<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 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)
(858) 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 26, 1999, there were 8,629,987 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 products supplied to the U.S.
government, 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 December 26, 1999
(unaudited) and September 30, 1999................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended December 1999 and 1998.......................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 1999 and 1998.......................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)... 6
ITEM 2. Management's Discussion And Analysis Of Results Of Operations And
Financial Condition................................................ 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................... 13
2
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASER POWER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
December 26, 1999 September 30, 1999
----------------- ------------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash ......................................... $ 266 $ 860
Accounts receivable, net...................... 5,367 4,488
Inventories, net.............................. 5,876 6,500
Other current assets.......................... 332 330
Net current assets of discontinued operations. -- 570
------------ ------------
Total current assets.................. 11,841 12,748
Property and equipment, net..................... 7,095 7,094
Intangibles and other assets, net.............. 417 419
Net non-current assets of discontinued operations 478 1,647
------------ ------------
Total assets.................................... $ 19,831 $ 21,908
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 1,818 $ 2,024
Accrued compensation and related expenses..... 1,270 1,529
Other current liabilities..................... 1,800 1,733
Allowance for operating losses of discontinued ops 117 450
Net current liabilities of discontinued operations 257 --
Subordinated convertible debentures........... 1,660 --
Current portion of long-term debt............. 498 1,084
------------ ------------
Total current liabilities............. 7,420 6,820
Long-term liabilities........................... 244 420
Long-term debt, less current portion............ 1,631 3,083
Subordinated convertible debentures............. -- 1,660
Stockholders' equity:
Common stock, par value $.001:
Authorized -- 15,000,000 shares
Issued and outstanding
8,579,987 shares at September 30, 1999 and
8,629,987 shares at December 26, 1999.. 9 8
Additional paid-in capital.................... 19,723 19,574
Accumulated deficit........................... (9,153) (9,639)
Accumulated other comprehensive loss.......... (43) (18)
------------ ------------
Total stockholders' equity............ 10,536 9,925
------------ ------------
Total liabilities and stockholders' equity.... $ 19,831 $ 21,908
============ ============
</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)
<CAPTION>
Three Months Ended December
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Product sales.................................. $ 8,061 $ 7,324
Contract research and development.............. 509 387
------------- -------------
Total revenues......................... 8,570 7,711
Costs and expenses:
Cost of product sales.......................... 6,000 5,463
Contract research and development.............. 297 259
Internal research and development.............. 221 122
Selling, general and administrative............ 1,423 1,810
------------- -------------
Total costs and expenses............... 7,941 7,654
------------- -------------
Income from operations........................... 629 57
Interest expense, net.......................... 128 69
------------- -------------
Income (loss) before income taxes................ 501 (12)
Income taxes................................... 15 4
------------- -------------
Net income (loss) from continuing operations..... 486 (16)
Loss from discontinued operations................ -- (656)
------------- -------------
Net income (loss)................................ $ 486 $ (672)
============= =============
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations....... $ .06 $ (0.00)
Loss from discontinued operations.............. -- (.08)
------------- -------------
Net income (loss)............................ $ .06 $ (.08)
============= =============
Average common shares outstanding - basic and diluted 8,608 8,398
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
LASER POWER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Three Months Ended December
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from continuing operations.................. $ 486 $ (16)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 339 450
Other current assets and current liabilities.............. (655) 891
Changes in operating assets and liabilities............... (176) (18)
------------- -------------
Net cash provided by (used in) operating activities of
continuing operations.............................. (6) 1,307
Net cash provided by (used in) operating activities of
discontinued operations............................ 1,764 (1,431)
------------- -------------
Net cash provided by (used in) operating activities.. 1,758 (124)
INVESTING ACTIVITIES
Additions to property and equipment........................... (431) (314)
Changes in other assets and liabilities....................... (4) (34)
------------- -------------
Net cash used in investing activities of continuing
operations......................................... (435) (348)
Net cash used in investing activities
of discontinued operations......................... (30) (27)
------------- -------------
Net cash used in investing activities................ (465) (375)
FINANCING ACTIVITIES
Payments on borrowings........................................ (3,987) (214)
Proceeds from borrowings...................................... 1,950 595
Net proceeds from issuance of stock 150 -
------------- -------------
Net cash provided by (used in) financing activities.. (1,887) 381
------------- -------------
Net decrease in cash and cash equivalents..................... (594) (118)
Cash at beginning of the period............................... 860 2,412
------------- -------------
Cash at end of the period..................................... $ 266 $ 2,294
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest...................... $ 196 $ 135
============= =============
</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 December 26, 1999 and the consolidated
results of operations for the three fiscal months ended December 26, 1999 and
December 27, 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 December 26, 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.
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; the company has disclosed
its comprehensive income as a component of its statement of stockholders'
equity.
As of January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. The Company has determined that its continuing operations are
only in one segment and has disclosed information related to its discontinued
operations elsewhere in these Notes to Consolidated Financial Statements.
Accordingly, the adoption of this statement has no impact on the Company's
financial statements.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using "Basic EPS" and "Diluted EPS"
as required by Statement of Financial Accounting Standards No. 128, Earnings per
Share ("SFAS 128"), which supersedes APB Opinion 15. Basic EPS includes no
dilution and is based on weighted-average common shares outstanding for the
period. Diluted EPS reflects the potential dilution of stock options,
convertible preferred stock and warrants to purchase common stock. For loss
periods, these common equivalent shares are excluded from the Diluted EPS
computation as their effect would be antidilutive.
3. FINANCING AGREEMENTS
In November 1999, the Company entered into a new credit agreement that
replaced its previous credit agreement. The credit agreement provides for a
revolving line of credit of $4,000,000, subject to a borrowing base limitation,
with an annual interest rate of 1.5% above the lender's prime rate. The credit
agreement also provides for a term loan of $1,950,000 amortized over 60 months
commencing October 31, 1999 with interest at 1.5% above the bank's prime rate,
and a $750,000 equipment financing facility with interest at 2% above the bank's
prime rate. The interest rate on the revolving line and the term loan will be
reduced to 1% over the prime rate after net proceeds from the sale of
discontinued operations exceeds $2,000,000. The agreement includes a .25%
facility fee and penalties on a declining scale in the event that the Company
terminates the agreement prior to the expiration of its term. The credit
agreement expires on October 31, 2002 unless renewed.
All borrowings under the new credit agreement are secured by accounts
receivable, inventory, and property and equipment. The agreement contains
restrictive covenants that include limitations on losses, maintenance of minimum
tangible net worth, debt equity and cash flow ratios, as well as restrictions on
capital and lease expenditures, and additional borrowings and payments of
dividends.
In December 1999, the Company prepaid approximately $270,000 of its term loan
in connection with the sale of one of its discontinued operations.
6
<PAGE>
4. INVENTORIES (in thousands)
December 26, 1999 September 30, 1999
----------------- ------------------
(unaudited)
Raw materials....................... $ 3,308 $ 3,405
Work in progress.................... 2,383 3,009
Finished goods...................... 1,440 1,483
--------- ---------
Subtotal....................... 7,131 7,897
Reserves............................ (1,255) (1,397)
--------- ---------
Inventories, net.................... $ 5,876 $ 6,500
========= =========
5. DISCONTINUED OPERATIONS (in thousands)
During fiscal 1999, the Company's Board of Directors adopted a plan to sell
its microlaser operations and to phase out certain contract research operations.
Operations to be sold or phased out are reported as discontinued operations. The
Company sold the majority of the assets of discontinued operations in December,
1999. The Company expects to conclude a transaction for the sale of the
remainder of discontinued operations by March 31, 2000.
The results of discontinued operations were as follows:
Three Months Ended December
---------------------------
1999 1998
--------- ---------
Revenues:
Product sales................................ $ 602 $ 438
Contract research and development............ 315 504
--------- ---------
Total revenues....................... 917 942
Costs and expenses:
Cost of product sales........................ 558 398
Contract research and development............ 264 400
Internal research and development............ 119 414
Selling, general and administrative.......... 309 342
--------- ---------
Total costs and expenses............. 1,250 1,554
--------- ---------
Loss from discontinued operations.............. (333) (612)
Interest expense, net........................ - 44
--------- ---------
Loss before income taxes....................... (333) (656)
Income taxes................................. - -
--------- ---------
Net loss from discontinued operations.......... $ (333) $ (656)
========= =========
Corporate overhead expenses, historically allocated and charged to
discontinued operations, were reversed and allocated back to continuing
operations because those expenses were not considered to be directly
attributable to discontinued operations. Expenses allocated back to continuing
operations totaled $96,000 and $95,000 in the three month period ending December
1999 and 1998, respectively.
7
<PAGE>
Interest expense attributable to discontinued operations includes an
allocation of interest on general corporate credit facilities. Interest is
allocated to discontinued operations based on the expected reduction in interest
expense that should occur upon the sale of any of the discontinued operations
and the use of proceeds from such sale to repay debt, and is representative of
projected future interest expense. The Company believes this approach is
substantially the same as if this debt was assumed by the buyer. All interest
expense for the three month period ended December 26, 1999 was allocated to the
continuing operations.
Assets and liabilities of discontinued operations have been reflected in the
consolidated balance sheets as current or non-current assets based on the
original classification of the accounts, except that current liabilities are
netted against current assets and non-current liabilities are netted against
non-current.
The accrual for the estimated pre-tax losses of $450,000 to be incurred
during the expected disposal period is presented separately in the accompanying
consolidated balance sheet for September 30, 1999. Such amount excludes
corporate overhead and interest allocation. The pre-tax loss for the three month
period ended December 26, 1999 amounting to $333,000 has been charged to this
accrual.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Revenues
For the three months ended December 26, 1999, product sales were $8,061,000
compared to $7,324,000 for the prior year, an increase of $737,000 or 10%.
Contract research and development revenues were $509,000 compared to $387,000
for the prior year, an increase of $122,000 or 32%. Sales of infrared optics
increased primarily due to higher delivery rates on long-term production
contracts. The increase in contract revenues is due to increased reimbursement
for work performed on a subcontract to develop a large optic thin-film coating
capability in the Temecula facility.
Gross Profit
Gross profit on product sales was $2,061,000 for the three months ended
December 26, 1999 compared to $1,861,000 for the prior year, an increase of
$200,000 or 11%. Gross profit on research and development revenues was $212,000
compared to $128,000 for the prior year quarter, an increase of $84,000 or 66%.
Gross margin on product sales was 25% for both periods presented. Gross margin
on contract research and development revenues was 42% compared to 33% for the
prior year. The increase in gross margin on contract research and development
revenues was due to the timing of revenue recognition for which the Company does
not have a corresponding cost.
Internal Research and Development Expense
Internal research and development expense was $221,000 for the three months
ended December 26, 1999 compared to $122,000 for the prior year, an increase of
$99,000 or 81%. The increase was due to a substantial increase in laser optic
manufacturing process development. 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 $1,423,000 for the three
months ended December 26, 1999 compared to $1,810,000 for the prior year, a
decrease of $387,000 or 21%. The decrease was due to a reduction in corporate
office staff and non-staff expense, partially offset by increased expenditures
at the operating unit level. Selling, general and administrative expense is not
expected to materially change as a percentage of sales in the near term.
Interest Expense
Net interest expense was $128,000 for the three months ended December 26,
1999 compared to $69,000 for the prior year, an increase of $59,000 or 86%. The
increase was due primarily to the allocation of interest expense to discontinued
operations in the prior year and to a lesser extent higher interest rates. The
Company does not expect interest expense to change materially in the near term
since the reduction in interest resulting from the application of proceeds of
the sale of discontinued operations will be offset by higher interest rates and
interest on new borrowings to finance capital additions.
9
<PAGE>
Income Taxes
Income tax is not material due to the application of tax net loss
carryforwards in the current year and the net loss in the prior year. 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
The Company completed its initial public offering in August 1997, raising
approximately $8.1 million, net of offering costs. Prior to the public offering,
the Company satisfied its liquidity requirements primarily from cash generated
from operating activities and the net proceeds of private sales of preferred and
common stock and, to a lesser extent, from issuance of subordinated debentures
and capital equipment leasing and bank debt.
In November 1999, the Company entered into a credit agreement with Wells
Fargo Bank. The new credit agreement provides for a $4 million working capital
line of credit, subject to a borrowing base, and a $1.95 million term loan to be
amortized over 5 years. The Company utilized the proceeds of the term loan and
an initial draw on the working capital line to retire debt under a prior credit
agreement. The new credit agreement also provides for a capital equipment
financing facility, and for a reduction in interest rates in the event that the
net proceeds of the sale of its discontinued operations exceeds $2,000,000. The
credit agreement expires in November 2002. The amount due under the working
capital line is classified as long-term debt in the Consolidated Balance Sheet
at December 26, 1999, and is secured by substantially all of the assets of the
Company.
Cash used in operating activities of continuing operations was $6,000 for
the three months ended December 26, 1999 compared to cash provided of $1,307,000
for the prior year, an increase in use of cash of $1,313,000. The primary reason
for the increase was an increase in accounts receivable related to the timing of
product shipments and contract research revenue recognition during the current
year period.
Cash used in investing activities of continuing operations was $435,000 for
the three months ended December 26, 1999 compared to $348,000 for the prior
year, an increase in use of cash of $87,000. The increase is due primarily to
increased requirements for new property and equipment for manufacturing
operations. The Company does not expect the rate of investment in capital
equipment to increase significantly for the remainder of the fiscal year.
Cash used in financing activities was $1,887,000 for the three months ended
December 26, 1999 compared to cash provided of $381,000 for the prior year, a
decrease in cash of $2,268,000. The decrease in cash is primarily due to the use
of cash proceeds from the sale of discontinued operations to reduce amounts
outstanding under the Company's term loan and revolving line of credit. For the
remainder of the year, the Company expects to increase cash from financing
activities as it obtains financing for capital additions.
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 limits its investment in capital
equipment and debt financing from other sources.
RISK FACTORS
POSSIBLE CHANGE OF CONTROL
In September 1999, II-VI Inc., one of the Company's principal competitors,
published its willingness to buy the outstanding capital stock of the Company.
The Company's Board of Directors, which had previously been told privately of
such proposal, rejected the public proposal on the grounds that the proposal did
not adequately reflect the value of the Company. The Board of Directors also
re-affirmed its commitment to maximizing stockholder value. The Board
subsequently retained the services of Cruttenden Roth & Company as its financial
advisor and directed Cruttenden Roth to evaluate the proposal by II-VI and to
advise the Board on the proposal and other strategic alternatives that may be
available to the Company. As of December 1, 1999 II-VI Inc. owned approximately
14.6% of the outstanding voting stock of the Company. In addition, another
company, Union Miniere USA, Inc., owns or has the right to acquire approximately
14.7% ownership of the voting stock of the Company. The Company has engaged in
preliminary discussions with multiple potential bidders for the Company. On
February 2, 2000, the Company announced that it had discontinued discussions
because none of the potential bidders appeared to be prepared to offer to
acquire Laser Power at price levels comparable to recent market values for the
Company's common stock. Due to the time spent and effort expended by the
Company's management in addressing the proposal by II-VI, considering strategic
alternatives and engaging in potential acquisition discussions, the Company's
officers have had less time and effort to conducting the business of the
Company. Other employees of the Company have expressed some concern over the
possible change in control of the Company and how it may effect their personal
employment situations. There can be no assurance that such factors will not have
a material adverse effect on the Company's business, financial condition or
results of operations.
10
<PAGE>
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company has incurred operating losses in the past and, at December 26,
1999, had an accumulated deficit of $9.1 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.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES
To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
investments in research and development and to consider from time to time the
strategic acquisition of businesses, products, or technologies complementary to
the Company's business. The success of the Company in developing, introducing
and selling new and enhanced products depends upon a variety of factors,
including product selection, timely and efficient completion of product design
and development, timely and efficient implementation of manufacturing and
assembly processes, effective sales and marketing and product performance in the
field. There can be no assurance that the Company will be able to develop and
introduce new products or enhancements to its existing products and processes in
a manner that satisfies customer needs or achieves market acceptance. The
failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations.
FUTURE CAPITAL REQUIREMENTS
Although the Company believes that its existing cash balances and available
lines of credit will be sufficient to meet its capital requirements for at least
the next 12 months, the Company may seek additional equity or debt financing to
compete effectively in the markets it serves. The timing and amount of the
Company's capital requirements cannot be precisely determined at this time and
will depend on a number of factors, including the demand for the Company's
products and products under development. There can be no assurance that such
additional financing will be available when needed, or, if available, will be on
terms satisfactory to the Company. If additional funds are raised by issuing
equity securities, further dilution to the then existing stockholders will
result.
FLUCTUATION IN QUARTERLY PERFORMANCE
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures. If significant variations were to
occur between forecasts and actual orders, the Company may not be able to reduce
its expenses proportionately and in a timely manner, and operating results could
be adversely affected. In addition, the Company's ability to fill orders in a
timely and responsive manner is dependent upon maintaining adequate
manufacturing capacity and significant inventories of raw material and finished
optics for replacement orders. The Company has experienced capacity constraints
in the past which have resulted in delays in order fulfillment and reduced gross
margins. Future delays in order fulfillment could lead to declines in product
sales. If product sales or prices were to decline substantially, inventory
writedowns could occur. Price reductions or increases in material costs could
also have an adverse effect on the Company's business, financial condition and
results of operations.
11
<PAGE>
EXPOSURE TO GOVERNMENT MARKETS
Product sales to customers in the defense industry accounted for 53% of
product sales from continuing operations in the fiscal quarter ended December
26, 1999. These customers in turn generally contract with a governmental entity,
typically the U.S. government. In addition, essentially all of the Company's
contract research and development revenues were derived from contracts with
customers in the defense industry. Many times, governmental programs are subject
to funding approval and can be modified or terminated with no warning upon the
determination of a legislative or administrative body. The loss or failure to
obtain certain contracts could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, the loss of a
major government customer or any significant reduction or delay in orders by
such customer, could have a material adverse effect on the Company's business,
financial condition and operating results.
EXPOSURE TO MAJOR CUSTOMERS
Approximately 35% of the Company's sales from continuing operations in the
fiscal year ended December 26, 1999, were derived from net sales to Lockheed
Martin Corporation. The loss of this major customer, or any significant
reduction or delay in orders by such customer, would have a material adverse
effect on the Company's business, financial condition and operating results.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 28% of the Company's total
revenues from continuing operations in the fiscal quarter ended December 26,
1999 and the Company expects that international sales will continue to account
for a substantial portion of total revenues. The Company may continue to expand
its operations outside of the United States and to enter additional
international markets, both of which will require significant management
attention and financial resources. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other trade barriers, political and economic instability in foreign markets,
difficulties in staffing and management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations and potentially adverse tax consequences. Since
substantially all of the Company's foreign sales are denominated in U.S.
dollars, the Company's products may also become less price competitive in
countries in which local currencies decline in value relative to the U.S.
dollar. The Company's business and operating results may also be materially and
adversely affected by lower sales levels which typically occur during the summer
months and the calendar year end in Europe and certain other overseas markets.
The sales of many of the Company's OEM customers are dependent on international
sales, which increases the Company's exposure to the risks associated with
international sales.
ENVIRONMENTAL, HEALTH AND SAFETY CONCERNS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of hazardous materials used
by the Company in connection with the manufacture of optics. Both the
governmental regulations and the costs associated with complying with such
regulations are subject to change in the future. There can be no assurance that
any such change will not have a material adverse effect on the Company's
business, financial condition and results of operations. The Company makes
investments in protective equipment, and continually reviews and monitors
process controls, manufacturing procedures and training to minimize the risks to
employees, surrounding communities and the environment due to the presence and
handling of such hazardous materials. The failure to properly handle such
materials could lead to harmful exposure to employees or to the improper
discharge of hazardous materials. Since the Company does not carry environmental
impairment insurance, such a failure could result in a material adverse effect
on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
Until 1997, there had been no public market for the Common Stock, and there
can be no assurance that an active public market for the Common Stock will
develop or be sustained. The trading price of the Common Stock could be subject
to significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in earning estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the optics and laser
industries and other events or factors. Also, speculation concerning the
potential acquisition of the Company could cause significant and rapid changes
in trading volume and price of the Common Stock. See "Possible Change of
Control." In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price for many companies
in industries similar or related to that of the Company and that have been
unrelated to the operating performance of those companies. These market
fluctuations may materially and adversely affect the market price of the Common
Stock.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Please see the discussion related to legal proceedings in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1999. There
has been no material developments with respect to these proceedings.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 19, 1999
disclosing that the Company has adopted a stockholder rights plan.
13
<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: February 9, 2000 /s/ Paul P. Wickman
--------------------------------------------
Paul P. Wickman
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 26, 1999 AND FOR
THE THREE MONTHS ENDED DECEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
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<PERIOD-END> DEC-26-1999
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