ("Term Note II"), all terms of which are incorporated herein by this
reference. Bank's commitment to grant Term Loan II shall terminate on February
26, 1999. Term Note II replaces and supersedes the Term Commitment Note dated
June 1, 1998 in the principal amount of $2,000,000.00 payable by Borrower to the
order of Bank.
(b) REPAYMENT. The principal amount of Term Loan II shall be repaid in
accordance with the provisions of Term Note II.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan II at any
time, in any amount and without penalty. All prepayments of principal shall be
applied on the most remote principal installment or installments then unpaid.
SECTION 1.4. INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit,
Term Loan I and Term Loan II shall bear interest at the rate of interest set
forth in the Line of Credit Note, Term Note I and Term Note II.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis
of a 360--day year, actual days elapsed. Interest shall be payable at the times
and place set forth in the Line of Credit Note, Term Note I and Term Note II
(collectively, the "Notes")
(c) COMMITMENT FEE. Borrower shall pay to Bank a non-- refundable
commitment fee for the Line of Credit equal to Six Thousand Two Hundred Fifty
Dollars ($6,250.00), which fee shall be due and payable in full upon the
execution of this Agreement.
(d) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to
one-quarter of one percent (.250%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and shall be
due and payable by Borrower in arrears on the last day of each May, August,
November and February.
SECTION 1.5. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees due under each Credit by charging
Borrower's demand deposit account number 4650-022304 with Bank, or any other
-4-
<PAGE>
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
SECTION 1.6. COLLATERAL.
As security for all indebtedness of Borrower to Bank under the Line of
Credit, Borrower hereby grants to Bank security interests of first priority in
all Borrower's accounts receivable and other rights to payment, general
intangibles, inventory, equipment and fixtures.
As security for all indebtedness of Borrower to Bank under Term Loan
I, Borrower hereby grants to Bank security interests of first priority in Wells
Fargo Bank Certificate of Deposit #1005-- 005103-001 and Borrower shall cause
Exotic Materials, Inc. to grant to Bank security interests of first priority in
all accounts receivable and other rights to payment, general intangibles,
inventory and equipment.
As security for all indebtedness of Borrower to Bank under Term Loan
II, Borrower hereby grants to Bank security interests of first priority in all
Borrower's equipment and Wells Fargo Bank Certificate of Deposit
#1005-005103-001.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.
SECTION 1.7 SUBORDINATION OF DEBT. All obligations of Borrower to
Union Miniere Inc. shall be subordinated in right of repayment to all
obligations of Borrower to Bank, as evidenced by and subject to the terms of
subordination agreements in form and substance satisfactory to Bank.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.
-5-
<PAGE>
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the state of Delaware, and
is qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes,
and each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated September 30, 1998, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) discloses
all liabilities of Borrower that are required to be reflected or reserved
against under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
-6-
<PAGE>
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower
to Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
-7-
<PAGE>
ARTICLE III
-----------
CONDITIONS
----------
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT.
The obligation of Bank to grant any of the Credits is subject to the fulfillment
to Bank's satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Corporate Resolution: Borrowing.
(iii) Certificate of Incumbency.
(iv) Continuing Security Agreement Rights to Payment and Inventory.
(v) Security Agreement Equipment and Fixtures.
(vi) UCC 1 Financing Statements.
(vii) Subordination Agreements Payments Permitted.
(viii) Security Agreement Specific Rights to Payment.
(ix) Third Party Security Agreement Rights to Payment and Inventory.
(x) Third Party Security Agreement Equipment.
(xi) Corporate Resolution: Subordination.
(xii) Such other documents as Bank may require under any other Section
of this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower
(d) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank.
-8-
<PAGE>
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date of
the signing of this Agreement and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
----------
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at the
times and place and in the manner specified therein, and immediately upon demand
by Bank, the amount by which the outstanding principal balance of any of the
Credits at any time exceeds any limitation on borrowings applicable thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records
in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the same,
and to inspect the properties of Borrower.
-9-
<PAGE>
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal
year, an unqualified audited financial statement of Borrower, prepared by a
certified public accountant acceptable to Bank, to include balance sheet, income
statement and statement of cash flow;
(b) not later than 30 days after and as of the end of each month, a
consolidated financial statement of Borrower, prepared by Borrower, to include
balance sheet, income statement and statement of cash flow;
(c) not later than 20 days after and as of the end of each month, a
borrowing base certificate, an inventory collateral report, an aged listing of
accounts receivable and accounts payable, and a reconciliation of accounts;
(d) semi-annually, a collateral audit of accounts receivable is to be
performed;
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
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and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of
any litigation pending or threatened against Borrower with a claim in excess of
$50,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles consistently
applied and used consistently with prior practices (except to the extent
modified by the definitions herein)
(a) Current Ratio not at any time less than 1.8 to 1.0, with "Current
Ratio" defined as total current assets divided by total current liabilities.
(b) Tangible Net Worth not at any time less than $10,500,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets.
(c) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.2 to 1.0, with "Total Liabilities" defined as the aggregate of
current liabilities and non--current liabilities less subordinated debt, and
with "Tangible Net Worth" as defined above.
(d) EBITDA Coverage Ratio not less than 1.5 to 1.0 from January 1,
1999 to September 30, 1999 and not less than 1.75 to 1.0 from October 1, 1999
and thereafter, with "EBITDA" defined as net profit before tax plus interest
expense (net of capitalized interest expense), depreciation expense and
amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided
by the aggregate of total interest expense plus the prior period current
maturity of long--term debt and the prior period current maturity of
subordinated debt.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property.
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SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably
necessary to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms hereof
as Bank may from time to time require.
ARTICLE V
---------
NEGATIVE COVENANTS
------------------
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the
Credits except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets during fiscal year ending September 30, 1999 in excess of an
aggregate of $1,500,000.00.
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
and (b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
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Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except any of the foregoing existing
as of, and disclosed to Bank prior to, the date hereof.
SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof.
ARTICLE VI
----------
EVENTS OF DEFAULT
-----------------
SECTION 6.1. The occurrence of any of the following shall constitute
an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above), and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.
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<PAGE>
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has incurred
any debt or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower.
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered against
Borrower by any court of competent jurisdiction under the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or Borrower, or any of
its directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
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<PAGE>
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty--five percent (25%) or more of the common stock of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all indebtedness of Borrower under each of the Loan Documents, any term
thereof to the contrary notwithstanding, shall at Bank's option and without
notice become immediately due and payable without presentment, demand, protest
or notice of dishonor, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any of the Credits and to exercise any or all of the
rights of a beneficiary or secured party pursuant to applicable law. All rights,
powers and remedies of Bank may be exercised at any time by Bank and from time
to time after the occurrence of an Event of Default, are cumulative and not
exclusive, and shall be in addition to any other rights, powers or remedies
provided by law or equity.
ARTICLE VII
-----------
MISCELLANEOUS
-------------
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:
BORROWER: LASER POWER CORPORATION
12777 High Bluff Drive
San Diego, CA 92130
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
401 B Street, Suite 2201
San Diego, CA 92101
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<PAGE>
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay
to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel),
expended or incurred by Bank in connection with (a) the negotiation and
preparation of this Agreement and the other Loan Documents, Bank's continued
administration hereof and thereof, and the preparation of any amendments and
waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any of the Credits, Borrower or its business, [any guarantor
hereunder or the business of such guarantor,] or any collateral required
hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to the Credits and supersede all prior negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be amended or modified only in writing signed by each party
hereto.
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<PAGE>
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall constitute
one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self--help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
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<PAGE>
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. ss.91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self--help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses) . By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
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<PAGE>
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
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<PAGE>
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
<PAGE>
LASER POWER CORPORATION WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Paul Wickman By: /s/ Bernie Palmer
--------------------------- -----------------------------
Title: Chief Financial Officer Bernie Palmer
Vice President
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<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------
$2,500,000.00 San Diego, California
February 1,1999
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at SAN DIEGO RCBO, 401 B STREET SUITE 2201, SAN DIEGO, CA 92101,
or at such other place as the holder hereof may designate, in lawful money of
the United States of America and in immediately available funds, the principal
sum of $2,500,000.00, or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rate per annum 1.50000% above the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. Each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on
the 1st day of each month, commencing MARCH 1,1999.
(c) DEFAULT INTEREST. From and after the maturity date of this Note, or such
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the term
of this Note borrow partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of the Credit Agreement between Borrower and Bank defined below; provided
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on AUGUST 1, 1999.
(b) ADVANCES. Advances hereunder, to the total amount of the principal sum
available hereunder, may be made by the holder at the oral or written request of
(i) PAUL P. WICKMAN, JR. or RONALD D. SUOKKO, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. The holder shall have no obligation to determine whether any
person requesting an advance is or has been authorized by any Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of FEBRUARY 1,
1999, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default'
under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default as defined in the
Credit Agreement, the holder of this Note, at the holder's option, may declare
all sums of principal and interest outstanding hereunder to be immediately due
and payable without presentment, demand, notice of nonperformance. notice of
protest, protest or notice of dishonor, all of which are expressly waived by
each Borrower, and the obligation, if any, of the holder to extend any further
credit hereunder shall immediately cease and terminate. Each Borrower shall pay
to the holder immediately upon demand the full amount of all payments, advances.
charges, costs and expenses, including reasonable attorneys' fees Ito include
outside counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
Revolving Line of Credit Note (08/96) Page 1
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<PAGE>
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
LASER POWER CORPORATION
By: /s/Paul P. Wickman
----------------------------
Title: Chief Financial Officer
Revolving Line of Credit Note (08/96) Page 2
02694, #4451312004
<PAGE>
TERM NOTE
$1,802,791.37 San Diego, California
February 1, 1999
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 401 B Street, Suite 2201, San Diego,
California, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of One Million Eight Hundred Two Thousand Seven Hundred Ninety-one
and 37/100 Dollars ($1,802,791.37), with interest thereon as set forth herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed) at
a rate per annum one and one quarter percent (1.25%) above the Prime Rate in
effect from time to time. The "Prime Rate" is a base rate that Bank from time to
time establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto. Each change in
the rate of interest hereunder shall become effective on the date each Prime
Rate change is announced within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable on the first day of each month, commencing March 1, 1999.
(c) DEFAULT INTEREST. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360--day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
REPAYMENT AND PREPAYMENT:
(a) REPAYMENT. Principal shall be payable on the first day of each
month in installments of Thirty Seven Thousand Five Hundred Fifty--eight and
15/100 Dollars ($37,558.15) each, commencing March 1, 1999, and continuing up to
and including January 1, 2003, with a final installment consisting of all
remaining unpaid principal due and payable in full on February 1, 2003.
<PAGE>
(b) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
(c) PREPAYMENT. Borrower may prepay principal on this Note at any
time, in any amount and without penalty. All prepayments of principal shall be
applied on the most remote principal installment or installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of February 1, 1999, as amended from time to time (the "Credit Agreement") . Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower. Each
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in--house counsel), expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of any
action in any way related to this Note, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first
written above.
LASER POWER CORPORATION
By: /s/ Paul P. Wickman
----------------------------
Title: Chief Financial Officer
-3-
<PAGE>
TERM NOTE
$1,583,333.36 San Diego, California
February 1, 1999
FOR VALUE RECEIVED, the undersigned LASER POWER CORPORATION
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 401 B Street, Suite 2201, San Diego,
California, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of One Million Five Hundred Eighty-three Thousand Three Hundred
Thirty--three and 36/100 Dollars ($1,583,333.36), with interest thereon as set
forth herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed) at
a rate per annum one and one quarter percent (1.25%) above the Prime Rate in
effect from time to time. The "Prime Rate" is a base rate that Bank from time to
time establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto. Each change in
the rate of interest hereunder shall become effective on the date each Prime
Rate change is announced within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable on the first day of each month, commencing March 1, 1999.
(c) DEFAULT INTEREST. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
REPAYMENT AND PREPAYMENT:
(a) REPAYMENT. Principal shall be payable on the first day of each
month in installments of Thirty Nine Thousand Five Hundred Eighty-three and
33/100 Dollars ($39,583.33) each, commencing March 1, 1999, and continuing up to
and including May 1, 2002, with a final installment consisting of all remaining
unpaid principal due and payable in full on June 1, 2002.
<PAGE>
(b) APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited
first, to any interest then due and second, to the outstanding principal balance
hereof.
(c) PREPAYMENT. Borrower may prepay principal on this Note at any
time, in any amount and without penalty. All prepayments of principal shall be
applied on the most remote principal installment or installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of February 1, 1999, as amended from time to time (the "Credit Agreement") . Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower. Each
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in--house counsel), expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of any
action in any way related to this Note, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first
written above.
LASER POWER CORPORATION
By: /s/ Paul P. Wickman
----------------------------
Title: Chief Financial Officer
-------------------------
-3-
<PAGE>
WELLS FARGO BANK CORPORATE RESOLUTION: SUBORDINATION
- --------------------------------------------------------------------------------
TO. WELLS FARGO BANK, NATIONAL ASSOCIATION
RESOLVED: (1) That LASER POWER CORPORATION ("Borrower")
proposes to obtain credit from time to time, or has obtained credit, from Wells
Fargo Bank, National Association ("Bank"); (2) that Borrower is now or may
hereafter be indebted to this corporation, UNION MINIERE INC., and Bank is
uwilling to extend or continue credit to Borrower unless the indebtedness of
Borrower to this corporation is subordinated to the indebtedness of Borrower to
Bank; and (3) that this corporation will benefit from the extension of credit by
Bank to Borrower.
BE IT FURTHER RESOLVED, that any one of the following officers:
Executive Vice President and Assistant Treasurer
------------------------------------------------
together with any one of the following officers:
NONE
of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and deed:
(a) to subordinate any and all indebtedness of Borrower to this
corporation now or hereafter outstanding to all indebtedness of Borrower now or
hereafter owing to Bank; and
(b) to execute and deliver to Bank such subordination agreements, in
form and substance satisfactory to Bank, as Bank may request, together with such
other contracts or instruments as Bank deems necessary or convenient to
establish, evidence and define such subordination.
BE IT FURTHER RESOLVED, that the authority hereby conferred is in
addition to that conferred by any other resolution heretofore or hereafter
delivered by this corporation to Bank and shall continue in full force and
effect until Bank shall have received notice in writing, certified by the
Secretary of this corporation, of the revocation hereof by a resolution duly
adopted by the Board of Directors of this corporation. Any such revocation shall
be effective only as to credit which is extended or committed by Bank, or
actions which are taken by this corporation pursuant to the resolutions
contained herein, subsequent to Bank's receipt of such notice. The authority
hereby conferred shall be deemed retroactive, and any and all acts authorized
herein which were performed prior to the passage of this resolution are hereby
approved and ratified.
SEE ATTACHED FORM FOR CERTIFICATION
<PAGE>
WELLS FARGO BANK CORPORATE RESOLUTION: SUBORDINATION
- --------------------------------------------------------------------------------
CERTIFICATION
I, J. Hovey Kemp, Assistant Secretary of UNION MINIERE INC., a
corporation created and existing under the laws of the state of Delaware, do
hereby certify and declare that the foregoing is a full, true and correct copy
of the resolutions dully passed and adopted by the Board of Directors of said
corporation, by written consent of all Directors of said corporation or at a
meeting of said Board dully and regularly called, noticed and held on April 6,
1999, at which meeting a quorum of the Board of Directors was present and voted
in favor of said resolutions; that said resolutions are now in full force and
effect; that there is no provision in the Articles of Incorporation or Bylaws of
said corporation, or any shareholder agreement, limiting the power of the Board
of Directors of said corporation to pass the foregoing resolutions and that such
resolutions are in conformity with the provisions of such Articles of
Incorporation and Bylaws; and that no approval by the shareholders of, or of the
outstanding shares of, said corporation is required with respect to the matters
which are the subject of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and, if required by
Bank affixed the corporate seal of said corporation, as of April 6, 1999.
/s/ J. Hovey Kemp
-----------------------------------------
Assistant Secretary
(SEAL)
<PAGE>
WELLS FARGO BANK CERTIFICATE OF INCUMBENCY
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
The undersigned, J. Hovey Kemp, Assistant Secretary of UNION MINIERE
INC., a corporation created and existing under the laws of the state of
Delaware, hereby certifies to Wells Fargo Bank, National Association ("Bank")
that (a) the following named persons are duly elected officers of this
corporation and presently hold the titles specified below, (b) said officers are
authorized to act on behalf of this Corporation in transactions with Bank, and
(c) the signature opposite each officer's name is his or her true signature:
TITLE NAME SIGNATURE
Richard Laird Executive Vice President /s/ Richard Laird
Thomas Corrigan Controller and Assistant Treasurer /s/ Thomas Corrigan
The undersigned further certifies that if any of the above-named
officers change, or if, at any time, any of said officers are no longer
authorized to act on behalf of this corporation in transactions with Bank, this
corporation shall immediately provide to Bank a new Certificate of Incumbency.
Bank is hereby authorized to rely on this Certificate of Incumbency until a new
Certificate of Incumbency certified by the Secretary of this corporation is
received by Bank.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the
corporate seal of said corporation as of April 6, 1999.
/s/ J. Hovey Kemp
--------------------------
Assistant Secretary
(SEAL)
<PAGE>
WELLS FARGO BANK SUBORDINATION AGREEMENT
(Payments Permitted)
THIS AGREEMENT is entered into by and among LASER POWER CORPORATION
("Borrower"), UNION MINIERE INC. ("Creditor"), and WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank").
RECITALS
A. Borrower is indebted to Creditor, and Borrower proposes to obtain credit
or has obtained credit from Bank; and
B. Bank has indicated that it will extend or continue credit to Borrower if
certain conditions are met, including without limitation, the requirement that
Creditor execute this Agreement.
NOW, THEREFORE, as an inducement to Bank to extend or continue credit and
for other valuable consideration, the parties hereto agree as follows:
1. INDEBTEDNESS SUBORDINATED. Creditor subordinates all Indebtedness now or
at any time hereafter owing from Borrower to Creditor (including without
limitation, interest thereon which may accrue subsequent to Borrower becoming
subject to any state or federal debtor-relief statute) ("Junior Debt") to all
Indebtedness now or at any time hereafter owing from Borrower to Bank ("Senior
Debt"). Creditor irrevocably consents and directs that all Senior Debt shall be
paid in full prior to Borrower making any payment on any Junior Debt, except
such payments as are expressly permitted by Section 3 of this Agreement.
Creditor will, and Bank is authorized in the name of Creditor from time to time
to, execute and file such financing statements and other documents as Bank may
require in order to give notice to other persons and entities of the terms and
provisions of this Agreement. As long as this Agreement is in effect, Creditor
will not take any action or initiate any proceedings, judicial or otherwise, to
enforce Creditor's rights or remedies with respect to any Junior Debt, including
without limitation, any action to enforce remedies with respect to any
collateral securing any Junior Debt or to obtain any judgment or prejudgment
remedy against Borrower or any such collateral.
2. INDEBTEDNESS DEFINED. The word "Indebtedness" is used herein in its most
comprehensive sense and includes any and all advances, debts, obligations and
liabilities of Borrower heretofore, now or hereafter made, incurred or created,
whether voluntary or involuntary and however arising, whether due or not due,
absolute or contingent, liquidated or unliquidated, determined or undetermined,
and whether Borrower may be liable individually or jointly with others,
including without limitation, obligations and liabilities arising from notes,
repurchase agreements and trust receipts.
3. RESTRICTION OF PAYMENT OF JUNIOR DEBT; DISPOSITION OF PAYMENTS RECEIVED
BY CREDITOR. Borrower will not make, and Creditor will not accept or receive,
any payment or benefit in cash, by setoff or otherwise, directly or indirectly,
on account of principal, interest or any other amounts owing on any Junior Debt,
except such payments as are expressly permitted herein. Borrower is permitted to
make and Creditor to receive ALL SCHEDULED PAYMENTS OF INTEREST ONLY on that
certain promissory note held by Creditor, dated as of November 2, 1987, in the
principal amount of $1,340,000.00 (the "Note"); provided however, that (a)
Borrower shall not make, nor Creditor receive, any prepayment or accelerated
payment on the Note, and (b) no payment of principal or interest on the Note
shall be made by Borrower, or received by Creditor, after notice from Bank to
Creditor that a default, or any condition, event or act which with the giving of
notice or the passage of time or both would constitute a default, has occurred
under the terms of any Senior Debt. If any payment is made in violation of this
Agreement, Creditor shall promptly deliver the same to Bank in the form
received, with any endorsement or assignment necessary for the transfer of such
payment or amounts setoff from Creditor to Bank, to be either (in Bank's sole
discretion) held as cash collateral securing the Senior Debt or applied in
reduction of the Senior Debt in such order as Bank shall determine, and until so
delivered, Creditor shall hold such payment in trust for and on behalf of, and
as the property of, Bank.
4. DISPOSITION OF EVIDENCE OF INDEBTEDNESS. If there is any existing
promissory note or other evidence of any of the Junior Debt, including the Note,
or if any promissory note or other evidence of Indebtedness is executed at any
SUBORDINATION AGREEMENT (08/96) Page 1
02694, #4451312004
<PAGE>
time hereafter with respect thereto, then Borrower and Creditor will mark the
same with a legend stating that it is subject to this Agreement, and if asked to
do so, will deliver the same to Bank. Creditor shall not, without Bank's prior
written consent, assign, transfer, hypothecate or otherwise dispose of any claim
it now has or may at any time hereafter have against Borrower at any time that
any Senior Debt remains outstanding and/or Bank remains committed to extend any
credit to Borrower.
5. AGREEMENT TO BE CONTINUING; APPLIES TO BORROWER'S EXISTING INDEBTEDNESS
AND ANY INDEBTEDNESS HEREAFTER ARISING. This Agreement shall be a continuing
agreement and shall apply to any and all Indebtedness of Borrower to Bank or
Creditor now existing or hereafter arising, including any Indebtedness arising
under successive transactions, related or unrelated, and notwithstanding that
from time to time all Indebtedness theretofore existing may have been paid in
full.
6. TERMINATION BY CREDITOR. Creditor may, to the extent provided herein,
terminate this Agreement by delivering written notice to Bank. Any such notice
must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its
office at SAN DIEGO RCBO, 401 B STREET SUITE 2201, SAN DIEGO, CA 92101, or at
such other address as Bank shall from time to time designate. If such notice is
received by Bank, this Agreement shall terminate as of the date of receipt,
except that the obligations of Creditor and the rights of Bank hereunder shall
continue with respect to all Senior Debt which existed at the time of Bank's
receipt of such notice, or thereafter arose pursuant to any agreement to extend
credit by which Bank is bound at the time of its receipt of such notice, and any
extensions, renewals or modifications of any such then existing or committed
Senior Debt, including without limitation, modifications to the amount of
principal or interest payable on any Senior Debt and the release of any security
for or any guarantors of all or any portion of any Senior Debt.
7. REPRESENTATIONS AND WARRANTIES; INFORMATION. Borrower and Creditor
represent and warrant to Bank that: (a) no interest in the Junior Debt has been
assigned or otherwise transferred to any person or entity; (b) payment of the
Junior Debt has not been heretofore subordinated to any other creditor of
Borrower; and (c) Creditor has the requisite power and authority to enter into
and perform its obligations under this Agreement. Creditor further represents
and warrants to Bank that Creditor has established adequate, independent means
of obtaining from Borrower on a continuing basis financial and other information
pertaining to Borrower's financial condition. Creditor agrees to keep adequately
informed from such means of any facts, events or circumstances which might in
any way affect Creditor's risks hereunder, and Creditor agrees that Bank shall
have no obligation to disclose to Creditor information or material about
Borrower which is acquired by Bank in any manner. Bank may, at Bank's sole
option and without obligation to do so, disclose to Creditor any information or
material relating to Borrower which is acquired by Bank by any means, and
Borrower hereby agrees to and authorizes any such disclosure by Bank.
8. TRANSFER OF ASSETS OR REORGANIZATION OF BORROWER. If any petition is
filed or any proceeding is instituted by or against Borrower under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, or
any other or similar law relating to bankruptcy, insolvency, reorganization or
other relief for debtors, or generally affecting creditors' rights, or seeking
the appointment of a receiver, trustee, custodian or liquidator of or for
Borrower or any of its assets, any payment or distribution of any of Borrower's
assets, whether in cash, securities or any other property, which would be
payable or deliverable with respect to any Junior Debt, shall be paid or
delivered to Bank until all Senior Debt is paid in full. Creditor grants to Bank
the right to enforce, collect and receive any such payment or distribution and
to give releases or acquittances therefor, and Creditor authorizes Bank as its
attorney-in-fact to vote and prove the Junior Debt in any of the above-described
proceedings or in any meeting of creditors of Borrower relating thereto.
9. OTHER AGREEMENTS; NO THIRD PARTY BENEFICIARIES. Bank shall have no
direct or indirect obligations to Creditor of any kind with respect to the
manner or time in which Bank exercises (or refrains from exercising) any of its
rights or remedies with respect to the Senior Debt, Borrower or any of
Borrower's assets. Creditor understands that there may be various agreements
between Bank and Borrower evidencing and governing the Senior Debt, and Creditor
acknowledges and agrees that such agreements are not intended to confer any
benefits on Creditor. Creditor further acknowledges that Bank may administer the
Senior Debt and any of Bank's agreements with Borrower in any way Bank deems
SUBORDINATION AGREEMENT (08/96) Page 2
02694, #4451312004
<PAGE>
appropriate, without regard to Creditor or the Junior Debt. Creditor waives any
right Creditor might otherwise have to require a marshalling of any security
held by Bank for all or any part of the Senior Debt or to direct or affect the
manner or timing with which Bank enforces any of its security. Nothing in this
Agreement shall impair or adversely affect any right, privilege, power or remedy
of Bank with respect to the Senior Debt, Borrower or any assets of Borrower,
including without limitation, Bank's right to: (a) waive, release or subordinate
any of Bank's security or rights; (b) waive or ignore any defaults by Borrower;
and/or (C) restructure, renew, modify or supplement the Senior Debt, or any
portion thereof, or any agreement with Borrower relating to any Senior Debt. All
rights, privileges, powers and remedies of Bank may be exercised from time to
time by Bank without notice to or consent of Creditor.
10. BREACH OF AGREEMENT BY BORROWER OR CREDITOR. In the event of any breach
of this Agreement by Borrower or Creditor, then and at any time thereafter Bank
shall have the right to declare immediately due and payable all or any portion
of the Senior Debt without presentment, demand, notice of nonperformance,
protest, notice of protest or notice of dishonor, all of which are hereby
expressly waived by Borrower and Creditor. No delay, failure or discontinuance
of Bank in exercising any right, privilege, power or remedy hereunder shall be
deemed a waiver of such right, privilege, power or remedy; nor shall any single
or partial exercise of any such right, privilege, power or remedy preclude,
waive or otherwise affect the further exercise thereof or the exercise of any
other right, privilege, power or remedy. Any waiver, permit, consent or approval
of any kind by Bank with respect to this Agreement must be in writing and shall
be effective only to the extent set forth in such writing.
11. LIQUIDATED DAMAGES. Inasmuch as the actual damages which could result
from a breach by Creditor of its duties under Section 3 hereof are uncertain and
would be impractical or extremely difficult to fix, Creditor shall pay to Bank,
in the event of any such breach by Creditor, as liquidated and agreed damages,
and not as a penalty, all sums received by Creditor in violation of this
Agreement on account of the Junior Debt, which sums represent a reasonable
endeavor to estimate a fair compensation for the foreseeable losses that might
result from such a breach.
12. COSTS, EXPENSES AND ATTORNEYS' FEES. If any party hereto institutes any
judicial or administrative action or proceeding to enforce any provisions of
this Agreement, or alleging any breach of any provision hereof or seeking
damages or any other judicial or administrative remedy, the losing party or
parties shall pay to the prevailing party or parties all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of such prevailing party's in-house counsel ), expended or
incurred by the prevailing party or parties in connection therewith, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Borrower, Creditor or any other person or entity.
13. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties. This Agreement may be
amended or modified only in writing signed by all parties hereto.
14. OBLIGATIONS JOINT AND SEVERAL; CONSTRUCTION. If this Agreement is
executed by more than one Creditor, it shall bind them jointly and severally.
All words used herein in the singular shall be deemed to have been used in the
plural where the context so requires.
15. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be
held to be prohibited by or invalid under applicable law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such waiver or other provision or any remaining
provisions of this Agreement.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of California.
17. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
SUBORDINATION AGREEMENT (08/96) Page 3
<PAGE>
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, this Agreement and each other
document, instrument or contract required hereby or now or hereafter delivered
to Bank in connection herewith (collectively, the "Documents"), or any past,
present or future extensions of credit and other activities, transactions or
obligations of any kind related directly or indirectly to any of the Documents,
including without limitation, any of the foregoing arising in connection with
the exercise of any self-help, ancillary or other remedies pursuant to any of
the Documents. Any party may by summary proceedings bring an action in court to
compel arbitration of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Documents.
The arbitration shall be conducted at a location in California selected by the
AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. ss.91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California , with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
SUBORDINATION AGREEMENT (08/96) Page 4
02694, #4451312004
<PAGE>
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance in the court in which such proceeding was commenced in accordance
with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 1 80 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Documents or the subject matter of the Dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Documents or any relationship between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
February 1, 1999.
BORROWER: BANK:
- --------- -----
LASER POWER CORPORATION WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Paul P. Wickman By: /s/ Bernard Palmer
-------------------------- -------------------------
Title: CFO Title: Vice President
----------------------- ----------------------
CREDITOR:
- ---------
UNION MINIERE INC.
By: /s/ signature
--------------------------
Title: Exec Vice President
-----------------------
SUBORDINATION AGREEMENT (08/96) Page 5
02694, #4451312004
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 28, 1999 AND FOR
THE SIX MONTHS ENDED MARCH 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
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<PERIOD-END> MAR-28-1999
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<SECURITIES> 0
<RECEIVABLES> 7,306
<ALLOWANCES> (561)
<INVENTORY> 6,942
<CURRENT-ASSETS> 16,073
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<SALES> 16,154
<TOTAL-REVENUES> 18,332
<CGS> 12,125
<TOTAL-COSTS> 13,681
<OTHER-EXPENSES> 5,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252
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<INCOME-TAX> 9
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