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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 DECEMBER 27, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 000-22625
LASER POWER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
(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 December 27, 1998, there were 8,398,455 shares of the Registrant's
Common Stock outstanding.
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LASER POWER CORPORATION
FORM 10-Q INDEX
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of December 27, 1998 and
September 30, 1998.................................................................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the three months
ended December 27, 1998 and December 31, 1997....................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months
ended December 27, 1998 and December 31, 1997....................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)......................................... 6
ITEM 2. Management's Discussion And Analysis Of Results Of Operations And
Financial Condition.............................................................................. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................................................. 13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASER POWER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 27, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,294 $ 2,412
Restricted cash.................... 1,000 1,000
Accounts receivable, net........... 6,648 5,660
Inventories, net................... 7,476 6,874
Other current assets............... 508 547
------- -------
Total current assets....... 16,926 16,493
Property and equipment, net.......... 7,995 8,088
Intangibles and other assets, net. 855 820
------- -------
Total assets............... $25,776 $25,401
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 3,714 $ 2,234
Accrued compensation and related
expenses......................... 1,267 1,305
Accrued liabilities................ 2,767 3,222
Current portion of long-term debt 1,916 4,428
------- -------
Total current liabilities 9,664 11,189
Long-term liabilities................ 945 1,032
Long-term debt....................... 2,883 287
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 December 27, 1998......... 8 8
Additional paid-in capital......... 19,417 19,416
Foreign currency translation
adjustment....................... 22 (39)
Accumulated deficit................ (8,823) (8,152)
------- -------
Total stockholders' equity 10,624 11,233
------- -------
Total liabilities and
stockholders' equity..... $25,776 $25,401
======= =======
</TABLE>
See accompanying notes.
3
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LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
December 27, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues:
Product sales ........................... $ 7,762 $ 7,778
Contract research and development ....... 892 1,399
------- -------
Total revenues .................. 8,654 9,177
Costs and expenses:
Product sales ........................... 5,861 5,759
Contract research and development ....... 659 1,105
Internal research and development ....... 535 712
Selling, general and administrative...... 2,153 1,951
------- -------
Total costs and expenses ........ 9,208 9,527
------- -------
Loss from operations ...................... (554) (350)
Interest expense, net ..................... 113 49
------- -------
Loss before income taxes .................. (667) (399)
Income taxes .............................. 4 87
------- -------
Net loss .................................. $ (671) $ (486)
======= =======
Basic loss per share ...................... $ (0.08) $ (0.06)
======= =======
Diluted loss per share .................... $ (0.08) $ (0.06)
======= =======
Average common shares outstanding
-- Basic................................. 8,398 8,100
======= =======
Average common shares outstanding
-- Diluted............................... 8,398 8,100
======= =======
</TABLE>
See accompanying notes.
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LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
December 27, December 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from operations........................... $(671) $(486)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 496 398
Other.......................................... (18) (18)
Changes in operating assets and liabilities.... (931) 5
------- -------
Net cash used in operating activities..... (1,124) (101)
INVESTING ACTIVITIES
Additions to property and equipment................ (314) (1,575)
Increase in intangibles and other assets........... (61) (343)
------- -------
Net cash used in investing activities..... (375) (1,918)
FINANCING ACTIVITIES
Payments on borrowings............................. (214) (70)
Proceeds from borrowings........................... 595 -
------- -------
Net cash provided by (used in) financing
activities.............................. 381 (70)
------- -------
Net decrease in cash and cash equivalents.......... (1,118) (2,089)
Cash and cash equivalents at beginning of the period 2,412 8,199
------- -------
Cash and cash equivalents at end of the period..... $ 1,294 $ 6,110
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........... $ 130 $ 127
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
LASER POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Laser Power Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, in the
opinion of management, contain all adjustments necessary to present fairly the
consolidated financial position as of December 27, 1998 and the consolidated
results of operations for the three months ended December 27, 1998 and December
30, 1997.
Certain information and footnote disclosures normally included in financial
statements have been omitted or condensed. These condensed consolidated
financial statements should be read in conjunction with the financial
information included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the period
ended December 27, 1998 are not necessarily indicative of the results that may
be attained for the entire fiscal year.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income". 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 December
27, 1998 and December 31, 1997.
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 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 has agreed to
immediately repay in full a third term loan of $946,000.
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.
The Company has pledged a $1,000,000 certificate of deposit as additional
collateral for the two term loans.
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4. INVENTORIES (unaudited) (in thousands)
<TABLE>
<CAPTION>
December 27, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Raw materials................. $3,596 $2,671
Work in progress.............. 3,562 3,525
Finished goods................ 1,242 1,461
------ ------
8,400 7,657
Reserves...................... (924) (783)
------ ------
$7,476 $6,874
====== ======
</TABLE>
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 months ended December 27, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months ended Reconciling
December 27, 1998 (unaudited) Optics Microlasers Items Combined
- ----------------------------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues................ $7,711 $1,000 $ (57) $ 8,654
Net income (loss)............. $ 280 $ (821) $(130) $ (671)
Total assets.................. $ -- $ -- $ -- $25,776
</TABLE>
The Company does not prepare total asset information by segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Revenues
For the three months ended December 27, 1998, product sales were $7,762,000
compared to $7,778,000 for the three months ended December 31, 1997, an decrease
of $16,000 or 0%. Contract research and development revenues were $892,000 for
the three months ended December 27, 1998 compared to $1,399,000 for the three
months ended December 31,1997, a decrease of $507,000 or 36%. 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 decrease in contract revenues was due
primarily to lower levels of contract funding for development of
microlaser-based display technology.
A number of factors will determine whether the Company will be able to
sustain or increase the current level of product sales, including significant
competition in laser optics markets, uncertainties in foreign markets
(particularly Asia) and currency exchange rates, the timing of exercise of
customer options on long-term production contracts for optics for military
applications, and the Company's ability to improve the manufacture and sale of
microlaser products. Contract research and development revenues are expected to
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 $1,901,000 for the three months ended
December 27, 1998 compared to $2,019,000 for the three months ended December 31,
1997, a decrease of $118,000 or 6%. Gross profit on research and development
revenues was $233,000 for the three months ended December 27, 1998 compared to
$294,000 for the three months ended December 31, 1997, a decrease of $306,000 or
21%. Gross margin on product sales was 24% for the three months ended December
27, 1998 compared to 26% for the three months ended December 31, 1997. The lower
gross margin on product sales was primarily due to lower margins in laser optics
7
<PAGE> 8
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 26%
for the three months ended December 27, 1998 compared to 21% for the three
months ended December 31, 1997. The increase in gross margin was due primarily
to a reduction in cost overruns.
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.
Internal Research and Development Expense
Internal research and development expense was $535,000 for the three months
ended December 27, 1998 compared to $712,000 for the three months ended December
31, 1997, a decrease of $177,000 or 25%. 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 current levels for the
remainder of the fiscal year.
Selling, General and Administrative Expense
Selling, general and administrative expense was $2,153,000 for the three
months ended December 27, 1998 compared to $1,951,000 for the three months ended
December 31, 1997, an increase of $202,000 or 10%. The increase was due to
additional staffing to strengthen certain administrative functions and to higher
sales and marketing expense for microlaser products. Selling, general and
administrative expense is not expected to increase significantly as a percentage
of sales in future periods.
Interest Expense
Net interest expense was $113,000 for the three months ended December 27,
1998 compared to $49,000 for the three months ended December 31, 1997, an
increase of $64,000 or 131%. The increase was due primarily to higher levels of
borrowing to finance capital additions. 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 $4,000 for the three months ended December 27, 1998
compared to $87,000 for the three months ended December 31, 1997, a decrease of
$83,000 or 95%. 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 $1,124,000 for the three months ended
December 27, 1998 compared to $101,000 for the three months ended December 31,
1997, an increase of $1,023,000. The primary reasons for the increase were the
operating loss sustained for the three month period, inventory investments in
raw materials and components for optics and microlasers and an increase in
accounts receivable primarily due to timing of shipments during the quarter.
Cash used in investing activities was $375,000 for the three months ended
December 27, 1998 compared to $1,918,000 for the three months ended December 31,
1997, a decrease of $1,543,000. The decrease is due primarily to reduced
requirements for new
8
<PAGE> 9
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 $381,000 for the three months
ended December 27, 1998 compared to cash used of $70,000 for the three months
ended December 31, 1997. The source of cash in the current year is new bank
financing for capital additions and draws on a working capital line of credit.
For the remainder of the year, the Company expects the primary source of cash to
be additional bank borrowings to finance additions to property and equipment and
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.
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.
RISK FACTORS
History of Operating Losses and Accumulated Deficit
The Company has incurred operating losses in the past and, at December 27,
1998, had an accumulated deficit of $8.8 million. The development, sales,
marketing and support of new products will require continued substantial
expenditures for the foreseeable future, which could result in additional
operating losses. The Company has funded a substantial portion of its product
development efforts through development contracts. Any failure by the Company to
maintain its external funding sources could result in increased operating
losses. There can be no assurance that the Company will maintain its external
funding sources or be profitable in the future or that present capital and any
funds provided by operations will be sufficient to fund the Company's future
capital requirements.
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.
9
<PAGE> 10
Dependence On New Products and Processes
To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
significant investments in research and development and to consider from time to
time the strategic acquisition of businesses, products, or technologies
complementary to the Company's business. The success of the Company in
developing, introducing and selling new and enhanced products depends upon a
variety of factors, including product selection, timely and efficient completion
of product design and development, timely and efficient implementation of
manufacturing and assembly processes, effective sales and marketing and product
performance in the field. There can be no assurance that the Company will be
able to develop and introduce new products or enhancements to its existing
products and processes in a manner that satisfies customer needs or achieves
market acceptance. The failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
Limited Microlaser Manufacturing Experience; Scale-up Risk
The Company has no experience in producing microlasers other than in low
level production quantities. The Company's microlasers are assembled from
component parts at the Company's San Diego facility. The Company purchases
component parts for its microlasers, including laser crystals, nonlinear
crystals and diode lasers, from various sources around the world. However, none
of the Company's suppliers of microlaser component parts has experience in
supplying components with the Company's specifications at increased volumes. The
Company does not have long term or volume purchase agreements with any of its
suppliers and currently purchases components on a purchase order basis. There
can be no assurance that these suppliers will be able to provide components to
the Company in the quantities, with the quality or at the prices necessary for
production quantities of the Company's products and products under development.
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 seek additional equity or debt financing to
compete effectively in the markets it serves. The timing and amount of the
Company's capital requirements cannot be precisely determined at this time and
will depend on a number of factors, including the demand for the Company's
products and products under development. There can be no assurance that such
additional financing will be available when needed, or, if available, will be on
terms satisfactory to the Company. If additional funds are raised by issuing
equity securities, further dilution to the then existing stockholders will
result.
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<PAGE> 11
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 33% and 41% of the
Company's total revenues in the three months ended December 27, 1998 and
December 31, 1997, respectively, and the Company expects that international
sales will continue to account for a substantial portion of total revenues. The
Company may continue to expand its operations outside of the United States and
to enter additional international markets, both of which will require
significant management attention and financial resources. International sales
are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, political and 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.
Exposure to Government Markets
Approximately 46% of the Company's product sales in the three months ended
December 27, 1998 were derived from customers in the defense industry. These
customers in turn generally contract with a governmental entity, typically the
U.S. government. In addition, over 50% of the Company's contract research and
development revenues were derived from contracts with various U.S. government
agencies. Many times, governmental programs are subject to funding approval and
can be modified or terminated with no warning upon the determination of a
legislative or administrative body. The loss or failure to obtain certain
contracts could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, the loss of a major
government customer or any significant reduction or delay in orders by such
customer, 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 three months ended December
27, 1998 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
11
<PAGE> 12
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.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
12
<PAGE> 13
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: February 10, 1999 /s/ Paul P. Wickman, Jr.
----------------------------------------
Paul P. Wickman, Jr.
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 27, 1998 AND FOR
THE THREE MONTHS ENDED DECEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-27-1998
<CASH> 1,294
<SECURITIES> 0
<RECEIVABLES> 7,220
<ALLOWANCES> (572)
<INVENTORY> 7,476
<CURRENT-ASSETS> 16,926
<PP&E> 16,255
<DEPRECIATION> (8,260)
<TOTAL-ASSETS> 25,776
<CURRENT-LIABILITIES> 9,664
<BONDS> 1,660
0
0
<COMMON> 8
<OTHER-SE> 22
<TOTAL-LIABILITY-AND-EQUITY> 25,776
<SALES> 7,762
<TOTAL-REVENUES> 8,654
<CGS> 5,861
<TOTAL-COSTS> 6,520
<OTHER-EXPENSES> 2,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> (667)
<INCOME-TAX> 4
<INCOME-CONTINUING> (671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (671)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<FN>
<F1> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
