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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended: December 31, 1996, Commission File No. 000-20731
PHOTRAN CORPORATION
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(Exact Name of Registrant as specified in its Charter)
MINNESOTA 41-1697628
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(State of Incorporation) (I.R.S. Employer Identification No.)
21875 Grenada Avenue, Lakeville, Minnesota 55044
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(Address of Principal Executive Offices) (Zip Code)
(612) 469-4880
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
Check whether the Issuer (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
twelve months (or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
State Issuer's revenues for its most recent fiscal year: $2,886,540.
The aggregate market value of voting stock held by nonaffiliates of the Issuer
on March 31, 1997 was $10,065,285.
The number of shares outstanding of the Issuer's only class of common stock on
March 31, 1997 was 5,154,392.
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PART I
ITEM 1: DESCRIPTION OF THE BUSINESS
BUSINESS DEVELOPMENT
Photran Corporation ("Photran" or the "Company") was incorporated in 1991
under the laws of the State of Minnesota. During the past three years, the
Company has not changed its form of organization or mode of conducting business,
except that the Company commenced commercial scale production of ITO coated
glass for the first time in July of 1995.
GENERAL
The Company develops, manufactures and markets high performance optical and
electrically conductive, thin film coated products. The Company employs a
process based on a technology known as planar magnetron sputtering. This
process is used to apply microscopically thin layers of metal, metal oxide,
nitride, boride, carbide and fluoride to a wide variety of substrate materials.
These thin film coatings provide essential optical, electrical or durability
properties to a substrate material such as glass, metal, or plastic.
The Company began commercial scale production on its first coating line in
July 1995. The Company's first product is its PCO brand of indium tin oxide
("ITO") coated glass. ITO coated glass consists of a high quality sheet of
thin glass which the Company coats with a transparent, electrically conductive
ITO coating. ITO coated glass is a principal component of flat panel displays.
These displays are used in watches, calculators, lap top computers and consumer
electronics devices.
TECHNOLOGY
The Company's core manufacturing technology is based on a vacuum coating
process known as planar magnetron sputtering. This process is used to apply
microscopic thicknesses of thin film coatings onto a variety of substrate
materials. The coating process occurs in a specially designed vacuum chamber.
The source material for the coating is normally a metal plate referred to as the
"target," which is mounted on a device called a "magnetron sputtering cathode."
The cathode and target assembly becomes the negative terminal in an electrical
circuit. A regulated power supply energizes the cathode and target, providing a
source of electrons. A small volume of argon gas is introduced into the vacuum
chamber near the cathode. Electrons emitted from the cathode collide with these
argon atoms causing the argon atoms to become positively charged or "ionized."
The negative charge on the target provides a strong electrical attraction for
the argon gas ions causing them to strike the target with very high velocity.
The kinetic energy of the argon gas ions, which is transferred to the target
surface, results in an atom of the target material being "sputtered" off the
surface. The sputtered atom travels at a very high speed toward the substrate
material, which is
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passing through the vacuum chamber. The sputtered atom strikes the substrate
surface with sufficient force to form a strongly bonded coating.
ITO COATED GLASS PRODUCTS AND MARKETS
To date, the Company's principal product has been its PCO brand TN grade
ITO coated glass. The Company had orders for approximately 1,000,000 pieces of
ITO coated glass as of December 31, 1996. The Company has also produced
enhanced reflection mirrors in limited quantities.
PCO BRAND TN GRADE AND LCM BRAND STN GRADE ITO COATED GLASS. The first
product the Company introduced was its twisted nematic (TN) grade ITO coated
glass that is the primary material used to construct many types of flat panel
displays. The most common type of flat panel display is the TN grade liquid
crystal display ("LCD"), which is used in watches, calculators, electronic games
and most types of inexpensive consumer electronics devices. These displays,
which incorporate TN grade ITO coated glass, are produced in very high volume by
an estimated 200 display manufacturing companies located in Japan and other
Asian countries.
To further its market position and to attempt to secure higher margins, the
Company is developing a new ITO coated glass product for the high-resolution
super twisted nematic ("STN") segment of this market. In 1997 the Company plans
to continue to focus on development of the STN grade market and to expand its
production capacity to allow for greater output of TN grade and the production
of STN grade ITO coated glass.
Based on a report published by Stanford Resources, Inc., a market research
firm specializing in the electronic display industry, the worldwide market for
the ITO coated glass used to manufacture all types of LCDs is currently expected
to be approximately $268 million by the year 2000. A report from the same
service indicates that by the year 2002 the market for flat panel displays, of
which ITO coated glass is a major component, is forecast to be more than $23
billion annually. The projected compound annual growth rate for the LCD segment
of the flat panel display market is estimated to be approximately 21% for the
period from 1991 to 2000 by Semiconductor International, a trade publication.
This rapid growth in the market for finished displays is expected to drive a
corresponding increase in demand for ITO coated glass.
TOUCH SCREEN PANELS. The Company also coats glass panels with ITO and
antimony tin oxide materials. These coated glass panels are the principal
material component in all resistive and capacitive type touch screens.
Resistive and capacitive type touch screens account for the majority of the
touch screen market.
A/R PRODUCTS AND MARKETS
Anti-reflection ("A/R") coatings consist of microscopically thin layers of
metal and metal oxide materials that utilize the principle of light wave
interference to reduce the reflectivity of the
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surface of a glass or plastic substrate. The Company is currently developing the
two A/R products described below.
POLARCLEAR POLARIZING FILM. The Company's PolarClear product will consist
of a sheet of plastic polarizing film, which is available from several sources
in the U.S. and Asia, to which the Company will apply an A/R coating. The
Company does not currently purchase this material and does not have any
agreements with any suppliers of the material.
Every LCD display utilizes a plastic polarizing film on the front of the
display. According to a report by Stanford Resources the annual market for
polarizers is projected to be $420 million by the year 2000.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas picture framing glass will consist
of a high quality sheet of clear glass that the Company will coat with A/R and
UV light blocking coatings. UV light is present at very damaging levels in
sunlight and most fluorescent light. It is the primary cause of irreversible
fading in paintings, prints and photographs.
According to the Professional Picture Framers Association, the annual
market for picture framing is approximately $4 billion. Historically, picture-
framing glass has accounted for approximately 8% of the total framing cost. The
Company estimates that between 10% and 12% of the glass currently used for
picture framing is a chemically etched "non glare" type of glass. This product
reduces glare by creating a matte texture for the picture or artwork. Although
it reduces glare, etched glass also reduces the image clarity and color
fidelity. The Company is aware of two A/R coated picture framing glass products
produced by a chemical dip process but is not aware of any A/R picture framing
glass coating applied using sputtering technologies.
The Company plans to sell ArtGlas for approximately the same price as
existing chemically dipped glass. The Company believes that the price and
performance qualities of ArtGlas will provide the Company with competitive
advantages in the picture framing glass market.
The Company's current production system cannot accommodate the large sheets
of glass required to produce ArtGlas. The Company intends to install a coating
system that will be capable of coating 30" x 40" sheets of ArtGlas.
ENHANCED REFLECTION MIRROR PRODUCTS AND MARKETS
Enhanced reflection mirrors ("ERMs") are glass or plastic sheets coated
with highly reflective mirror coatings on the surface closest to the point of
use (front surface). The Company commenced shipments of ERM products on a
limited basis in 1996. To date, the Company's selling efforts with respect to
ERM products has been very limited. The Company intends to focus additional
development and selling efforts on certain Asian customers during 1997. It is
not possible to determine at this time whether sales of ERM products will
contribute materially to the Company's revenues in 1997.
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PMAX ENHANCED REFLECTION MIRRORS. The Company's PMAX enhanced reflection
mirrors consist of a polished glass sheet coated with an ultra-high reflection
mirror coating on the front surface. Front surface mirrors are used in all
photocopiers, laser and bar code scanners, projection televisions, overhead
projectors and many other types of specialty mirror applications.
SALES AND DISTRIBUTION
The Company's sales and distribution activities are currently handled on a
direct basis and through selling agents. The Company's sales efforts are
currently conducted largely by senior management. Sales and distribution of
products under development will vary, depending on the product and the markets
to be pursued.
ITO PRODUCTS
ITO products are sold to manufacturers of flat panel displays. These
displays are used in such products as watches, calculators and lap top
computers. The Company sells its ITO coated glass and touch screen products
directly and through independent sales agents in the U.S. and Asia. This method
of distribution has provided a low cost, effective method of serving these
markets.
The Company has informal sales arrangements with several U.S. and Asian
sales agents and is in the process of formalizing these arrangements. These
sales agents are paid a sales commission that is standard for the industry.
A/R PRODUCTS
POLARCLEAR POLARIZING FILM. PolarClear A/R and UV light blocking
polarizing films will be distributed through the Company's existing ITO coated
glass selling agents. This product is used by the same customers who purchase
the Company's ITO coated glass products.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas will be sold on a wholesale basis
to a limited number of established distributors of picture framing glass in the
U.S. and Europe.
ENHANCED REFLECTION MIRROR PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. To reach the markets for ERMs, the
Company will utilize sales agents to call on manufacturers of photocopiers,
laser and bar code scanners, overhead projectors and projection televisions.
COMPETITION
The Company has not yet shipped significant quantities of products in any
of the markets in which it intends to compete. It has not, therefore,
established a significant market presence in any of these markets.
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ITO PRODUCTS
TN GRADE AND STN GRADE ITO COATED GLASS. Approximately half of the world's
production capacity for TN grade ITO coated glass is located in Japan. Japanese
LCD manufacturers utilize most of the ITO coated glass production capacity in
Japan. The principal suppliers of ITO coated glass for the LCD industry outside
of Japan are Applied Films Corporation of Boulder, Colorado; Samsung Corning of
Seoul, South Korea and Merck Balzers of Liechtenstein. These ITO suppliers have
substantial financial, technical, manufacturing and marketing resources, are
well established and will provide formidable competition to the Company for the
foreseeable future. The Japanese ITO coating manufacturers are not active in
supplying markets outside of Japan. However, to the extent the Company attempts
to develop business in Japan they will provide direct competition.
Because of the strong competition in the TN grade ITO coated glass market,
the Company is planning to focus on the higher quality, higher margin STN grade
segment of the ITO coated glass market. The Company believes that only three
Japanese ITO producers and Samsung Corning are able to supply significant
quantities of STN grade ITO coated glass. The Company estimates that until
recently, approximately 90% of the demand for STN grade ITO coated glass was in
Japan. However, beginning in the fourth quarter of 1995, several new STN grade
LCD production lines have commenced production in Taiwan, Singapore, Korea and
Hong Kong. The Company believes that the non-Japanese markets for STN grade ITO
coated glass will be easier to penetrate than the Japanese market. The Company,
therefore, intends to target the non-Japanese markets for STN grade LCD
manufacturing and has made a strategic decision to refrain from entering the
Japanese market because formidable competition and captive markets would make
such penetration difficult and costly.
TOUCH SCREEN PANELS. The only existing supplier of ITO and antimony tin
oxide coated panels for the touch screen market of which the Company is aware is
the Display Products Division of Donnelly Corporation in Holland, Michigan.
Donnelly has fully integrated production facilities for glass bending and thin
film coating. The Company's touch screen product is manufactured using a
different coating technology which the Company believes is more efficient than
the process used by its competitors. The Company intends, therefore, to compete
in this market on the basis of price.
A/R PRODUCTS
POLARCLEAR POLARIZING FILTERS. The market for A/R coated polarizing
plastic sheets has developed rapidly in the last two years. Currently Optical
Coating Laboratory, Inc. (OCLI) of Santa Rosa, California and Nitto Denko of
Japan account for the majority of the market for A/R coated polarizing material.
There are five other principal suppliers of polarizing material worldwide.
Three are in Japan and two are in the U.S. Each of these companies has
substantial manufacturing, technical, marketing and financial resources. The
Company believes the processes it has under development will enable it to
compete on the basis of both cost and quality.
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ARTGLASS PICTURE FRAMING GLASS. There are two companies of which the
Company is aware that currently supply anti-reflection picture framing glass.
Denton Vacuum, Inc. of Cherry Hill, New Jersey, and Schott Glas Werks of Mainz,
Germany, sell anti-reflection picture glass for the framing market that is
manufactured by a chemical dip process. The Company believes its ArtGlass
product will have more effective optical and A/R properties than products
offered by competitors and believes that these properties will provide a
competitive advantage in this market. The Company plans to sell ArtGlass for
approximately the same price as existing chemically dipped glass.
ERM PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. The market for enhanced reflection
mirrors is currently being served by OCLI, Viratec Thin Films, Inc. (Viratec) of
Faribault, Minnesota and Opton, Inc. of Norfolk, Virginia. These three
companies are believed to supply more than 90% of the worldwide demand for ERMs.
All three companies have large manufacturing facilities in the U.S., Europe and
Asia for cutting and edge grinding of these products to meet end user
specifications. The Company intends to compete in this market on the basis of
price.
RAW MATERIALS
The principal raw materials used in the Company's manufacturing processes
are glass substrates, which are coated with thin films, and the targets, which
are the source material for the thin film coatings. The glass used for ITO
coated glass is a special grade of thin soda lime glass. This material is
available from five suppliers worldwide. The Company currently purchases its
glass substrate from Glaverbel, S.A. of Belgium, although it does not have a
long term supply agreement with this supplier. Other suppliers are located in
the U.K. and Japan. The Company believes that it can obtain comparable quality
material from other suppliers should its current source be disrupted. Raw
materials for products to be introduced in 1997 and the target materials are
widely available from a variety of sources.
CUSTOMERS
During 1995, sales of ITO coated glass to the Company's two largest
customers accounted for 57% and 28% of total revenue, respectively. Sales to
the largest customer accounted for 87% of 1996 sales. The Company's largest
customer is located in Taiwan and is the largest LCD manufacturer outside of
Japan. The Company does not have any long-term contractual commitments from its
customers. The Company sold its PCO brand of ITO coated glass to a limited
number of customers in 1995 and 1996, primarily due to production capacity
limitations. The Company expects to increase its productive capacity during
1997, and anticipates that it will be able to expand its ITO product customer
base when this increased capacity is available.
The Company plans to further expand its customer base in the near term
through new product offerings. Based on current sales to its largest customer,
however, the Company expects that customer to continue to account for at least
50% of its sales revenue in 1997.
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Customers for the Company's ITO coated glass products are predominantly
located in Asia. The Company anticipates that the initial customers for its A/R
and ERM products will be located predominantly in the U.S.
INTELLECTUAL PROPERTY
The Company's policy is to attempt to protect its technology by, among
other things, filing patent applications for technology that it considers
important to the development of its business. The Company has seven issued U.S.
patents, four U.S. patent applications which have been filed and 16 U.S. patent
applications which have been prepared and are in the process of being finalized
for filing. The validity and breadth of claims covered in the Company's patents
and patent applications involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that the
Company's pending applications will result in patents being issued or if issued
that such patents or the Company's existing patents will provide a competitive
advantage, or that competitors of the Company will not design around any patents
issued to the Company. Other than the prior art review done in connection with
the Company's patent applications, the Company has not undertaken any
independent investigation regarding potential infringement of its current or
proposed products on the property rights of others.
GOVERNMENT REGULATION; ENVIRONMENTAL LAWS
The Company's business is not subject to any material governmental
regulations, nor are any governmental approvals required for the operations of
the Company as currently conducted or anticipated to be conducted in the
foreseeable future. Costs and effects of environmental compliance are also not
material to the Company's business.
RESEARCH AND DEVELOPMENT
The Company spent $353,636 and $455,847 on research and development
activities in 1995 and 1996, respectively. None of these expenditures are borne
directly by customers.
EMPLOYEES
As of December 31, 1996, the Company had 107 full-time employees and 2
part-time employees. Of these full-time employees, 15 were in research and
development and engineering, 40 were in manufacturing and production, 33 were in
machining, machine assembly and facilities maintenance, one was in sales, and 18
were in management or administrative positions. In March of 1997 management
eliminated 21 full-time positions. These staff reductions primarily affected
the engineering, research and machining departments. None of the Company's
employees are covered by a collective bargaining agreement, and management
considers its relations with its employees to be good.
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ITEM 2 - DESCRIPTION OF PROPERTY
FACILITIES
The Company leases its main office and manufacturing facility located at
21875 Grenada Avenue, Lakeville, Minnesota 55044. This 23,000 square foot
facility consists of 16,000 square feet of manufacturing space (including
approximately 10,000 square feet of high quality environmentally controlled
clean room area). The remaining 7,000 square feet is used for administrative,
engineering, R & D and sales offices. The Company also leases a nearby 47,000
square foot building located at 21725 Hanover Avenue, Lakeville, Minnesota
55044. The Company intends to use this facility for its machine shop, shipping
and receiving, and another manufacturing line. The Company has options to
purchase both of these buildings. The Company believes these facilities are in
good condition and are adequate for the foreseeable future. The Company carries
insurance covering the full replacement value of these properties. For
discussion concerning the lease obligations, see Note 6 to Financial Statements.
EQUIPMENT
The Company currently operates a single in-line coating machine which it
has designated "P-1." The P-1 line is housed in a high quality environmentally
controlled clean room. It is being used primarily to produce ITO coated glass.
During the fourth quarter of 1996, the Company was informed by its Chinese
joint venture partner of the partner's desire to dissolve the joint venture. The
Company had been constructing a coating line for sale to the joint venture. The
Company will now keep this coating line, designated the "P-1000," and is
currently modifying it to suit the Company's manufacturing needs. This
equipment is owned by a lease financing company subject to the Company's
obligation to purchase the equipment at the end of the lease term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - China Joint Venture."
The Company owns the majority of its manufacturing equipment (other than
the P-1000) as well as equipment used in its research and development
activities. Some of the Company's machine shop and office equipment is subject
to operating and capital leases none of which are material to the Company's
business. All of the Company's personal property, whether owned or leased, is
in good condition and adequate for the foreseeable future.
ITEM 3 - LEGAL PROCEEDINGS
The Company was not a party to any legal proceedings during 1996. On April
10, 1997, the Securities and Exchange Commission notified the Company that the
Commission had commenced a formal investigation with respect to certain
financial and accounting irregularities that had been identified by the Company
and its independent auditors. The investigation is in the
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preliminary stages and it is not possible to determine at this time what impact,
if any, the investigation will have on the Company's financial condition or
results of operations.
During the quarter ended December 31, 1996, the Company was informed by
its Chinese joint venture partner of the partner's intention to dissolve the
joint venture agreement and cancel the related equipment purchase contract.
In April 1997, the Company received notice that arbitration proceedings had
been commenced against it by its joint venture partner, claiming
approximately $4.4 million plus legal fees and costs. This process is still
in a very early stage, and it is too soon to determine whether the Company
will be liable for any additional amounts beyond the return of amounts which
are recorded as customer deposits (see Note 2). It is possible that
additional amounts due upon final dissolution of this agreement could be
material to the financial position and operating results of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of security holders during
the quarter ended December 31, 1996.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common shares are listed on the NASDAQ National Market under
the symbol "PTRN." The high and low bid prices during the fiscal quarters since
the Company's common shares became listed, as reported in the NASDAQ NMS monthly
statistical report, are as follows:
1996
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HIGH LOW
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Second quarter 14 1/4 9 3/4
Third quarter 12 1/8 5 5/8
Fourth quarter 6 1/2 3 1/4
There were approximately 347 shareholders of record as of December 31,
1996. The Company has not paid any dividends on its common shares and
anticipates retaining future earnings, if any, to finance operations of the
Company.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
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First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
(1) (1) (1) (2)
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $677,459 $217,595 $785,648 $451,349 $758,085 $1,438,203 $665,349 $1,255,671 $2,886,541 $3,362,818
Gross Profit
(loss) 248,743 120,662 44,029 4,574 (97,504) 401,347 (919,016) 787,713 (723,748) 1,314,296
Income
(loss) from
operations (72,558) (77,708) (293,065) (217,974) (444,565) 197,609 (4,321,362) 434,516 (5,131,550) 336,443
Income (loss)
before
extraordinary
item (217,396) (95,031) (351,665) (278,936) (366,916) 105,253 (4,273,940) 318,727 (5,209,917) 50,013
Net Income
(loss) (217,396) (95,031) (423,655) (278,936) (366,916) 105,253 (4,273,940) 318,727 (5,281,907) 50,013
Income (loss)
per common
share before
extraordinary
item (.07) (.03) (.09) (.08) (.07) .03 (1.00) .09 (1.23) .01
Net Income
(loss) per
common share (.07) (.03) (.11) (.08) (.07) .03 (1.00) .09 (1.25) .01
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Total assets 14,141,498 7,456,556 24,667,209 9,140,265 24,160,193 10,298,636 20,503,304 14,192,655 20,503,304 14,192,655
Long-term
debt, less
current
portion 290,318 473,022 152,726 1,355,779 104,040 1,343,030 327,813 762,783 327,813 762,783
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</TABLE>
(1) As restated - see restatements of interim financial results on page 12.
(2) See Other nonrecurring charges section on page 16.
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RESTATEMENTS OF INTERIM FINANCIAL RESULTS
The Company has determined that it was necessary to restate previously
reported interim financial results for the first, second and third quarters
of 1996. A tabular comparison of the statement of operations and balance
sheet for the quarter ended March 31, 1996 as previously reported and as
restated has been filed with the Commission on Form 8-K. Similar tabular
comparisons of the statements of operations and balance sheets for the
quarters ended June 30, 1996 and September 30, 1996 have been filed with the
Commission as amendments to the Company's quarterly reports on Form 10-QSB
for such quarters. Presented below is a description of the items restated by
quarter.
QUARTER ENDED MARCH 31, 1996
Revenue for the first quarter of 1996 has been reduced by $460,491
related to recorded sales transactions that did not meet the Company's
criteria for revenue recognition. In addition, errors in the valuation of
raw materials inventory, depreciation and in the computation of capitalized
interest increased cost of sales and interest expense by $66,000 and $84,000
respectively.
QUARTER ENDED JUNE 30, 1996
Revenue for the second quarter of 1996 has been reduced by $867,453 due
primarily to the reversal of equipment sales revenue of $910,000 resulting
from recognition criteria not being met. The Company has also corrected an
error in the valuation of raw materials inventory. This correction decreased
gross profit by $37,000. Accordingly, costs previously reported as cost of
sales have now been classified as equipment held for sale on the balance
sheet. See "Results of Operations -Revenue."
QUARTER ENDED SEPTEMBER 30, 1996
Revenue for the third quarter of 1996 has been reduced by $1,312,970.
Previously reported net sales transactions of $173,000 that did not meet the
Company's criteria for revenue recognition have been reversed. In addition,
equipment sales revenue of $1,140,000 has been reversed as a result of the
change to the completed contract method of revenue recognition on an
equipment contract discussed above. Costs previously reported as cost of
sales have now been reclassified as equipment held for sale. See "Results of
Operations - Revenue."
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FORWARD LOOKING STATEMENTS
THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING
STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING DEMAND FROM
MAJOR CUSTOMERS, EFFECTS OF COMPETITION, CHANGES IN THE PRODUCT OR CUSTOMER MIX
OR REVENUES AND IN THE LEVEL OF OPERATING EXPENSES, RAPIDLY CHANGING
TECHNOLOGIES AND THE COMPANY'S ABILITY TO RESPOND THERETO, THE IMPACT OF
COMPETITIVE PRODUCTS AND PRICING, THE TIMELY COMPLETION OF CONSTRUCTION AND
INSTALLATION, AND THE ACTUAL PERFORMANCE, OF NEW MANUFACTURING EQUIPMENT, THE
TIMELY COMPLETION, TESTING, ACCEPTANCE AND SHIPMENT OF EQUIPMENT MANUFACTURED
FOR SALE, THE TIMELY DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS AND OTHER
FACTORS DISCLOSED THROUGHOUT THIS FORM 10-KSB. THE ACTUAL RESULTS THAT THE
COMPANY ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE
TO SUCH RISKS AND UNCERTAINTIES. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE
ANY FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW
AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT,
INCLUDING THE DISCUSSION SET FORTH IN THE SECTION TITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS, AND IN
THE COMPANY'S OTHER REGISTRATION STATEMENTS AND REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME THAT ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
REVENUES
For the year ended December 31, 1996 net sales decreased 17% to
$2,886,540 from $3,362,818 in 1995. Revenues consisted primarily of gross
sales of TN grade ITO coated glass. The decrease in revenue for the year
ended December 31, 1996 compared to 1995 is due primarily to a combination of
a general market price reduction for TN grade ITO coated glass and a change
by the Company's principal customer to a smaller sheet size. These changes
had the combined effect of reducing the unit price of the Company's TN grade
ITO coated glass by approximately 50% from the beginning of the year to the
end of the year. This decrease in per unit revenue was partially offset by
an increase in the number of units produced of approximately 28%.
The Company expects the market price for TN grade ITO coated glass will
begin to recover in the second half of 1997. The Company is also pursuing sales
of larger size substrates that will provide increased revenue per unit for
substantially the same coating cost per unit. The Company also expects to
expand its productive capacity in 1997 with the addition of one or more thin
film coating lines. Based on recent discussions with its Asian selling agents
and current customers, management anticipates significant growth in revenue from
the sale of ITO coated glass in 1997 following the addition of productive
capacity.
During 1996 the Company dedicated a significant portion of its available
production time on its P-1 line to the development of full scale production
processes for enhanced reflection mirrors
13
<PAGE>
and its LCM brand ITO coated glass. Management believes because of the
fluctuations in the market for TN grade ITO it is necessary to accelerate the
shift in product mix from TN grade ITO to these products. The Company is
providing samples to prospective customers and is working with its independent
sales representatives to develop customers for these products.
During 1996 most of the Company's engineering capabilities were dedicated
to the design and construction of two thin film coating lines, one of which
was held for sale at December 31, 1996. As a result, the Company did not
realize increases in productive capacity and capabilities in 1996.
In the summer of 1996 the Company entered into an agreement to sell certain
ITO coating equipment to its largest customer for a total contract price of
$2,916,500. The Company has received a down payment of $500,000. Revenue of
$2,050,000 from the equipment contract was recognized on the percentage-of-
completion method through the third quarter of 1996. Delivery of the equipment
was originally scheduled for the fourth quarter of 1996. Delivery was delayed
and the customer has requested the Company to install and operate the equipment
in the Company's facilities during 1997. The Company is in the process of
negotiating contract amendments to extend the delivery date. The amendments had
not been finalized as of the date of this report and, therefore, the Company has
determined that it is appropriate to change to the completed contract method of
accounting for this transaction in the fourth quarter of 1996. Previously
reported revenues and cost of sales related to this transaction, which were
recorded in the second and third quarters of 1996, have been reversed
and the associated costs have been classified as equipment held for sale in the
December 31, 1996 balance sheet.
The Company's largest customer accounted for 87% and 57% of the Company's
revenue during 1996 and 1995, respectively. This customer is the prospective
purchaser of the ITO coating equipment discussed above. If the sale is
consummated, to the extent that this equipment satisfies a significant portion
of the customer's need for ITO coated glass, the Company will need to find
additional customers to replace this source of revenue. The Company expects,
however, to continue supplying this customer with ITO coated glass in future
periods. Based on recent discussions with this customer, management currently
expects the customer's purchases of ITO coated glass in future periods to be
comparable to historical levels, although no long-term purchase commitments
exist. During 1995, a second customer accounted for 28% of total revenue.
GROSS PROFIT (LOSS)
Gross loss was $723,748 in 1996, compared to gross profit of $1,314,296
in 1995. The loss was due in part to the shift to smaller sheet size and
market and unit price decreases discussed above. Cost of sales consists of
substrate costs, target material costs, labor and overhead related to the
Company's manufacturing operations. Cost of sales also includes the costs
associated with the enhancements of commercial scale production processes for
the manufacture of the Company's LCM brand ITO coated glass and improvements
in the process for enhanced reflection mirrors. The production of these
products requires ultra clean substrates and must be performed in a clean
room environment to achieve acceptable production yields. Management made
the decision
14
<PAGE>
to commence production of these products on its existing production line prior
to the installation of the clean room and material handling and cleaning
upgrades. As a result, production yields were significantly reduced and scrap
cost increased. Management believes that equipment and facility improvements
planned for 1997 will resolve these problems.
In addition, during the fourth quarter of 1996 the Company determined that
certain glass inventory that the Company had successfully coated and sold
earlier in 1996 had become stained by the packaging materials. The multiple
washings which this glass required and the poor quality of output and high scrap
rates have made it economically unfeasible to attempt to coat this glass.
Management, therefore, has reduced the carrying value of this inventory by
approximately $400,000 and charged that amount to cost of sales in the fourth
quarter.
PROCESS AND PRODUCT DEVELOPMENT
Process and product development expenses increased to $455,847 in 1996 from
$353,636 in 1995. These expenses consist of personnel costs, consulting,
testing, supplies and depreciation expenses. The increase in 1996 was due
primarily to increased personnel and consulting fees incurred for the purpose of
expanding the Company's product line.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $1,003,365 in 1996 from
$462,686 in 1995. These expenses consist primarily of compensation expenses
for administration, finance, and general management personnel, as well as
office supplies, depreciation, bad debt and professional fees. The increase
in 1996 is partially a result of increased staffing. Bad debt expense
increased by approximately $80,000 due to the bankruptcy of one customer in
late 1996. In addition, the Company incurred significant professional fees
in connection with a special investigation of certain transactions which were
recorded in 1996 which was initiated by the Board of Directors and led to a
restatement of previously reported interim financial results for the first,
second, and third quarters of 1996. Additional professional fees will be
incurred in connection with this investigation in 1997, but it is not
currently possible to determine whether such fees will be material to the
Company's 1997 results of operations.
SELLING EXPENSES
Selling expenses increased to $ 459,281 in 1996 from $161,531 in 1995.
These expenses consist principally of compensation costs for sales personnel,
commissions, travel expenses, trade show expenses, and freight out costs. The
addition of sales and customer support staff and increases in trade show, travel
and freight costs are the primary reasons for the increase in selling expenses
for the year ended December 31, 1996.
15
<PAGE>
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996 the Company's Chinese joint venture partner
notified the Company of its intention the cancel a joint venture agreement with
the Company and a related equipment purchase contract with the Company. In
connection with the cancellation of the equipment purchase contract, the Company
determined that certain equipment which was to have been sold to the joint
venture and equipment that was under development for the Company's use was no
longer economically feasible or did not fit the Company's current manufacturing
needs. This equipment, which the Company determined had no foreseeable future
value, was written off, resulting in a charge of $1,800,000.
In the fourth quarter of 1996, the Company discontinued its development of
commercial scale production equipment for its ZeroRay-TM- glare and radiation
control filters due to technical difficulties encountered with the large scale
production of the optical gel adhesive necessary for attaching the filters to
computer and television screens. Management believes that the resolution of
these issues would have required significant additional resources and would have
raised the cost of the filters to a point where the product could not be
competitive with other similar products. In connection with this decision,
management determined that production equipment that had been purchased to
manufacture the ZeroRay product had been impaired. The Company determined that
this equipment, which had a historical cost of approximately $378,000, had no
foreseeable future value and was, therefore, written off.
In addition, the Company determined that as a result of refocusing of its
operations, a piece of manufacturing equipment had little future value to the
Company at December 31, 1996. The machine has been written down to its fair
value, resulting in an impairment charge of approximately $272,000 in the
fourth quarter of 1996.
NET INTEREST EXPENSE
For the year ended December 31, 1996 the Company had interest expense net
of interest income of $78,367 compared to interest expense of $286,430 in 1995.
The change was due to the earnings from the investment of the proceeds from the
Company's initial public offering. In addition, the Company retired
substantially all of its outstanding debt in June of 1996 after its initial
public offering.
EXTRAORDINARY ITEM
Upon repayment of the Company's Bridge Notes in June 1996, the remaining
unamortized balance of $71,990 in deferred financing fees was written off.
The loss on extinguishment has been classified as an extraordinary item in
the Statement of Operations for the year ended December 31, 1996.
NET INCOME (LOSS)
The net loss of $5,281,907 for the year ended December 31, 1996 compared to
net income of $50,013 for 1995 was primarily due to the non-recurring charges
and inventory valuation adjustments discussed above. In addition, the decrease
in the unit revenues discussed above and the product and process enhancement
costs included in cost of sales contributed to the loss.
NET OPERATING LOSS CARRYFORWARDS
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), a change in ownership of greater than 50% of the
Company within a three year period results in an annual limitation on the
Company's ability to utilize its net operating loss ("NOL") carryforwards
which accrued during the tax periods prior to the change in ownership. As of
December 31, 1996, the Company had an NOL carryforward of approximately $6.5
million which expires in 2006 through 2010. Due to certain ownership changes
which occurred during the year ended December 31, 1993, the NOL carryforwards
of $700,000 incurred through February 1993, which can be utilized by the
Company on an annual basis, are limited to approximately $50,000. The annual
limitation may be increased for any built-in gains recognized within five
years of the date of the ownership change. Utilization of the approximately
$5.8 million of NOL carryforwards incurred after February 1993 is not limited
under Section 382 of the Code. However, the Company's ability to use its NOL
carryforwards may be further limited by subsequent issuances of common stock.
CHINA JOINT VENTURE
In 1994 the Company entered into a joint venture agreement with the
Shenzhen WABO Group Company Limited ("WABO"), of Shenzhen, China. The agreement
is governed by the laws of the People's Republic of China. The joint venture
company, known as the Shenzhen Fortune
16
<PAGE>
Conductive Glass Company, Ltd. ("Fortune"), was created to produce TN grade ITO
coated glass for the Asian market.
The Company had agreed to sell to Fortune an ITO glass coating system and
technology limited to the production of TN grade ITO coated glass for the gross
purchase price of $10,145,000. The Company had also agreed to provide a royalty
free license to Fortune for the use of certain of the Company's proprietary
technology for the production of TN grade ITO coated glass. The Company was
obligated to provide 40% of the $11,645,000 total capitalization of the joint
venture. This 40% contribution, totaling $4,658,000, was deducted from the
gross purchase price of the coating system. This was to result in the Company
receiving a net purchase price of $5,487,000 for the equipment sold to the joint
venture. The Company was not relying on any material earnings or distributions
from Fortune and, therefore, recorded the costs incurred as equipment held for
sale. The Company was accounting for this sale on the completed contract
method.
The equipment was originally scheduled to be shipped by November 6, 1995.
The project was delayed for several months due to a delay by WABO in delivering
a required letter of credit and the Company's resulting inability to obtain
working capital financing on a timely basis. The project schedule was
subsequently extended by mutual agreement between the parties. WABO failed to
deliver a required extension of the letter of credit on a timely basis, which
further delayed the project and prevented the Company from shipping the
equipment by April 15, 1996. The Company was subject to certain contractual
penalties for failure to ship by April 15, including the refund of Fortune's
advance of approximately $1.5 million, which amount had been recorded as a
current liability of the Company. WABO orally agreed to waive these penalties
provided the equipment was shipped no later than June 30, 1996. The equipment
did not ship by June 30, 1996.
During the quarter ended December 31, 1996, the Company attempted to
resolve the issues regarding payment of penalties as well as payment for various
technical modifications. The Company had negotiated with representatives of WABO
and had drafted an amendment to the agreement to resolve these issues. The
Company was subsequently informed by WABO of their intention to dissolve the
joint venture agreement.
The Company will keep the glass coating system, and plans to modify and
install the equipment for its own use. The equipment has been reclassified to
property, plant, and equipment at December 31, 1995. The Company has recorded
an additional liability of approximately $200,000 related to glass that was
provided by WABO for use in testing the system. In April 1997, the Company
received notice that arbitration proceedings have been commenced against it
by WABO, claiming damages of or reimbursement of approximately $4.4 million
plus legal fees. This process is still in a very early stage, and it is too
soon to determine whether the Company will be liable for any additional
amounts. It is possible, however, that additional amounts due upon final
dissolution of the joint venture could have a material adverse effect on the
financial position and operating results of the Company.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred accumulated losses since its inception of
$8,718,768 and incurred negative cash flows from operating activities of
$1,478,877 for the year ended December 31, 1996. The Company had cash outlays
for property and equipment additions of $8,896,744 for the year ended
December 31, 1996.
The Company's continuation as a going concern is dependent on its ability
to meet its obligations as they become due. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue
as a going concern. Management's plans regarding operating losses and its
plans concerning the above matters are presented in the Outlook section below.
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $2,038,955 and net accounts receivable
of $606,500. As discussed in the Outlook section below, management believes
that its existing sources of liquidity and anticipated funds from operations,
including collections on equipment sales, combined with the net proceeds from
a first quarter 1997 sale-leaseback accounted for as a financing transaction
of $2,250,000, will satisfy the Company's projected working capital and
capital expenditure requirements for 1997. Management is, however, also
investigating the possibility of obtaining working capital financing,
although there can be no assurance that such financing will be available or
be available on terms acceptable to the Company.
The net cash used in operating activities for 1996 was $1,478,877 due
principally to the net loss for the year of $5,281,907 which was partially
offset by non-cash charges for depreciation and asset impairment losses.
Expenditures for equipment held for sale were $937,706, offset by the receipt of
a $500,000 downpayment.
In 1996, the Company entered into an agreement to sell ITO coating
equipment to its largest customer for a total contract price of $2,916,500.
The Company received a down payment of $500,000 which is recorded as a
customer advance at December 31, 1996. Delivery of the equipment was
originally scheduled for the fourth quarter of 1996. This delivery has been
delayed, and the customer has requested the Company to install and operate
the equipment in the Company's facilities during 1997. The Company is in the
process of negotiating contract amendments to extend the delivery date and
clarify payment terms in light of the changed nature of the agreement. Costs
incurred to date have been classified as equipment held for sale as of
December 31, 1996.
Cash used in investing activities was $8,896,744 during 1996 compared to
$2,474,835 in 1995. In both periods this cash was used for the purchase of
equipment and leasehold improvements. In 1996 expenditures related to the
equipment intended for sale to the Company's China joint venture have been
categorized as additions to property and equipment due to the cancellation of
the equipment purchase agreement and the Company's decision to use this
equipment as a second manufacturing line. Internal costs, consisting primarily
of direct labor and supplies used in the construction of equipment, of
approximately $2,470,000 and $1,010,000 were capitalized or charged to
construction in process during 1996 and 1995 respectively.
Cash flows from financing activities during the year ended December 31,
1996 consisted primarily of approximately $18,500,000 in proceeds from the
Company's initial public stock offering in May 1996. Following the
offering, the Company repaid $4,000,000 of Bridge Notes together with
approximately $287,500 in accrued interest and a loan from a director of
$1,166,668. The Company also repaid a $2,000,000 EXIM secured bank line of
credit from the proceeds of the offering to reduce interest payments and to
avoid payment of EXIM renewal fees.
OUTLOOK
In March 1997, David E. Stevenson, the Company's president and founder,
resigned as an officer and director. The Company has assembled an executive
committee comprised of a Vice President for Finance and Administration, a Vice
President for Manufacturing and a Vice President for Technology. The Company
has also hired a Corporate Controller. The Company's short-term focus is on
increasing revenues, decreasing expenses, increasing production capacity and
improving manufacturing capabilities. The executive committee, together with
the Board of Directors, is currently developing a strategic plan to return the
Company to profitability. The new management team, together with the Company's
Board of Directors, has taken several
18
<PAGE>
steps to refocus the Company's efforts during the last 45 days. The Company
has terminated several engineering projects that did not directly relate to
the installation of additional coating equipment at the Company's facilities.
In an effort to focus all of the Company's personnel on manufacturing
activities and the development and refinement of core deposition
technologies, in March of 1997 the Company also laid off 21 employees, and
reassigned several others. In addition, the restructuring of manufacturing
shifts and process modifications made to the P-1 line have resulted in a
significant increase in production output. Moreover, the Company has engaged
in direct discussions with its major customers, selling agents, and
suppliers, and none of these customers, selling agents or suppliers have
indicated an intention to terminate their relationship with the Company.
Management expects that sales of TN grade ITO coated glass will be the
predominant source of revenue during 1997. Although the Company is continuing
to work on the development of additional products for introduction in 1998,
management expects that TN grade ITO coated glass sales will continue to
generate the majority of the Company's revenues in 1998 as well.
Based on the actions described above, the Company believes that its
existing sources of liquidity and anticipated funds generated by operations
will satisfy the Company's working capital and capital expenditure
requirements for 1997. It is possible, however, that the Company may have to
obtain additional capital through the issuance of equity or debt securities.
There can be no assurance that such additional capital will be available or
be available on terms acceptable to the Company.
New product introductions will depend on the success of the Company's
development efforts and on the results of management's analysis of market
opportunities and capital expenditure requirements. The Company's ability to
increase revenues is highly dependent on its ability to complete the
installation of additional coating equipment. The capital expenditures
related to such installation are expected to be available from internally
generated funds, including proceeds from the sale of ITO coating equipment to
the Company's principal customer (see Results of Operations - Revenues). If
the Company is unable to finalize the contract amendments currently under
discussion with that customer, it intends to keep the equipment for its own
use; the loss of equipment sale revenue associated with this transaction,
together with a refund of the customer's down payment of $500,000, however,
would force the Company to slow the process of installing additional
equipment and possibly force it to seek external capital to fund necessary
capital expenditures. Barring any unforeseen adverse external developments,
however, management believes that the Company's new plan, which will build on
the Company's asset base and technology position, will provide for the growth
in revenue and earnings necessary for the long term financial health of the
Company.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's future operating results may fluctuate significantly due to
factors such as the timing of new product announcements and introductions by the
Company, its major customer and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix, changes in the level of operating expenses, inventory obsolescence and
asset impairments, competitive pricing pressures, the gain or loss of
significant customers, increased product and process development costs
associated with new product introductions, the timely completion of
construction and installation of new manufacturing equipment, the timely
completion, testing, acceptance and shipment of equipment manufactured for sale,
and general economic conditions. All of the above factors are difficult for the
Company to forecast, and these
19
<PAGE>
or other factors may materially adversely affect the Company's business and
operating results for one quarter or a series of quarters. The Company's
current expense levels are based in part on its expectations regarding future
revenues and in the short term are fixed to a large extent. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant decline in
demand relative to the Company's expectations or any material delay of customer
orders would have a material adverse effect on the Company's financial
condition, cash flows, and operating results.
20
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .22
Balance Sheets as of December 31, 1995 and 1996. . . . . . . . . . . . . . .23
Statements of Operations for the years ended December 31, 1995 and
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Statements of Shareholders' Equity for the years ended December 31,
1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Statements of Cash Flows for the years ended December 31, 1995 and
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Notes to Financial Statements for the years ended December 31,
1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Photran Corporation
Lakeville, Minnesota
We have audited the accompanying balance sheets of Photran Corporation (the
Company) as of December 31, 1995 and 1996 and the related statements of
operations, shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Photran Corporation as of December 31, 1995
and 1996 and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's accumulated losses of $8,718,768 since
incorporation and negative cash flows from operating activities of $1,478,877
for the year ended December 31, 1996 raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
concerning these matters are described in Note 1. These financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 10, 1997
22
<PAGE>
<TABLE>
<CAPTION>
PHOTRAN CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
- -----------------------------------------------------------------------------------------------
1995 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,532,361 $ 2,038,955
Accounts receivable, net 808,549 606,500
Inventory 1,420,048 754,572
Equipment held for sale (Note 2) 3,203,314 1,547,426
Prepaid expenses 14,527 109,540
------------ ------------
Total current assets 6,978,799 5,056,993
PROPERTY AND EQUIPMENT, net (Note 3) 6,995,381 15,446,311
DEFERRED FINANCING COSTS 191,990
OTHER ASSETS 26,485
------------ ------------
$ 14,192,655 $ 20,503,304
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bridge financing (Note 4) $ 4,000,000 $
Line of credit (Note 4) 2,141,480
Current portion of long-term debt
notes payable and capital lease
obligations (Note 4) 1,041,547 51,592
Accounts payable 1,195,833 663,411
Accrued expenses 261,221 758,915
Customer advances (Note 2) 1,555,435 2,260,420
------------ ------------
Total current liabilities 10,195,516 3,734,338
LONG-TERM DEBT (Note 4) 762,783 327,813
------------ ------------
Total liabilities 10,958,299 4,062,151
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Notes 4 and 7):
Undesignated stock, no par value - 6,000,000 shares
authorized, no shares issued and outstanding
Common stock, no par value - 24,000,000 shares
authorized, 2,837,323 and 5,154,392 shares issued
and outstanding, respectively 6,671,217 25,159,921
Accumulated deficit (3,436,861) (8,718,768)
------------ ------------
Total shareholders' equity 3,234,356 16,441,153
------------ ------------
$ 14,192,655 $ 20,503,304
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
- -----------------------------------------------------------------------------------------------
1995 1996
<S> <C> <C>
REVENUES $ 3,362,818 $ 2,886,540
COST OF SALES 2,048,522 3,610,288
----------- -----------
Gross profit (loss) 1,314,296 (723,748)
OPERATING EXPENSES:
Process and product development 353,636 455,847
General and administrative 462,686 1,003,365
Selling and marketing 161,531 459,281
Other nonrecurring charges (Note 8) 2,489,309
----------- -----------
Total operating expenses 977,853 4,407,802
----------- -----------
INCOME (LOSS) FROM OPERATIONS 336,443 (5,131,550)
INTEREST EXPENSE, net 286,430 78,367
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 50,013 (5,209,917)
EXTRAORDINARY ITEM-loss on extinguishment of debt (Note 1) (71,990)
----------- -----------
NET INCOME (LOSS) $ 50,013 $(5,281,907)
----------- -----------
----------- -----------
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE (Notes 1 and 7)
Income (loss) before extraordinary item $ 0.01 $ (1.23)
Extraordinary item (0.02)
----------- -----------
Net income/loss $ 0.01 $ (1.25)
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
(Notes 1 and 7) 3,346,194 4,247,349
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
PHOTRAN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------------- ACCUMULATED TOTAL
SHARES AMOUNT DEFICIT EQUITY
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,834,823 $ 6,661,167 $(3,486,874) $ 3,174,293
Common stock issued upon exercise of
options - July 1995 2,500 10,050 10,050
Net income 50,013 50,013
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 2,837,323 6,671,217 (3,436,861) 3,234,356
Common stock issued in connection with
initial public offering, net of offering
costs of $2,248,372 2,300,000 18,451,628 18,451,628
Common stock issued upon exercise of
warrants - June and August 1996 17,069 37,076 37,076
Net loss (5,281,907) (5,281,907)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 5,154,392 $25,159,921 $(8,718,768) $16,441,153
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
- ---------------------------------------------------------------------------------------------------------
1995 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) before extraordinary item $ 50,013 $ (5,209,917)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization, property and equipment 295,324 634,948
Loss on impairment of fixed and other assets 2,495,698
Amortization of deferred financing costs 40,421 120,000
Changes in current assets and liabilities that provided
(used) cash:
Accounts receivable (636,809) 177,049
Inventory (1,067,668) 665,476
Equipment held for sale (2,607,031) (937,376)
Prepaid expenses (582) (95,013)
Accounts payable 550,793 (532,421)
Accrued expenses 136,366 497,694
Customer advances 704,985
------------ ------------
Cash used in operating activities (3,239,173) (1,478,877)
CASH FLOWS FROM INVESTING ACTIVITIES -
Property and equipment additions (2,474,835) (8,896,744)
------------ ------------
Cash used in investing activities (2,474,835) (8,896,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge financing 4,000,000
Proceeds from lines of credit 2,141,480
Proceeds from notes payable and long-term debt 1,411,692
Payments of notes payable and long-term debt (490,013) (7,606,489)
Common stock issued net of offering costs of $2,248,372 in 1996 10,050 18,488,704
------------ ------------
Cash provided by financing activities 7,073,209 10,882,215
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,359,201 506,594
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 173,160 1,532,361
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,532,361 $ 2,038,955
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
26
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------
1. BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING LOSSES AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Photran Corporation (the Company) is engaged in the manufacture
and sale of products incorporating thin film coatings which consist of
microscopic layers of metal and metal oxide materials. Materials coated
with these thin film coatings are components in a wide variety of products,
including liquid crystal displays, enhanced reflection mirrors and anti-
reflective glass. To date, the Company's sales have consisted of coated
glass products to a limited number of companies located in Asian countries
for use in liquid crystal displays.
MANAGEMENT'S PLANS REGARDING OPERATING LOSSES
The Company has incurred accumulated losses aggregating $8,718,768 since
its inception. The Company incurred negative cash flows from operating
activities of $1,478,877 for the year ended December 31, 1996.
The Company had cash outlays for property and equipment additions of
$8,896,744 for the year ended December 31, 1996.
At December 31, 1996 the Company had customer deposits of $2,260,420.
$1,735,000 of that amount is the deposit payment from the Company's
Chinese joint venture partner for the purchase of equipment. That
equipment purchase agreement has been canceled and the joint venture
partner has commenced arbitration proceedings claiming approximately
$4.4 million. (including the $1.7 million discussed above) In addition,
the Company has received a deposit of $500,000 from a customer for the
purchase of a coating line for which the related contract is in default.
The customer has delayed shipment of the equipment and the Company is
currently in the process of negotiating amendments to the purchase contract.
If the Company is not successful in amending the contract and the equipment
is not shipped the deposit may have to be refunded.
The Securities and Exchange Commission has informed the Company that it
is conducting an investigation with respect to certain fianncial and
accounting irregularities announced by the Company in March 1997 relating
to fiscal 1996. The investigation is in the preliminary stages and it is
impossible to determine what impact, if any, the investigation will have
on the Company's financial condition or results of operations.
These factors, among others, indicate the Company may be unable to
continue as a going concern for a reasonable period of time. The
Company's continuation as a going concern is dependent on its ability to
meet its obligations as they become due and ultimately attain sales and
operating levels to support its cost structure.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. Management's
plans regarding operating losses and its plans concerning the above matters
are presented below.
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $2,038,955 and net accounts
receivable of $606,500. The Company believes that its existing sources
of liquidity and anticipated funds from operations, including the
available proceeds from a first quarter 1997 sale-leaseback accounted
for as a financing transaction of $2,250,000, will satisfy the Company's
projected working capital and capital expenditure requirements for 1997.
Management is, however, also investigating the possibility of obtaining
working capital financing, although there can be no assurance that such
financing will be available or be available on terms acceptable to the
Company.
New product introductions will depend on the success of the Company's
development efforts and on the results of management's analysis of
market opportunities and capital expenditure requirements. The Company's
ability to increase revenues is highly dependent on its ability to
complete the installation of additional coating equipment. The capital
expenditures related to such installation are expected to be available
from internally generated funds, including proceeds from the sale of ITO
coating equipment to the Company's largest customer. If the Company is
unable to finalize the contract amendments currently under discussion
with that customer, it intends to keep the equipment for its own use;
the loss of equipment sales revenue associated with this transaction,
together with a refund of the customer's down payment of $500,000,
however, would force the Company to slow the process of installing
additional equipment, and possibly force it to seek external capital to
fund necessary capital expenditures. Barring any unforeseen adverse
external developments, however, management believes that the Company's
new plan, which will build on the Company's asset base and technology
position, will provide for the growth in revenue and earnings necessary
for the long-term financial health of the Company.
SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION - Revenues for coated glass sales are recognized upon
shipment of products to customers. Contracts for the sale of equipment
are accounted for using the completed contract method (see Note 2).
REVENUE FROM SIGNIFICANT CUSTOMERS - Substantially all of the Company's
sales for the years ended December 31, 1995 and 1996 were to customers
located in Asian countries. The percentages of total revenue from sales to
customers in excess of 10% of the total for each year were as follows:
1995 1996
Customer A 57% 87%
Customer B 28 -
PROCESS AND PRODUCT DEVELOPMENT - Expenditures for research and development
of products and manufacturing processes are expensed as incurred. Research
and development expense was $353,636 and $455,847 for the years ended
December 31, 1995 and 1996, respectively.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
ACCOUNTS RECEIVABLE - The Company's accounts receivable at December 31,
1995 and 1996 are due primarily from foreign customers located in Asian
countries. In 1995, the Company required the establishment of irrevocable
letters of credit in its favor from approved banks prior to shipment of the
products underlying these accounts receivable in order to reduce its
exposure to bad debts. At December 31, 1996, $338,000 of accounts
receivable from foreign customers were not secured by letters of credit.
These accounts were due from customers with whom the Company has had a
creditor relationship for over one year.
27
<PAGE>
The percentage of gross receivables due from customers in excess of 10% of
the December 31 balance is as follows:
1995 1996
Customer A 67% 49%
Customer B - 48
Customer C 30 -
INVENTORY - Inventory is valued at the lower of cost, determined on the
first-in, first-out method, or market value. Inventory at December 31
consists of the following:
1995 1996
Raw materials and supplies, at cost $ 1,420,048 $ 1,117,569
Finished goods 34,892
----------- -----------
1,420,048 1,152,461
Less: Obsolescence reserve 397,889
----------- -----------
Net inventory $ 1,420,048 $ 754,572
----------- -----------
----------- -----------
Inventories are periodically reviewed for obsolescence, overstock, and
quality defects by physical examination and by comparing quantities on hand
to forecasted future requirements. Items considered obsolete or overstock
are written off. Items with quality defects are valued at net realizable
value. In the fourth quarter of 1996, the Company determined that certain
glass inventory which the Company had successfully coated and sold earlier
in 1996 had become stained by the packaging materials. The multiple
washings which this glass required and the poor quality of output and high
scrap rates have made it economically unfeasible to attempt to coat this
glass. Management has established an obsolescence reserve of $397,889,
which has been charged to cost of sales in the fourth quarter to reduce the
carrying value of this glass to its estimated net realizable value if sold
as uncoated scrap.
The Company purchases substantially all of its raw glass, which is the
majority of the raw materials used in the manufacture of its products, from
a single source supplier. The Company believes that acceptable alternative
sources of this material are available.
EQUIPMENT HELD FOR SALE - Equipment held for sale is carried at cost.
Equipment held for sale includes $85,000 and $59,000 of interest capitalized
for the years ended December 31, 1995 and 1996, respectively.
CUSTOMER ADVANCES - Customer advances represent amounts received from
customers as down payments on equipment contracts. (See Note 2).
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Cost
includes expenditures for new equipment and incremental labor and direct
costs incurred for construction of equipment modifications. Property and
equipment include $209,000 of interest capitalized during the year ended
December 31, 1996. Property, other than manufacturing process equipment,
is depreciated using the straight-line method over estimated useful lives
of three to ten years. Manufacturing process equipment is depreciated
using the units-of-production method, with such equipment's useful life
estimated to be approximately ten years. Amortization of equipment under
capital leases is over the shorter of the lease term or the economic useful
life and is recorded as depreciation expense. Depreciation is not recorded
on property not yet placed in service. Repairs and maintenance are charged
to expense as incurred.
28
<PAGE>
DEFERRED FINANCING COSTS - Deferred financing costs at December 31, 1995
consisted primarily of underwriting and legal fees associated with the
issuance of bridge note financing in fiscal 1995 (see Note 4). Accumulated
amortization was $40,000 at December 31, 1995. The unamortized balance was
written off upon repayment of the Bridge Notes in 1996, and has been
classified as an extraordinary item in the statements of operations.
OTHER ASSETS - The Company has obtained patent rights to various
manufacturing processes and product technology. The founding shareholder
has transferred key manufacturing and product technology to the Company,
including patent rights, for the sum of $1. Through December 31, 1995 and
1996, there were no sales of product subject to royalty. In addition, the
Company had purchased and capitalized an exclusive license for certain
related technology from Applied Elastomerics, Inc. for $13,000 which was to
be amortized upon commencement of production over the term of the license
agreement. The license expired in May 1996 and was not renewed.
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of property and equipment and other long-lived assets for
potential impairment by comparing its carrying value to the estimated
undiscounted future cash flows expected to result from the use of these
assets. Should the sum of the related expected future net cash flows be
less than the carrying value, an impairment loss is recognized. An
impairment loss is measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset.
As of December 31, 1996, the Company reassessed the carrying values of the
fixed assets related to several production projects in relation to the
expected future cash flows from sales of the manufactured products. The
Company decided that it would refocus its efforts with respect to such
projects and would not pursue those for which commercial production did not
appear feasible in the near term. The related fixed assets were,
therefore, written down to their estimated fair values, which in some cases
were determined by their historical cost less a restocking fee to the
extent that the Company could return purchased components to the
manufacturer. (See Note 8).
The value of the license rights was deemed impaired as of December 31, 1996,
and the costs were written off. These charges are included within other
nonrecurring charges in the statements of operations.
INCOME TAXES - The Company calculates income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for differences
between the financial statement and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the period in which the
differences are expected to affect taxable income.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE - Net income
(loss) per common and common equivalent share is computed by dividing
net income (loss) by the weighted average number of common stock and
dilutive common stock equivalents outstanding. The weighted average
number of common and common equivalent shares outstanding has been
adjusted to give retroactive effect to the reverse stock split
authorized by the Company's shareholders on March 2, 1996. Common stock
equivalents result from dilutive stock options and warrants. Common
stock equivalents are not included in the per share calculations when
the effect of their inclusion would be antidilutive, except that, in
accordance with Securities and Exchange Commission (SEC) requirements,
common and common equivalent shares issued during the 12 months prior to
the Company's initial public offering have been included in the
calculation (using the treasury stock method based on an initial public
offering price of $9.00 per share for all prior periods presented).
29
<PAGE>
Fully diluted earnings (loss) per common share is not presented because of
its antidilutive effect.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions of SFAS No. 123 to
such arrangements.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. (See Note 7).
FINANCIAL RISKS AND UNCERTAINTIES - The Company has disclosed in the
financial statements certain financial risks and uncertainties to which
it is subject: concentration of sales to a limited number of customers;
single source supplier of raw materials; and use of estimates to review
the carrying value of long-lived assets and equipment held for sale
which may change in the future given the rapid technological changes
associated with the industry in which the Company operates. Also, the
Company has a contract for the sale of a thin film coating machine to
its largest customer, which is in default (see Note 2). If the contract
is completed and the equipment is used by the customer to satisfy a
significant portion of the customer's need for ITO-coated glass, the
Company will need to find additional customers to replace this source of
revenue.
The technology used in the Company's manufacturing equipment may be subject
to rapid technological change within time frames not currently anticipated
by the Company. It is reasonably possible that the Company's estimate of
recoverability of the carrying value of its equipment will change in the
future.
2. EQUIPMENT CONTRACTS AND EQUIPMENT HELD FOR SALE
In 1994, the Company entered into a joint venture agreement with the
Shenzhen WABO Group Company, Limited (WABO) of Shenzhen, China. The joint
venture company, known as the Shenzhen Fortune Conductive Glass Company,
Ltd. (Fortune), was created to produce TN-grade ITO-coated glass for the
Asian market.
WABO provided cash to Fortune to purchase a glass coating system from the
Company and for working capital purposes. The Company was obligated to
provide $4,658,000 (40% of the total capitalization of the joint venture of
$11,645,000). The Company agreed to sell to Fortune the ITO glass coating
machine for $10,145,000. The Company's contribution of $4,658,000 was to
have been deducted from the gross purchase price of the coating system.
The Company was recording the net purchase price of $5,487,000 ($10,145,000
- $4,658,000) as an equipment sale. The Company was following the
provisions of Emerging Issues Task Force (EITF) Issue No. 89-7 in
accounting for the glass coating system sale. EITF 89-7 offers guidance
regarding gain recognition on sales to joint venture companies by a joint
venture partner and accounting for the company's investment in the joint
venture. The Company was accounting for the sale of the glass coating
system using the completed contract method and has recorded the down
payment of $1,530,000 as a customer advance. All costs incurred in
constructing the equipment were classified as equipment held for sale at
December 31, 1995.
The equipment was scheduled to ship in April 1996, and the Company was
liable for various penalties for failure to ship by April 15, 1996, which
had been verbally waived by WABO provided the equipment was
30
<PAGE>
shipped by June 30, 1996. Due to various technical modifications
requested, the equipment had not shipped by September 30, 1996. During
the quarter ended December 31, 1996, the Company attempted to resolve
the issues regarding payment of late delivery penalties as well as
payment for the various technical modifications. The Company had
negotiated with representatives of WABO and had drafted an amendment to
the agreement in which all penalties for late delivery were waived in
exchange for the technical modifications being provided at no charge.
The Company was subsequently informed by WABO of their intention to
dissolve the joint venture and cancel the related equipment purchase
contract. The Company intends to keep the glass coating system and is
currently in the process of modifying the system for its own use. All
costs incurred for the machine were reclassified to construction-in-
progress during the quarter ended December 31, 1996. The Company has
recorded a liability of approximately $200,000 related to glass which was
provided by WABO for use in testing the system. The Company and WABO are
currently in disagreement as to cancellation of the contract and dissolution
of the joint venture. (See Note 6).
In 1996, the Company entered into an agreement to sell ITO coating
equipment to its largest customer for a total contract price of
$2,916,500. The Company received a down payment of $500,000 which is
recorded as a customer advance at December 31, 1996. Delivery of the
equipment was originally scheduled for the fourth quarter of 1996. This
delivery has been delayed, and the customer has requested the Company to
install and operate the equipment in the Company's facilities during
1997. The Company is in the process of negotiating contract amendments
to extend the delivery date and clarify payment terms in light of the
changed nature of the agreement. This amendment has not yet been
finalized. Costs incurred to date have been classified as equipment held
for sale as of December 31, 1996.
31
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
Estimated
Useful
Lives in Years 1995 1996
Leasehold improvements 10 $ 912,395 $ 1,676,037
Manufacturing process equipment 10 4,157,449 5,889,628
Construction-in-progress 1,139,023 7,250,367
Other manufacturing equipment 7 1,084,621 1,413,892
Fixtures 3-7 272,072 414,916
----------- ------------
7,565,560 16,644,840
Less accumulated depreciation
and amortization 570,179 1,198,529
----------- ------------
$ 6,995,381 $ 15,446,311
----------- ------------
----------- ------------
Manufacturing process equipment, Other manufacturing equipment, and
Fixtures includes assets under capital lease at costs of $276,824 and
$312,632 and accumulated amortization of $39,926 and $79,665 at December 31,
1995 and 1996, respectively.
4. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS
Notes payable, long-term debt, and capital lease obligations at December 31
consist of the following:
1995 1996
Notes payable:
Bridge financing (A) $ 4,000,000
Line of credit (B) 1,916,480
Line of credit (C) 225,000
Long-term debt and capital lease obligations:
Shareholder note payable (D) $ 1,416,667
Shareholder note payable (E) 200,000 $ 200,000
Capital lease obligations (F) 187,663 179,405
----------- ---------
1,804,330 379,405
Less current maturities (1,041,547) (51,592)
----------- ---------
Long-term debt $ 762,783 $ 327,813
----------- ---------
----------- ---------
The carrying amounts of long-term debt approximate fair market value on
December 31, 1995 and 1996, respectively. Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value of the existing debt.
(A) In October 1995, the Company issued $4 million of notes payable
(the Bridge Notes). The Bridge Notes bore interest at 11.75% per
annum with interest and principal due the earlier of October 15, 1996
or the receipt by the Company of gross proceeds of at least $7 million
in a private or public financing that includes securities with equity
features or debt with a term of one year or more. The Bridge Notes
were repaid in June 1996 with proceeds from the Company's initial
public offering.
In connection with this financing, the Company issued warrants to the
purchasers of the Bridge Notes to purchase a total of 400,000 shares
of the Company's common stock and issued warrants to the selling agent
32
<PAGE>
of the Bridge Notes to purchase a total of 40,000 shares of the
Company's common stock. See Note 7 for a description of the
terms of these warrants.
(B) During fiscal 1995, the Company obtained a $2,000,000
transaction-specific line of credit ($1,916,480 outstanding at
December 31, 1995) through the Bank of America, guaranteed by the
Export Import Bank (EXIM) of the United States. Under terms of the
line of credit, proceeds from this borrowing were to be used by the
Company to complete the coating system equipment which was to be sold
to the joint venture (see Note 2). Borrowings bore interest at 1%
over prime (9.5% at December 31, 1995) and were secured by the
equipment held for sale and all other current assets. The borrowings
were repaid from the proceeds of the initial public offering.
(C) The EXIM guarantee was extended to a $500,000 revolving line of
credit ($225,000 outstanding at December 31, 1995). This line of
credit was to be used to finance products for export. Borrowings bore
interest at a rate of 1% over prime (9.5% at December 31, 1995) and
were secured by accounts receivable and inventory. The line was
repaid with the proceeds of the initial public offering.
(D) On May 1, 1995, a director of the Company made a loan to the
Company in the original principal amount of $1.5 million. The loan
bore interest at prime plus 3.75% (12.25% at December 31, 1995) and
was secured by substantially all equipment and intellectual property
of the Company. The Company incurred costs of approximately $10,000
relating to the issuance of the note. These costs were being
amortized, on a straight-line basis, from the date of issuance until
May 10, 1997, which was the original maturity date of the note. The
note was repaid with the proceeds of the initial public offering. In
connection with the issuance of this loan, warrants were issued to the
director to purchase up to 75,000 shares of the Company's common stock.
See Note 7 for a description of the terms of these warrants.
(E) The $200,000 shareholder note payable bears interest at 10%, is
unsecured, and is convertible, at the shareholder's option, into
shares of the Company's common stock at a conversion rate of $2.00 per
share. The note is due January 1998. In connection with the issuance
of this loan, warrants were issued to the director to purchase up to
20,000 shares of the Company's common stock, exercisable from August
1994 to August 1997, at an exercise price of $2.00 per share.
Interest payable on this note was $47,500 and $67,500 at December 31,
1995 and 1996, respectively.
(F) Capital lease obligations are secured by the underlying property
and bear interest at effective interest rates of approximately 8.75%
to 15.70%.
33
<PAGE>
The principal maturities of long-term debt and minimum payments on capital
lease obligations outstanding at December 31, 1996 are as follows:
Long-Term Capital
Debt Leases Total
Years ending December 31:
1997 $ 69,430 $ 69,430
1998 $ 200,000 66,388 266,388
1999 50,685 50,685
2000 27,734 27,734
2001 1,413 1,413
---------- --------- ---------
200,000 215,650 415,650
Less amounts representing
interest 36,245 36,245
---------- --------- ---------
Long-term debt and capital
lease obligations outstanding $ 200,000 $ 179,405 $ 379,405
---------- --------- ---------
---------- --------- ---------
Total interest, including amortization of financing fees, incurred in 1995
and 1996 was approximately $384,000 and $605,000, respectively. Of these
amounts, approximately $85,000 and $268,000 were capitalized to
construction-in-progress or equipment held for sale during 1995 and 1996,
respectively.
5. INCOME TAXES
For income tax purposes, the Company has U.S. federal net operating loss
carryforwards of approximately $6,500,000 as of December 31, 1996. The
carryforwards expire in various amounts during the years 2006 through 2010.
Due to certain ownership changes, as defined in Section 382 of the Internal
Revenue Code, which occurred during the year ended December 31, 1993, the
Company's net operating loss carryforwards incurred through February 1993
of approximately $700,000 are limited to annual utilization of
approximately $50,000 per year.
Utilization of the Company's net operating loss carryforwards was not
limited as a result of its public offering in June 1996. However, the
Company's ability to use its net operating loss carryforwards may be
further limited by subsequent issuances of common stock.
The benefit for income taxes in fiscal 1996 has been offset by a valuation
allowance because future realization of the net operating loss
carryforwards is uncertain. The Company utilized net operating loss
carryforwards in fiscal 1995 to substantially offset any taxes due.
1995 1996
Tax expense (benefit) computed at
statutory rates $ 18,000 $(1,848,000)
State taxes 2,000
Effect of nondeductible items (7,000) (44,000)
Other (2,000)
Change in valuation allowance (13,000) 1,894,000
---------- -----------
$ - $ -
---------- -----------
---------- -----------
34
<PAGE>
Temporary differences, tax carryforwards, and valuation allowances at
December 31 consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Current:
Inventory valuation reserves and other accruals $ 20,000 $ 243,000
Impairment losses not currently deductible 871,000
Valuation allowance (20,000) (1,114,000)
--------- ----------
$ - $ -
----------- -----------
----------- -----------
Noncurrent:
Excess of tax over book depreciation and amortization $ (298,000) (370,000)
Tax loss carryforward 1,511,000 2,383,000
Valuation allowance (1,213,000) (2,013,000)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS - The Company is obligated under a
noncancelable operating lease for the rental of its office and
manufacturing facility through July 2001. The lease contains provisions
for payment of the facility operating expenses and real estate taxes as
additional rents. The Company has the option to terminate the lease on the
fifth anniversary of the commencement of the lease by providing 120 days
written notice to the lessor, with a penalty. During January 1996, the
Company entered into an operating lease to rent additional manufacturing
space for a term of ten years. This lease contains provisions for payment
of the facility operating expenses and real estate taxes as additional
rents. Rent expense for the years ended December 31, 1995 and 1996 was
approximately $100,000 and $150,000, respectively. Minimum lease payments
due under these operating leases for the next five years are as follows:
Year ending December 31:
1997 $ 221,610
1998 221,610
1999 221,610
2000 221,610
2001 185,672
EMPLOYMENT AGREEMENT - The Company had executed an employment agreement
with its president, who resigned in March 1997. The agreement, which
expires December 31, 1997, provided for a maximum base compensation of
$120,000 per year if certain financial performance goals, as set by the
Company's Board of Directors, were met. The agreement also provided for
the issuance of options, at the discretion of the Board of Directors, for
the purchase of the Company's common stock, payment of annual incentive
bonuses, and an option for the president to require the Company to purchase
his shares if the Company terminated his employment without cause prior to
an initial public offering of the Company's common stock. Options for the
purchase of 25,000 shares of the Company's common stock have been issued
pursuant to this agreement. The Company's obligation under the agreement
terminated in March 1997 when the president resigned.
CONTINGENCIES - During the quarter ended December 31, 1996, the Company was
informed by WABO of their intention to dissolve the joint venture and cancel
the related equipment purchase contract. In April 1997, the Company
received notice that arbitration proceedings have been commenced against it
by WABO, claiming approximately $4.4 million plus legal fees and costs.
This process is still in a very early stage, and it is too soon to determine
whether the Company will be liable for any additional amounts
35
<PAGE>
beyond the return of amounts which are recorded as customer deposits (see
Note 2). It is possible that additional amounts determined to be due upon
final resolution of this matter could be material to the financial
position, cash flows and operating results of the Company.
In connection with the coating equipment that the Company was building for
sale to Fortune, the Company entered into a contract with a third party to
design and build power supplies to be sold under the equipment contract, as
well as for the Company's own use. The third party has asserted that the
Company is liable to it for various costs incurred in connection with the
production of the power supplies and has demanded payment of $240,000 in
addition to amounts the Company has already paid under the contract. Due
to various defects in the contract as well as the third party's failure to
perform its obligations, the Company has rescinded the contract and
demanded that the third-party refund all monies paid to it by the Company.
Management, in consultation with the Company's legal counsel, is of the
opinion that the Company has valid defenses against the claims asserted by
the third party. However, it is possible that the Company will be liable for
amounts in addition to those already paid under the contract. Such amounts
could be material but the Company is unable to estimate what amounts, if
any, will ultimately be paid.
The SEC has informed the Company that it is conducting an investigation with
respect to certain financial and accounting irregularities announced by the
Company in March 1997 relating to fiscal 1996. The Company has submitted
documents to the SEC pursuant to requests from the SEC as part of the
investigation. The investigation is in the preliminary stages and it is
impossible to determine what impact, if any, the investigation will have on
the Company's financial condition or results of operations.
7. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
shares of common stock in an initial public offering. In connection with
this offering, the Company issued an overallotment option to the
underwriters to purchase up to 300,000 shares solely to cover
overallotments. This option was exercised in June 1996. Total net
proceeds to the Company of the initial offering and the overallotment
option were $18,451,628 after deducting offering costs of $2,248,372.
SUPPLEMENTARY EARNINGS PER SHARE - The Company utilized approximately
$7,500,000 of the net proceeds from the initial public offering to retire
debt and lines of credit outstanding. Had the Company issued a sufficient
number of shares to retire this debt, approximately 940,000 shares at a net
price of $8.04 per share after deducting offering costs, as of January 1,
1996, the net loss for the year would have been reduced by approximately
$125,000 in interest expense on these borrowings, and supplementary earnings
per share for the year ended December 31, 1996 would have been $(1.13).
AUTHORIZED SHARES - On March 2, 1996, the Company's shareholders approved
an amendment to the Company's Articles of Incorporation whereby the
authorized stock of the Company was stated as 24,000,000 shares of common
stock, no par value, and 6,000,000 undesignated shares, no par value. The
Company's Board of Directors may designate any series and fix any relative
rights and preferences of the undesignated stock. The authorized shares
have been restated in the financial statements to reflect the impact of
this amendment.
REVERSE STOCK SPLIT - On March 2, 1996, the Company's shareholders approved
a one-for-two reverse stock split. The reverse stock split became
effective on May 29, 1996 when the initial public offering of the Company's
common stock became effective. All share and per share amounts included in
the financial statements and notes thereto have been restated to reflect
the impact of the reverse stock split.
STOCK OPTION PLAN - On March 2, 1996, the Company's shareholders approved
the amendment of the Company's 1992 Stock Option Plan (the Plan) to provide
for the issuance of up to 625,000 shares of the Company's common stock
under the Plan. Under the Plan, incentive stock options and nonqualified
stock options may be granted to key employees and others at exercise prices
not less then 85% of the fair market
36
<PAGE>
value of the underlying common stock at the date of grant. The Board of
Directors establishes all terms and conditions of each grant. The
following summarizes stock option activity related to the Plan:
Option Shares
-------------
Outstanding Exercisable Price Range
Balances at December 31, 1994 27,750 7,126 $ 2.00 - 4.00
Granted 48,500 4.00
Became exercisable 32,000 2.00 - 4.00
--------- -------- -------------
Balances at December 31, 1995 76,250 39,126 $ 2.00 - 4.00
Granted 36,375 4.13 - 12.75
Canceled (9,500) 4.00
Became exercisable 14,449 2.00 - 4.00
--------- -------- -------------
Balances at December 31, 1996 103,125 53,575 $2.00 - 12.75
--------- -------- -------------
--------- -------- -------------
The following table summarizes information concerning currently
outstanding and exercisable options.
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Estimated Prices Outstanding Life Price Exercisable Price
$ 2.00 - $ 3.99 23,500 5.64 $ 2.00 18,941 $ 2.00
4.00 - 5.99 61,625 5.18 4.08 34,634 4.00
6.00 - 7.99 14,250 8.89 6.06 - -
8.00 - 9.99 1,250 10.00 8.75 - -
10.00 - 11.99 2,000 10.00 10.74 - -
12.00 - 13.99 500 10.00 12.75 - -
------- ------
103,125 53,575
------- ------
------- ------
During 1994, the Board of Directors granted an option to an unrelated party
to purchase 6,875 shares of the Company's common stock at an exercise price
of $4.00 per share. Options to purchase 2,500 shares of common stock were
exercised during 1995. Options to purchase 4,375 shares expired during
1995.
During 1995, the Board of Directors granted currently exercisable options
to purchase 5,000 shares of common stock at $4.00 per share to each outside
member of the Board of Directors (for options to purchase an aggregate of
15,000 shares of common stock). In addition, the Board of Directors
granted options to purchase 15,000 shares of common stock at $4.00 per
share to each outside member of the Board of Directors (for options to
purchase an aggregate of 45,000 shares of common stock), which vest over a
three-year period commencing March 15, 1996. All options granted to
members of the Board of Directors expire ten years after the date of grant.
Ten thousand of such options which had not vested expired during March 1996
upon the resignation of a member of the Board of Directors.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost
has been recognized for the stock options. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards vesting in 1995 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and income
(loss) per share would have been reduced (increased) to the proforma amounts
indicated below:
1995 1996
Net income (loss) - as reported $50,013 $(5,281,907)
------- -----------
------- -----------
Net income (loss) - pro forma $40,755 $(5,313,826)
------- -----------
------- -----------
Income (loss) per share - as reported $ 0.01 $ (1.25)
------- -----------
------- -----------
Income (loss) per share - pro forma $ 0.01 $ (1.25)
------- -----------
------- -----------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: dividend yield of 0%;
expected volatility of 0%, as only grants prior to the Company's initial
public offering have vested in either year; risk-free interest rate of
5.75% to 6.75%; and expected lives of 10 years.
37
<PAGE>
STOCK WARRANTS - The Company has granted warrants in connection with
certain debt financing obtained during 1992, 1993, and 1995 and in
connection with common stock issued during 1993 and 1994.
Warrants outstanding at December 31, 1995 and 1996 are as follows:
Number of
Shares Exercise
----------------- Price per Period
1995 1996 Share Exercisable
49,250 49,250 $2.00 Exercisable to November 1997
145,109 129,509 2.00 March 1994 to 1998
20,000 20,000 2.00 August 1994 to 1997
90,000 90,000 2.00 September 1994 to 1998
23,444 23,444 4.00 November 1994 to 1998
44,519 43,050 4.00 December 1994 to 1998
23,028 23,028 4.00 January 1995 to 1999
3,250 3,250 4.00 February 1995 to 1999
75,000 75,000 4.00 May 1996 to 2003
400,000 400,000 6.75 October 1996 to 2000 (A)
40,000 40,000 9.00 October 1996 to 2000 (A)
------- -------
913,600 896,531
------- -------
------- -------
(A) These warrants were issued in connection with the issuance of Bridge
Notes during fiscal 1995. In connection with this financing, the Company
issued warrants to the purchasers of the Bridge Notes to purchase a total
of 400,000 shares of the Company's common stock and to the selling agent of
the Bridge Note financing warrants to purchase a total of 40,000 shares of
the Company's common stock. The holders of the warrants may convert the
warrants, at any time during the exercise period, into the number of shares
of the Company's common stock obtained by dividing the differential between
the then-current market price of the Company's common stock, as defined,
and the warrant exercise price by such current market price of the
Company's common stock. The Company has obtained a valuation of the
warrants and has determined, based on such valuation, that the value of the
warrants, if any, is insignificant to the financial statements.
In connection with a $1,500,000 loan received in May 1995 from a director
of the Company, warrants were issued to the director to purchase up to
75,000 shares of the Company's common stock at an exercise price of $4.00
per share. The Company has obtained a valuation of the warrants and has
determined, based on such valuation, that the value of the warrants, if
any, is insignificant to the financial statements.
8. OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's joint venture partner, WABO,
notified the Company of its intention to cancel the joint venture agreement
and the related equipment purchase contract. In connection with the
cancellation of the equipment purchase contract, the Company determined
that certain equipment which was to have been sold to Fortune and was also
under development for the Company's own use was no longer economically
feasible or did not fit the Company's current manufacturing needs. This
equipment has been written down to its fair value, which in some cases was
determined as its cost less a restocking charge to the extent such
equipment can be returned to the manufacturer. Equipment which had no
foreseeable future value was written off. This resulted in a charge of
approximately $1,800,000 in the fourth quarter of 1996.
Also, the Company decided to discontinue its development of commercial
scale production equipment for its ZeroRay Glare and Radiation Control
filters due to technical difficulties encountered with the large
38
<PAGE>
scale production of the Gelglas optical gel adhesive. Management believes
that the resolution of these technical difficulties would have required
significant additional resources and would have raised the cost of the
filters to a point where the product could not be competitive with other
similar products. In connection with this decision, management determined
that, as of December 31, 1996, certain production equipment which had been
purchased to manufacture the ZeroRay product had been impaired. This
equipment was determined to have no foreseeable future value and was
written off. This resulted in a charge of approximately $378,000 in the
fourth quarter of 1996.
In addition, the Company determined that as a result of refocusing of its
operations, a piece of manufacturing equipment had little future value to
the Company at December 31, 1996. The machine has been written down to its
fair value, resulting in an impairment charge of approximately $272,000 in
the fourth quarter of 1996.
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was $146,492 and $484,160 for the years ended
December 31, 1995 and 1996, respectively. Property acquired by capital
lease was $128,466 and $40,083 for the years ended December 31, 1995 and
1996, respectively.
As a result of the equipment sales contracts discussed in Note 2, assets
classified as equipment held for sale to Fortune at December 31, 1995 are
classified within property, plant, and equipment at December 31, 1996. All
expenditures related to the Fortune contract during 1996 are classified as
cash flows from investing activities. Conversely, equipment held for sale
at December 31, 1996 had been classified within property, plant, and
equipment at December 31, 1995. All expenditures related to the contract
with a customer during 1996 have been classified as operating cash flows.
The net effect of the changes in classification of these two assets was a
noncash transfer from equipment held for sale to property, plant, and
equipment of $2,593,264.
During 1996, the Company received equipment with an estimated fair value of
$25,000 from a customer in lieu of payment on accounts receivable.
10. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Company entered into a sale-leaseback,
which will be treated as a financing transaction, for the coating equipment
in construction-in-progress that was originally intended to be sold to
Fortune. Under the terms of the agreement, the Company received proceeds
of $4.5 million of which $2.25 million is restricted and $2.25
million is available to the Company.
39
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
independent accountants during the two most recent fiscal years.
40
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors and executive officers as of December 31, 1996:
Name Age Position
---- --- --------
David E. Stevenson (4) 47 President, Chief Executive Officer, and
Chairman
Paul T. Fink 41 Chief Financial Officer, Treasurer,
Director
Kathleen V. Stevenson (4) 47 Secretary, Director
Robert S. Clarke (1) (3) 53 Director
Steven King (2) (3) 51 Director
Frank Brantman (1) 52 Director
- -------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.
(4) Resigned in March, 1997.
The Board of Directors is divided into three classes, and directors serve
for staggered three-year terms. Kathleen V. Stevenson served in a class with a
term expiring in 1997; Robert S. Clarke and Steven King serve in a class with a
term expiring in 1998; and David E. Stevenson served and Paul T. Fink serves in
a class with a term expiring in 1999. Frank Brantman was elected as a director
in October, 1996 by a unanimous vote of the board. He serves in the same class
as Kathleen Stevenson served and will stand for re-election at the annual
meeting of shareholders in 1997. Officers serve at the discretion of the
Board. David E. Stevenson and Kathleen V. Stevenson are husband and wife.
DAVID E. STEVENSON, the founder of the Company, served as a director and
officer of the Company from its inception in May 1991 to March 1997, when he
resigned from all of his positions with the Company. From 1988 to 1991, Mr.
Stevenson was employed as president and CEO of Viratec Thin Films, Inc. and
Viratec Tru Vue, Inc. of Faribault, Minnesota. From 1984 to 1988, Mr. Stevenson
was executive vice president and chief operating officer of Viracon, Inc. of
Owatonna, Minnesota. From 1983 to 1984, he was director of corporate
development for Apogee Enterprises, Inc., of Minneapolis, Minnesota. Mr.
Stevenson holds a Bachelor of Science degree from the University of Michigan and
is also a Certified Public Accountant.
PAUL T. FINK has been employed by the Company since January 1995. Mr. Fink
joined the Company as Controller, was named Chief Financial Officer in February
1996 and was elected as a Director in March 1996. Prior to joining the Company,
Mr. Fink was employed as the Chief Financial
41
<PAGE>
Officer of Vomela Specialty Company, St. Paul, Minnesota, from 1989 to 1994 and
Com-Tal Machine and Engineering, Vadnais Heights, Minnesota, from 1984 to 1989.
Mr. Fink was employed by McGladrey & Pullen, Certified Public Accountants, as an
auditor from 1980 to 1984. Mr. Fink holds a Bachelor of Science degree in
Accounting from the University of Minnesota, a Masters of Business
Administration degree in Financial Management from the University of St. Thomas,
and is also a Certified Public Accountant.
KATHLEEN V. STEVENSON served as a director and officer of the Company from
November 1991 to March 1997 and was a part-time employee of the Company
responsible for human resource matters. Ms. Stevenson resigned from all of her
positions with the Company in March of 1997. Ms. Stevenson has owned and
operated a tableware and linen mail order company in Wayzata, Minnesota since
1984. Previously, she was employed in various financial management and staff
positions with Norwest Bank, Minneapolis, Minnesota; Michigan Bank, Detroit,
Michigan, and City National Bank, Detroit, Michigan. Ms. Stevenson holds a
Bachelor of Science degree in Accounting from Michigan State University.
ROBERT S. CLARKE has been a director of the Company since March 1993.
Since 1981 Mr. Clarke has been the President of Alpen, Inc., Boulder, Colorado,
a leading manufacturer of architectural insulating glass. Since 1991 Mr. Clarke
has also been President, Chairman and a director of Vac-Tec Systems, Inc., a
public company involved in the manufacture of high performance windows utilizing
suspended vacuum-coated films.
STEVEN KING has been a director of the Company since May 1993. Since 1986
Mr. King has been Chairman and CEO of Landscape Structures, Inc., of Delano,
Minnesota, a company that creates and manufactures innovative play structures
promoting early childhood development. Mr. King is also a registered architect.
FRANK BRANTMAN has been a director of the Company since October of 1996.
Since 1988 he has been president of Leaf Industries, Inc., Minneapolis,
Minnesota, a contract manufacturer. Mr. Brantman is also executive vice
president and director of BMB, Inc., a Lake Forest, Illinois, medical products
company. Mr. Brantman has significant private and public board experience.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors to file initial reports of ownership
and reports of changes in ownership of common stock of the Company with the
Securities and Exchange Commission (SEC). Executive officers, directors and
persons who beneficially own more than ten percent of the common stock of the
Company are required by SEC regulations to furnish the Company with copies of
all Section 16 (a) forms they file. Based solely on a review of the copies of
such forms furnished to the Company and written representations from the
Company's officers and directors, all Section 16 (a) filing requirements
applicable to the Company's executive officers and directors have been
satisfied.
42
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last two fiscal years to the Company's Chief
Executive Officer. No employee of the Company received salary and bonus in
excess of $100,000 for the covered periods:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY OPTIONS (2)
- --------------------------- ----------- ------ -------------------
<S> <C> <C> <C>
David E. Stevenson . . . . . . . . . . . . . . . 1996 $86,719 --
Former Chief Executive Officer 1995 81,560 25,000 (3)
and Chairman (1) 1994 79,221 --
</TABLE>
- ----------------------------
(1) Resigned in March 1997.
(2) Number of shares of Common Stock subject to options granted during the year
indicated.
(3) Options to purchase 25,000 shares were granted to Mr. Stevenson as part of
his 1995 compensation as an officer and employee of the Company.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with David E. Stevenson,
its former Chief Executive Officer, for a five-year term ending December 31,
1997. The agreement provided for a maximum base compensation of $120,000 per
year if certain financial performance goals, as set by the Company's Board of
Directors, were met. The agreement also provided for the issuance of options, at
the discretion of the Board of Directors, for the purchase of the Company's
common stock. As of December 31, 1995, options to purchase 25,000 shares of the
Company's common stock had been issued to Mr. Stevenson pursuant to this
agreement. The agreement also provided for an annual incentive bonus in the
event the Company had earnings before taxes in excess of 30% of shareholders'
equity at the last day of the fiscal year. Mr. Stevenson never received any
annual incentive bonuses. Mr. Stevenson is required by the agreement to maintain
confidentiality of all Company trade secrets and upon termination is prohibited
from participating in a competing venture for a period of two years. Mr.
Stevenson resigned on March 19, 1997 and he is not entitled to any continuing
compensation or severance payments.
43
<PAGE>
STOCK OPTIONS
On December 15, 1992, the Board of Directors and shareholders of the
Company adopted the 1992 Stock Option Plan (the "Plan") in order to provide for
the granting of stock purchase options to employees and officers of the Company.
The Plan permits the granting of incentive stock options meeting the
requirements of Section 422A of the Internal Revenue Code of 1986, as amended,
and also nonqualified stock options which do not meet the requirements of such
section. As amended by the Board of Directors and approved by the shareholders
in February of 1996, the Company has reserved 625,000 shares of its common stock
for issuance upon the exercise of options granted under the Plan. As of the
date of this report, the Company has outstanding options to purchase an
aggregate of 76,250 shares under the Plan.
OPTIONS GRANTED FOR THE YEAR ENDED DECEMBER 31, 1996
No options were granted to a named executive officer during the year ended
December 31, 1996.
AGGREGATE OPTION VALUES AT DECEMBER 31, 1996.
The following table sets forth certain information at December 31, 1996, as
to options held by the Company's former Chief Executive Officer:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN THE MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David E. Stevenson . . . . . . . . . . . . . . 25,000 (1) ---- $0 (2) ----
</TABLE>
- --------------------
(1) Options expire if not exercised within 90 days of termination of
employment. Mr. Stevenson's employment was terminated on March 19, 1997.
(2) The value of exercisable options is equal to the difference between the
December 31, 1996 market price per share and the option exercise price per
share multiplied by the number of shares subject to options.
44
<PAGE>
COMPENSATION OF DIRECTORS
Directors were not paid fees for attending meetings in 1996. All directors
are reimbursed for their travel expenses incurred in attending Board meetings.
On March 1, 1995, the Board of Directors granted currently exercisable
options to purchase 5,000 shares of Common Stock at $4.00 per share to each of
three outside members of the Board of Directors (for options to purchase an
aggregate of 15,000 shares of Common Stock) as compensation for prior service to
the Company. On the same date, the Board of Directors also granted options to
purchase 15,000 shares of Common Stock at $4.00 per share to each of three
outside members of the Board of Directors (for options to purchase an aggregate
of 45,000 shares of Common Stock) as compensation for each outside director's
then current three-year term. These 45,000 options vest ratably over a three-
year period commencing March 15, 1996. All options expire ten years after the
date of grant. Options for 10,000 shares expired in March 1996 upon the
resignation of one of the outside directors. This director, who is a sitting
judge, resigned prior to the Company's initial public offering due to an ethical
conflict of interest relating to a judge serving on the board of a public
company.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the March 31, 1997 certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer, and (iv) all executive officers and directors of the Company
as a group.
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED (1) OWNERSHIP
- ---------------- ------------ ---------
DIRECTORS AND OFFICERS (2):
David E. Stevenson (3) (9). . . . . . . 350,042 6.76%
Paul T. Fink (4) . . . . . . . . . . . . 5,000 *
Kathleen V. Stevenson (5) (9). . . . . . 5,000 *
Robert S. Clarke (6) . . . . . . . . . . 15,000 *
Steven King (7) . . . . . . . . . . . . 336,319 6.27%
Frank Brantman . . . . . . . . . . . . . 1,000 *
All executive officers and directors as
a group (5 persons) (8) . . . . . . . . 712,361 13.16%
- --------------------
* Less than 1%.
45
<PAGE>
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of the effective date of this filing,
or within 60 days of such date, are treated as outstanding when determining
the percent of the class owned by such individual and when determining the
percent owned by the group. Unless otherwise indicated, each person named
or included in the group has sole voting and investment power with respect
to the shares of common stock set forth opposite the shareholder's name.
(2) The address of each director and officer of the Company is 21875 Grenada
Avenue, Lakeville, MN 55044.
(3) Includes 25,000 shares of common stock issuable pursuant to currently
exercisable options.
(4) Represents 5,000 shares of common stock issuable pursuant to currently
exercisable options.
(5) Represents 5,000 shares of common stock issuable pursuant to currently
exercisable options.
(6) Represents 15,000 shares of common stock issuable pursuant to currently
exercisable options.
(7) Includes (i) 15,000 shares of common stock issuable pursuant to currently
exercisable options, (ii) 95,000 shares of common stock issuable pursuant
to currently exercisable warrants, and (iii) 100,000 shares issuable upon
conversion of outstanding promissory notes.
(8) Includes 260,000 shares issuable pursuant to currently exercisable options
and warrants, and upon conversion of outstanding promissory notes.
(9) Resigned effective March 19, 1997.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS FROM DIRECTOR
Steven King, a director of the Company, made a loan to the Company in the
original principal amount of $1.5 million on May 1, 1995 for working capital and
general corporate purposes. The note issued in connection with the loan bore
interest from the date of issue at an annual rate of 3.75 % in excess of the
"Reference Rate" announced from time to time by First Bank National Association,
and was secured by substantially all equipment and intellectual property of the
Company. The note was subject to periodic payments of principal and accrued
interest. The note was prepaid without penalty in June 1996.
In connection with this loan, warrants to purchase up to 75,000 shares of
common stock were issued to Mr. King. The warrants are exercisable at any time
after April 30, 1996, and expire on May 1, 2003. The exercise price of these
warrants is $4.00 per share. The warrants provide for the automatic adjustment
of the number of shares issuable upon exercise of the warrants, and of the
exercise price, in certain events, including stock dividends, stock splits,
reorganizations, reclassifications and the merger, consolidation or sale of all
or substantially all of the assets of the Company. The warrants grant certain
registration rights with respect to the stock issuable upon exercise of the
warrants in the event the
46
<PAGE>
Company proposes to register any shares of its common stock under the Securities
Act of 1993. These registration rights are not applicable under certain
circumstances.
ITEM 13. EXHIBITS
(a) Exhibits.
The following exhibits are included with this Annual Report on Form 10-KSB
(or incorporated by reference) as required by Item 601 of Regulation S-B.
EXHIBIT
- -------
NO. DESCRIPTION
--- -----------
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996 (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, declared effective
May 29, 1996, hereinafter referred to as the "Registration
Statement").
3.2 Amended and Restated By-Laws of Photran Corporation, effective
December 23, 1992 as amended through February 3, 1996. *
4.1 Second Amended and Restated Articles of Incorporation and Amended and
Restated By-Laws of Photran Corporation as amended. (See Exhibits 3.1
and 3.2 above.). *
4.2 Specimen of Common Stock Certificate. *
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18,
1992, for the purchase of 1,700 shares, issued to Christopher T.
Vanyo. An identical Warrant For Purchase of Shares of Common Stock
was granted to one other individual for the purchase of 1,600
shares. *
4.4 Form of Common Stock Purchase Warrant. Identical Common Stock
Purchase Warrants in the amounts of 20,000 shares, 14,500 shares,
14,750 shares, 92,482 shares, and 52,627 shares were granted to R.J.
Steichen & Company on November 1, 1992, December 1, 1992, January 5,
1993, February 19, 1993 and March 17, 1993, respectively. *
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of
20,000 shares and 60,000 shares were granted to a total of eleven
individuals on August 8, 1993 and September 23, 1993, respectively. *
47
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.6 Form of Agent's Common Stock Purchase Warrant. Identical Agent's
Common Stock Purchase Warrants in the amounts of 5,750 shares and
24,250 shares were granted to R.J. Steichen & Company on September 23,
1993 and September 24, 1993, respectively. *
4.7 Form of Stock Purchase Warrant. Identical Stock Purchase Warrants in
the amounts of 23,444 shares, 44,519 shares, and 23,028 shares were
granted to R.J. Steichen & Company on November 17, 1993, December 14,
1993, and January 31, 1994, respectively. *
4.8 Form of Stock Purchase Warrant for 75,000 shares of Common Stock,
dated May 1, 1995, granted to Steven King. *
4.9 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a
total of 28 individuals on October 15, 1995 to purchase a total of
400,000 shares. *
4.10 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated
October 31, 1995, granted to John G. Kinnard and Company,
Incorporated. *
4.11 Representative's Warrant to purchase 160,000 shares of Common Stock,
dated June 3, 1996, granted to John G. Kinnard and Company,
Incorporated. *
10.1 Contract Agreement for the Joint Venture of Shenzhen Fortune
Conductive Glass Company, Ltd., between Photran Corporation and
Shenzhen Wabo (Group) Company, Limited. *
10.2 License Agreement between Photran Corporation and Applied
Elastromerics dated May 30, 1991, as amended. *
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries,
Inc. and Photran Corporation dated July 1991. *
10.4 Photran Corporation 1992 Stock Option Plan. *
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a total
of 76,250 shares. *
10.6 Employment Agreement between David E. Stevenson and Photran
Corporation dated January 1, 1993. *
48
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.7 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995. *
10.8 Equipment Lease between Textron and Photran Corporation dated June 21,
1995. *
10.9 Sale Agreement between Photran Corporation and Wintek Corporation
dated June 28, 1996 (incorporated by reference to the Registrant's
quarterly report on Form 10-QSB for the quarter ended June 30, 1996).
10.10 Equipment Lease Agreement between Photran Corporation and NBD
Equipment Finance, Inc. dated February 13, 1997. **
23.1 Consent of Deloitte & Touche LLP. **
27.1 Financial Data Schedule. **
99.1 Resignations of David E. Stevenson and Kathleen V. Stevenson, dated
March 19, 1997. **
- --------------------------------
* Incorporated by reference to the Registrant's Registration Statement.
** Denotes document filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
A report on Form 8-K was filed with the Commission on March 25, 1997
regarding the resignation of two persons who were officers and directors of the
Company, including David E. Stevenson, the Company's Chief Executive Officer,
Chairman and its founder.
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHOTRAN CORPORATION
Date: April 30, 1997 By: /s/ Paul T. Fink
---------------------------------
Paul T. Fink
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has also been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Paul T. Fink Date: April 30, 1997
- --------------------------------------
Paul T. Fink, Chief Financial Officer,
Treasurer, Secretary, Director
/s/ Frank Brantman Date: April 30, 1997
- --------------------------------------
Frank Brantman, Director
/s/ Robert S. Clarke Date: April 30, 1997
- --------------------------------------
Robert S. Clarke, Director
/s/ Steven King Date: April 30, 1997
- --------------------------------------
Steven King, Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Second Amended and Restated Articles of Incorporation of
Photran Corporation, effective March 2, 1996 (incorporated
by reference to the Registrant's Registration Statement on
Form SB-2, declared effective May 29, 1996, hereinafter
referred to as the "Registration Statement").
3.2 Amended and Restated By-Laws of Photran Corporation,
effective December 23, 1992 as amended through
February 3, 1996. *
4.1 Second Amended and Restated Articles of Incorporation and
Amended and Restated By-Laws of Photran Corporation as
amended. (See Exhibits 3.1 and 3.2 above.). *
4.2 Specimen of Common Stock Certificate. *
4.3 Warrant for Purchase of Shares of Common Stock, dated
November 18, 1992, for the purchase of 1,700 shares,
issued to Christopher T. Vanyo. An identical Warrant For
Purchase of Shares of Common Stock was granted to one
other individual for the purchase of 1,600 shares. *
4.4 Form of Common Stock Purchase Warrant. Identical Common
Stock Purchase Warrants in the amounts of 20,000 shares,
14,500 shares, 14,750 shares, 92,482 shares, and 52,627
shares were granted to R.J. Steichen & Company on
November 1, 1992, December 1, 1992, January 5, 1993,
February 19, 1993 and March 17, 1993, respectively. *
4.5 Form of Warrant for Purchase of Shares of Common Stock.
Identical Warrants for Purchase of Shares of Common Stock
in the amounts of 20,000 shares and 60,000 shares were
granted to a total of eleven individuals on August 8, 1993
and September 23, 1993, respectively. *
4.6 Form of Agent's Common Stock Purchase Warrant. Identical
Agent's Common Stock Purchase Warrants in the amounts of
5,750 shares and 24,250 shares were granted to R.J.
Steichen & Company on September 23, 1993 and September 24,
1993, respectively. *
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.7 Form of Stock Purchase Warrant. Identical Stock Purchase
Warrants in the amounts of 23,444 shares, 44,519 shares,
and 23,028 shares were granted to R.J. Steichen & Company
on November 17, 1993, December 14, 1993, and January 31,
1994, respectively. *
4.8 Form of Stock Purchase Warrant for 75,000 shares of Common
Stock, dated May 1, 1995, granted to Steven King.*
4.9 Form of Warrant for Purchase of Shares of Common Stock.
Identical Warrants for Purchase of Shares of Common Stock
were granted to a total of 28 individuals on October 15,
1995 to purchase a total of 400,000 shares. *
4.10 Agent's Warrant to Purchase 40,000 shares of Common Stock,
dated October 31, 1995, granted to John G. Kinnard and
Company, Incorporated. *
4.11 Representative's Warrant to purchase 160,000 shares of
Common Stock, dated June 3, 1996, granted to John G.
Kinnard and Company, Incorporated. *
10.1 Contract Agreement for the Joint Venture of Shenzhen
Fortune Conductive Glass Company, Ltd., between Photran
Corporation and Shenzhen Wabo (Group) Company, Limited.*
10.2 License Agreement between Photran Corporation and Applied
Elastromerics dated May 30, 1991, as amended. *
10.3 Office Warehouse Lease between Owobopte Rehabilitation
Industries, Inc. and Photran Corporation dated July 1991. *
10.4 Photran Corporation 1992 Stock Option Plan. *
10.5 Form of Incentive Option Agreement. Identical Incentive
Option Agreements were entered into with 66 employees for
purchase of a total of 76,250 shares. *
10.6 Employment Agreement between David E. Stevenson and
Photran Corporation dated January 1, 1993. *
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.7 Office Warehouse Lease between Sparta Foods, Inc. and
Photran Corporation dated December 21, 1995. *
10.8 Equipment Lease between Textron and Photran Corporation
dated June 21, 1995. *
10.9 Sale Agreement between Photran Corporation and Wintek
Corporation dated June 28, 1996 (incorporated by reference
to the Registrant's quarterly report on Form 10-QSB for
the quarter ended June 30, 1996).
10.10 Equipment Lease Agreement between Photran Corporation and
NBD Equipment Finance, Inc. dated February 13, 1997.**
23.1 Consent of Deloitte & Touche LLP. **
27.1 Financial Data Schedule. **
99.1 Resignations of David E. Stevenson and Kathleen V.
Stevenson, dated March 19, 1997. **
- --------------------------------
* Incorporated by reference to the Registrant's Registration Statement.
** Denotes document filed herewith.
<PAGE>
[LETTERHEAD]
BILL OF SALE
For the sum of $4,500,000.00, and other valuable consideration, Photran
Corporation hereby conveys to NDB Equipment Finance, Inc., all right, title and
interest to one (1) P1000 thin film vacuum coating line.
The seller warrants that the equipment is free and clear of all liens,
encumbrances and security interests.
Photran Corporation
- - By /s/ Paul T. Fink
--------------------------------
Paul T. Fink, CFO
--------------------------------
Printed Name - Title
- - Dated 2/18/97
----------------------------
<PAGE>
RIDER TO EQUIPMENT LEASE AGREEMENT
THIS RIDER is entered into by and between Photran Corporation (the
"Lessee") and NBD Equipment Finance, Inc. (the "Lessor") with respect to that
Equipment Lease Agreement of even date herewith (the "Lease"), pursuant to which
the Lessor has agreed to lease to the Lessee and the Lessee has agreed to lease
from the Lessor certain personal property more particularly described in the
Lease (the "Equipment").
The Lessor has agreed to purchase the Equipment from the Lessee and lease
it back to the Lessee under the terms of the Lease only if the Lessee makes the
additional agreements contained herein and contemplated hereby.
In consideration of the foregoing, and in order to induce each other to
enter into the Lease, the Lessor and Lessee agree as follows:
1. The Lessor is paying to Lessee the amount of $4,500,000.00 (the "Lease
Proceeds") on the date hereof for the Equipment. Of that amount, $2,250,000.00
will be wire transferred to an account designated by the Lessee for the
unrestricted sue by the Lessee (the "Unrestricted Proceeds") and $2,250,000.00
(the "Collateral Proceeds") will be deposited with NBD Bank, N.A. (the "Bank")
to be held as collateral in favor of the Lessor against the Lessee's obligations
under the Lease and under this Rider.
2. The Lessee will execute and deliver to the Lessor a separate
Assignment of Deposit Account under which the deposit of the Collateral
Proceeds, and any account into which such Collateral Proceeds is deposited, and
any rollover or replacement account to which such initial deposit is
subsequently credited, will be assigned to the Lessor.
3. The Lessee agrees with the Lessor that the Lessee is irrevocably bound
to purchase the Lessor's interest in the Equipment for an amount of
$2,250,000.00, upon the earlier to occur of (i) the end of the normally
scheduled term of the Lease, or (ii) a default under the Lease. Any part of such
purchase obligation which is unpaid after it becomes due will accrue interest at
a rate equal to the rate of interest announced from time to time by the First
National Bank of Chicago as its "Corporate Base Rate", plus three percent (3.0%)
per annum.
4. Any sale of the Lessor's interest in the Equipment to the Lessee shall
be as is where is with respect to the Equipment, and shall be without warranty
of any kind with respect to the Equipment, including, without limitation any
warranty of fitness for a particular purpose.
5. The element of damages contemplated by Section 13(c)(3) of the Lease
will instead of being the fair market value of the Equipment, be the amount of
$2,250,000.00.
6. If any part of the Collateral Proceeds subject to a security interest
in favor of Lessor is used to satisfy any obligation of the Lessee under the
Lease prior to the expiration of its term, the Lessee will deposit additional
cash with the Lessor, or with a third party subject to a lien in favor of the
Lessor, in the amount equivalent to any part of the original Collateral Proceeds
so used. If the amount of deposit collateral subject to a security interest in
favor of the Lessor ever declines below $2,250,000.00, the Lessee will deposit
additional cash with the Lessor, or with a third party subject to a lien in
favor of the Lessor, in the amount equivalent to such deficiency.
<PAGE>
7. Excepts as modified by this Rider, the Lease shall remain unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Rider to be entered into
as of February 13, 1997.
PHOTRAN CORPORATION
By: - /s/ Paul T. Fink
-----------------------------------
Paul T. Fink CFO
-----------------------------------
Printed Name - Title
NBD EQUIPMENT FINANCE, INC.
By:
-----------------------------------
-----------------------------------
Printed Name - Title
<PAGE>
- --------------------------------------------------------------------------------
DELEGATION OF TREASURY MANAGEMENT AUTHORITY
(PURSUANT TO SECTION 2(h) OF BANKING RESOLUTIONS)
In accordance with the Banking Resolutions of Photran Corporation
---------------------------------
[Insert the name of the Organization]
("Resolutions"), the undersigned delegates to each person named below, acting
singly [_______________], the authority referred to
[If persons listed below must act jointly, line out "singly" and insert
"jointly"; otherwise leave blank.]
in Section 2 of the Resolutions set forth opposite such person's name below:
Name Paragraph(s)* Title Signature
- ------------------ ------------- --------------- ------------------------
David E. Stevenson President & CEO /s/ David E. Stevenson
- ------------------ ------------- --------------- ------------------------
Paul T. Fink CFO /s/ Paul T. Fink
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
[PLEASE LINE OUT SPACES NOT USED]
DELEGATION OF FINANCIAL AUTHORITY
(PURSUANT TO SECTION 3(j) OF BANKING RESOLUTIONS)
In accordance with the Banking Resolutions of Photran Corporation
---------------------------------
[Insert the name of the Organization]
("Resolutions"), the undersigned delegates to each person named below, acting
singly [_______________], the authority referred to
[If officers listed below must act jointly, line out "singly" and insert
"jointly"; otherwise leave blank.]
in Section 3 of the Resolutions set forth opposite such person's name below:
Name Paragraph(s)** Title Signature
- ------------------ ------------- --------------- ------------------------
David E. Stevenson President & CEO /s/ David E. Stevenson
- ------------------ ------------- --------------- ------------------------
Paul T. Fink CFO /s/ Paul T. Fink
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
- ------------------ ------------- --------------- ------------------------
[PLEASE LINE OUT SPACES NOT USED]
In Witness Whereof, I have hereunto subscribed my name and affixed the seal of
the Organization, if applicable, this 13 day of February, 1997.
--------------------------------
[CORPORATE SEAL] [Print the name of the Customer]
[If any]
- By /s/ Paul T. Fink
--------------------------------
[Signature]
[A DELEGATION PURSUANT TO SECTION 2(h) MUST BE SIGNED BY AN
AUTHORIZED PERSON AND A DELEGATION PURSUANT TO SECTION 3(j)
BY AN AUTHORIZED OFFICER, AS DEFINED IN THE RESOLUTIONS.]
Name Paul T. Fink
-------------------------------
[Print the name of the signer]
* If all the authority in Section 2 is to be delegated, insert "All". If only
authority in a specific paragraph is to be delegated, insert that
paragraph's number (E.G., to issue "Funds Transfers", insert 2(c)).
** If all the authority in Section 3 is to be delegated, insert "All". If only
authority in a specific Section is to be delegated, insert that paragraph's
number (E.G., to "Borrow Money; Obtain Credit", insert "(3(a)").
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF INCUMBENCY
The undersigned certifies that: I am an authorized official of ________________,
duly organized and existing
[Insert the name of the Organization]
under the laws of the State of _____________, ("Organization"); the persons
named below are presently holding offices set forth opposite their respective
[Insert the State in which the Organization is established]
signatures below; and each such signature is his or her genuine signature:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Type or Print Name Signatures (Please sign inside the box) Phone and Fax
- -----------------------------------------------------------------------------------------
<S> <C> <C>
(Name) David E. Stevenson (Phone)
- -------------------------- --------------
(Title) President & CEO /s/ David E. Stevenson (Fax)
- -----------------------------------------------------------------------------------------
(Name) Paul T. Fink (Phone)
- -------------------------- --------------
(Title) CFO /s/ Paul T. Fink (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
(Name) (Phone)
- -------------------------- --------------
(Title) (Fax)
- -----------------------------------------------------------------------------------------
</TABLE>
In Witness Whereof, I have hereunto subscribed my name and affixed the seal of
the Organization, if applicable, this 13 day of February, 1997.
- /s/ Paul T. Fink
-----------------------------------
Name Paul T. Fink
------------------------------
[Print the name of the signer]
Title CFO
------------------------------
[Print the title of the signer]
<PAGE>
[LETTERHEAD]
REQUEST FOR INSURANCE
TO:
- --------------------------------
Insurance Company
Norwest Insurance - Mark Bierman
- --------------------------------
Agency/Agent
- --------------------------------
Address
- --------------------------------
(612) 921-2703
- --------------------------------
Telephone
RE: Insurance coverage on leased equipment as listed herein or attached hereto:
P1000 thin film vacuum coating line
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gentlemen,
I have entered in to a lease with NBD Equipment Finance, Inc. on the above
listed item(s). In accordance with the terms and conditions of said lease, I
hereby authorize and request this equipment to be insured for the amount
indicated, stating NBD Equipment Finance, Inc., as an additional insured and as
loss payee and insuring perils named as follows:
A. Damage and Liability /$4,500,000.00
-------------------------------------------------------------- -------------
B. /$
-------------------------------------------------------------- -------------
C. /$
-------------------------------------------------------------- -------------
Please make this coverage effective __________ and deliver evidence of coverage
as soon as possible to:
NBD EQUIPMENT FINANCE, INC.
ATTN: INSURANCE DESK
151 N. DELAWARE ST., SUITE 850
INDIANAPOLIS, IN 46204
Photran Corporation
-------------------------------------
- - By /s/ Paul T. Fink
----------------------------------
Address 21875 Grenada Avenue
-----------------------------
Lakeville, MN 55044
-------------------------------------
<PAGE>
BANKING RESOLUTIONS
Organization Name: Photran Corporation
State Where Organized:
Type of Organization: Corporation
The undersigned certifies that: I am an official of, and authorized to
certify on behalf of, the above named corporation which is duly organized and
existing under the laws of the State indicatd, ("Organization"); in connecton
with the use of the above name, the Organization has complied with the
relevant Indiana statute, and or any statute of any other jurisdiction whose
law may apply, covering the use of an assumed business sname; the following
is a complete, true and correct copy of certin resolutions of the
Organization, which resolutions were duly adopted and are in conformity with
the laws of the State where organized and the organizational documents
("Resolutions"); and the Resolutions have not been rescinded or modified and
are in full force and effect on the date hereof:
RESOLUTIONS
1. DESIGNATION OF DEPOSITORY; DEPOSITS. NBD Bank, N.A. ("NBD") is
designated a depository in which funds of the Organization may be deposited
by its officers, members, managers, partners, trustess, owners, agents and
employees, each of whom is authorized to endorse for deposit or negotiation,
or to deposit without indorsement, any and all checks, drafts, items,
instruments, notes, bills of exchange and orders for the payment of money
belonging to or coming into possession of the Organization (including,
without limitation, those payable to the Organization in any trade name or
style used by the Organization). Any indorsement may be by the written or
stammped indorsement of the Organization without designation of the person
making the indorsement.
2. TREASURY MANAGEMENT. Any one [_____________] of the officers, members,
[If Authorized Persons must act jointly, line out "one" and insert "two";
otherwise leave blank]
managers, partners, trustees, owners, agents and employees, as applicable, of
the Organization and the other persons designated below:
David E. Stevenson, Pres & CEO
-------------------------------
Paul T. Fink, Treasurer & CFO
-------------------------------
[Insert the titles of any other Authorized Persons.]
(each an "Authorized Person") is authorized to do any or all of the following on
behalf of the Organization:
(a) CHECKS WITH MANUAL SIGNATURES. Sign with manual signature any
and all checks, drafts, instruments, items and other orders for the payment
of money, including, without limitation, orders or directions in informal
or letter form and those drawn to the individual order of any person(s)
whose name(s) appear(s) as signer(s) thereof, against any funds at any time
standing to the credit of the Organization in any account with NBD
("Checks").
(b) CHECKS WITH FACSIMILE SIGNATURES. Authorize and direct NBD in
writing to honor Checks bearing or purporting to bear the facsimile
signature(s) made by using any name (including, without limitation, a
trade or assumed name), word, mark or symbol (whether made with or
generated by signature plate, any similar device, computer or machine),
regardless by whom or by what means the actual or purported facsimile
specimen(s) thereof on file with NBD.
(c) FUNDS TRANSFERS. Issue electronic, oral, telephonic or written
instructions with respect to the transfer of funds by: electronic means,
including, without limitation, automated clearinghouse systems (e.g., ACH)
and wire; book transfer; or Check; whether signed, if applicable, by
persons authorized by these Resolutions or authorized by NBD.
(d) DEPOSITORY TRANSFER CHECKS; PRE-AUTHORIZED CHECKS AND DRAFTS.
Authorize the issuance of depository transfer checks (each having
"Depository Transfer Check" printed on its face), pre-authorized checks or
pre-authorized drafts. These checks and drafts shall require no signature
other than the printed name of the Organization, which shall constitute the
official signature of the Organization for the prupose of these checks and
drafts.
(e) ACCOUNTS. Open accounts with NBD.
<PAGE>
(f) BANKING SERVICES. Utilize any other global treasury management
services provided by NBD (including, without limitation, electronic,
investment and financial advisory services).
(g) AGREEMENTS. Execute and deliver agreements, documents and
instruments (and amendments or waivers thereto or terminations thereof);
and take, or refrain from taking, action to carry into effect the
Resolutions set forth in this Section 2 and the transactions contemplated
by them upon such terms and conditions as such Authorized Person(s) deem(s)
advisable as evidenced by such execution, delivery, action or non-action.
(h) DELEGATION OF AUTHORITY. Delegate in writing, at any time and
from time to time, to one or more other persons acting as specified in the
delegation, any of the authority referred to in this Section 2 and the
Organization agrees to be bound by any action taken by, or non-action of,
such persons; and amend or revoke any such delegation.
3. FINANCIAL SERVICES. Any one [____________] of the following officers,
[If Authorized Officers must act jointly, line out "one" and insert
"two"; otherwise leave blank]
members, managers, partners, trustees, owners, agent and employees, as
applicable, of the Organization and the other persons designated below:
Chairman, President, Chief Executive Officer, any Vice President,
Chief Financial Officer, Treasurer, any Assistant Treasurer, Secretary
and ______________________________________________________________
[Insert the titles of any other Authorized Officers]
(each an "Authorized Officer") is authorized to do any or all of the following
on behalf of the Corporation:
(a) BORROW MONEY; OBTAIN CREDIT, LEASES. Borrow money, apply for
letters of credit and obtain other credit and financial accommodations,
from NBD on a current or long-term basis, or enter into equipment leasing
transactions.
(b) TELEPHONIC/ELECTRONIC EXTENSIONS OF CREDIT. Request a loan or
other financial accommodation by telephone, writing, telex or facsimile
transmission, or by any other form of communication deemed advisable by any
Authorized Officer or the requisite Authorized Officers. NBD shall incur no
liability for acting in accordance with requests or instructions which NBD
believes in good faith to have emanated from any Authorized Officer or the
requisite Authorized Officers.
(c) DERIVATIVE TRANSACTIONS. Enter into any: rate sway transactions,
basis swap, forward rate transaction, commodity swap, commodity option,
equity or equity index transaction, cap transaction, floor transaction,
collar transaction, currency swap transaction, cross-currency rate swap
transaction, currency option and any similar transaction or option and any
combination of the foregoing (collectively, "Derivative Transactions"); and
any cancellation, buy-back, reversal, termination or assignment of any
Derivative Transaction.
(d) DISCOUNT NOTES. Discount with NBD any notes, drafts, instruments
or acceptances held by the Organization.
(e) PROCEEDS OF CREDIT. Receive and receipt for, and sign orders and
issue instructions (written or oral) regarding, the handling and delivery
of the proceeds of any extension of credit.
(f) GRANT LIENS AND SECURITY INTERESTS. Mortgage, pledge, transfer,
assign to, and create liens and security interest in favor of, NBD in any
and all of the real, personal and mixed property and assets of the
Organization, including, without limitation, accounts receivable, bonds,
drafts, documents, equipment, instruments, inventory, machinery, notes,
stocks, real estate, securities and warehouse receipts of the Organization;
and to execute and deliver any and all financing statements, instruments,
mortgages and other documents in connection therewith.
(g) GUARANTIES. Assume, guaranty, endorse, contingently agree to
purchase or provide funds for the payment of, or otherwise agree to become
liable upon, the obligations of a third party to NBD or to maintain the
net worth or working cpaital or other financial condition of any third
party which is obligated to NBD; or to otherwise assure NBD against losses
relating to any extension of credit to a third party.
(h) SECURITY TRANSACTIONS. Purchase or sell through NBD, either as
agent, principal or otherwise, for immediate or future delivery, stocks,
bonds, commercial paper, commodities, any other instruments or
<PAGE>
securities, Federal Reserve funds, currency exchange, puts and warrants or
any other property whatsoever; deliver to and deposit with NBD for
safekeeping, custody or other purposes any and all securities of any kind
whatsoever, and, in connection therewith, to open and maintain with NBD
safekeeping or custody accounts and to sign agreements and orders and issue
instructions in respect thereto; and withdraw, receive and receipt for, and
sign orders and issue instructions for the handling, transfer,
registration, sale, substitution, exchange and delivery of, any stocks,
bonds, commercial paper, commodities and any other instruments or
securities or other property held by NBD for the account of the
Organization; such withdrawals, substitutions, exchanges, and deliveries,
whether subject to payment or not, may also be made by the bearer of any
order, receipt or request so signed.
(i) AGREEMENTS. Execute and deliver agreements, applications,
documents, drafts, instruments, notes and undertakings (and amendments or
waivers thereto or terminations thereof); and take, or refrain from taking,
action to carry into effect the Resolutions set forth in this Section 3 and
the transactions contemplated by them upon such terms and conditions,
including, without limitation, interest rates, as such Authorized
Officer(s) deem(s) advisable as evidenced by such execution, delivery,
action or non-action.
(j) DELEGATION OF AUTHORITY. Delegate in writing, at any time and
from time to time, to one or more other persons, acting as specified in the
delegation, any of the authority referred to in this Section 3 and the
Organization agrees to be bound by any action taken by, or non-action of,
such persons; and amend or revoke any such delegation.
4. NBD SUBSIDIARIES AND AFFILIATES. These Resolutions also apply in full to
any account, financial accommodation, service, transaction or property at or
with any facility or branch of NBD and its subsidiaries and affiliates and the
term "NBD" used in these Resolutions includes such subsidiaries and affiliates.
5. REVOCATION OR MODIFICATION OF RESOLUTIONS. These Resolutions and any
delegation made pursuant to them shall continue in full force and effect until
express written notice of its revocation or modification has been received by
NBD and NBD has had a reasonable opportunity to act upon such notice. However,
if the authority contained in these Resolutions or any delegation is revoked or
terminated by operation of law without such notice, it is resolved and agreed,
for the purpose of inducing NBD to act under these Resolutions and any
delegation, that the Organization shall indemnify and hold NBD harmless from any
loss suffered or liability incurred by NBD in so acting after such revocation or
termination without such notice.
In Witness Whereof, I have hereunto subscribed my name, and affixed the
Organization's seal, if applicable, this 13 day of February, 1997.
- /s/ Paul T. Fink
------------------------------------
[Signature]
Name Paul T. Fink, CFO
-------------------------------
[Print the name of the signer]
Title CFO
-------------------------------
[Print the title of the signer]
<PAGE>
SECURITY AGREEMENT
SECURITY AGREEMENT AND COLLATERAL ASSIGNMENT WITH RESPECT TO
SAFEKEEPING ACCOUNT AND SECURITIES
In order to induce NBD EQUIPMENT FINANCE, INC. (herein referred to as "Lender")
to make certain credit facilities available to PHOTRAN CORPORATION (the
"Borrower") in the aggregate amount of $4,500,000.00 under the terms of an
Equipment Lease Agreement and a related Rider to Equipment Lease Agreement both
of even date herewith (such documents, together with any renewal, extension,
amendment or replacement thereof being hereinafter referred to as the "Lease
Documents") and in order to secure all of Borrower's obligations to Lender under
the Lease Documents, the Borrower has agreed to grant to Lender a security
interest in all of Borrower's security entitlement in Safekeeping Account No.
__________ (the "Account") maintained with NBD BANK, N.A. ("Intermediary") and
in the investment property and financial assets credited to the Account itself.
NOW, THEREFORE, it is agreed by and between the parties hereto as follows:
1. As security for the obligations of Borrower to Lender under the Lease
Documents, including, without limitation, the repayment of all monies which
Lender may hereafter loan or advance to or for the benefit of the Borrower under
the Lease Documents, up to the dollar amount specified above, Borrower hereby
grants a security interest in and assigns and transfers to Lender all of
Borrower's right, title and interest in any investment property or financial
assets, deposits, certificates of deposit, monies owing to Borrower and funds
which may hereafter accumulate in or become withdrawable from or paid out of
such Account of Borrower with Intermediary, including any balance which may
remain to the credit of said account upon the closing thereof.
2. Intermediary is hereby authorized and directed to remit to Lender, upon
demand by Lender, all funds that may hereafter be withdrawable or payable out of
the Account of Borrower in the name of Borrower with Intermediary, and Borrower
agrees that Borrower will not withdraw or attempt to withdraw any funds or other
property from such account, except as permitted by this agreement. Lender is
hereby authorized and fully empowered, without further authority from Borrower,
to direct Intermediary to liquidate any or all investment property in such
account and to request Intermediary to remit to Lender, any funds that may be
due to Borrower, and Intermediary is hereby authorized and directed to pay to
Lender such sums as Lender shall so request or demand without the consent of or
notice to Borrower. INTERMEDIARY SHALL MAKE NO DISBURSEMENTS DIRECTLY TO
BORROWER, OTHER THAN FROM DIVIDEND AND INTEREST INCOME GENERATED BY THE
INVESTMENT PROPERTY AND FUNDS IN THE ACCOUNT, WITHOUT INQUIRY OF OR NOTICE TO
LENDER AND THE CONSENT OF LENDER. UNLESS NOTIFIED TO THE CONTRARY IN WRITING BY
LENDER, INTERMEDIARY MAY MAKE DISTRIBUTIONS TO BORROWER OF INTEREST INCOME
GENERATED BY ASSETS IN THE ACCOUNT AT ANY TIME WITHOUT NOTICE TO OR CONSENT OF
LENDER.
3. Borrower hereby constitutes and appoints Lender as Borrower's true, lawful
and irrevocable attorney-in-fact to demand, receive and enforce payments and to
give receipts, releases, satisfactions for, and to sue for all monies payable to
Borrower by Intermediary, and Borrower agrees that this may be done in the name
of Lender with the same force and effect as Borrower could do had this Agreement
not been made. Any and all monies or payments which may be received by
Borrower, to which Lender is entitled under and by reason of this Agreement,
will be received by Borrower as trustee for Lender, and will be immediately
delivered, in kind, to Lender without commingling.
4. BORROWER MAY NOT EXECUTE ANY SALE TRANSACTIONS IN THE ACCOUNT AND
INTERMEDIARY MAY NOT ACCEPT FOR EXECUTION ANY SUCH TRANSACTIONS WITHOUT NOTICE
TO AND THE CONCURRENCE OF LENDER. THE PROCEEDS OF ANY SUCH SALE, INCLUDING ANY
1
<PAGE>
ASSET IN WHICH THE PROCEEDS ARE REINVESTED, WILL REMAIN IN THE ACCOUNT, WILL NOT
DISTRIBUTED TO BORROWER, AND WILL REMAIN SUBJECT TO THE SECURITY INTEREST
CREATED UNDER THIS AGREEMENT. ANY ASSET WHICH CONSISTS OF A MATURED DEBT OWED TO
BORROWER, SUCH AS BILLS, NOTES, BONDS OR CERTIFICATES OF DEPOSIT, MAY BE
REINVESTED IN AN ASSET OF LIKE QUALITY AND MATURITY, WITHOUT ANY NOTICE TO OR
INQUIRY OF THE LENDER SO LONG AS THE REPLACEMENT INVESTMENT REMAINS IN THE
ACCOUNT AND IS SUBJECT TO THE SECURITY INTEREST CREATED UNDER THIS AGREEMENT.
5. Upon the occurrence of a default under the terms of the Lease Documents,
Lender shall be entitled without the consent or concurrence of Borrower, to
direct Intermediary to liquidate any or all then outstanding (investment
property or financial assets) in Borrower's Account and to direct Intermediary
to pay Lender such credit balance as shall exist in the Account after such
liquidation and after the payment to Intermediary of all the indebtedness of
Borrower to Intermediary in connection with transactions in such Account.
6. Any sums paid under this Agreement by Intermediary to Lender from the
accounts of Borrower shall be applied by Lender to the payment of the
obligations owing by Borrower to Lender under the Lease Documents. The balance,
if any, remaining after the payment of said obligations shall be paid by Lender
to Borrower. The receipt or receipts of Lender for such funds so paid to it by
Intermediary shall, as to Intermediary, operate as the receipt of Borrower as
fully and as completely as if funds had been paid to Borrower in person and
receipted for by Borrower. The liens created by this Agreement shall be junior
to the liens claimed by Intermediary for indebtedness owed to Intermediary by
Borrower.
7. Lender is hereby authorized and empowered to receive from Intermediary, and
Intermediary is authorized and directed to deliver to Lender and at Borrower's
expense, copies of all confirmations and other notices with respect to all
transactions executed by Intermediary for the account of Borrower, copies of the
periodic Account statements of Borrower, and copies of any and all matters
pertaining to the accounts of Borrower with Intermediary, including, without
limitation, copies of all correspondence directed to Borrower.
8. As between Borrower and Lender, this Agreement shall remain in full force
and effect until canceled in writing by the Lender. Any cancellation of this
agreement shall be without effect as to Intermediary until Intermediary is
notified in writing by Lender.
9. Borrower hereby represents and warrants to Lender that neither the Account
above assigned, nor any of the investment property therein contained have not
heretofore been alienated or assigned, and that Borrower will not allow any
lien, security interest or encumbrance to attach to such Account (other than the
security interest of Lender) without the written consent of Lender.
10. This Agreement shall be binding upon Borrower, and upon Borrower's
successors and assigns, including, without limitation, any trustee in
bankruptcy, and it shall be binding upon and inure to the benefit of the
successors and assigns of Lender and Intermediary.
11. Borrower agrees to indemnify, defend, save and hold free and harmless
Intermediary from any claim of Borrower, Lender or any third party arising out
of compliance with any instruction or requests of Borrower or Lender with
respect to the Account, or any attempted attachment or garnishment of such
Account, or any property therein contained, including all reasonable fees and
expenses, including without limitation, attorneys' fees.
12. Intermediary owes no duty to Lender to do or refrain from doing any act
other than to follow specific instructions from Lender as authorized by this
Agreement. In all other respects, the operation and management of Borrower's
account will continue unmodified, except as specifically indicated to the
contrary by this Agreement.
<PAGE>
Dated as of 2/13, 1997.
PHOTRAN CORPORATION
By: - /s/ Paul T. Fink
-----------------------------
Paul T. Fink CFO
-----------------------------
Printed Name - Title
STATE OF MN )
)
COUNTY OF DAKOTA )
Before me, a Notary Public in and for said County and State, personally
appeared Paul Fink, the CFO of Photran Corporation and acknowledged the
execution of the foregoing document as its authorized act and deed.
Witness my hand and Notarial Seal.
/s/ Adrienne Schneider
- -----------------------------
Signature - Notary Public
ADRIENNE SCHNEIDER
- ----------------------------- [SEAL]
Printed Name - Notary Public
My County of Residence: DAKOTA
-----------------
My Commission Expires: 1/31/00
-----------------
<PAGE>
[LOGO] EQUIPMENT LEASE AGREEMENT
Lease Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LESSEE SELLER
- --------------------------------------------------------------------------------
Name Name
Photran Corporation
- --------------------------------------------------------------------------------
Address Address
21875 Grenada Avenue
- --------------------------------------------------------------------------------
City State Zip Code City State Zip Code
Lakeville MN 55044
- --------------------------------------------------------------------------------
Tax Payer I.D. No. Contact Phone Contact Phone
1574923 Paul Fink 612-469-4880
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUANTITY DESCRIPTION OF EQUIPMENT (GIVE MANUFACTURER, MODEL NO., SERIAL NO. ETC)
1 P1000 thin film vacuum coating line
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Location of Equipment if different than above
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RENTAL TERMS AND FEES:
- --------------------------------------------------------------------------------
LEASE TERM: MONTHLY RENTAL PAYMENT:
Term in Months
36 36 Payments of $90,120.31 Plus Tax $5,857.82 Total $95,978.13
- -------------- -- --------- -------- ---------
Rent payments Followed by (When Applicable)
are due on the
Payments of $ Plus Tax $ Total $
-- --------- -------- ----------
- --------------
day of each
month. Payments of $ Plus Tax $ Total $
-- --------- -------- ----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADVANCE PAYMENTS:
/ / First Month $______________
/ / Last Month $______________
/ / Security Deposit $______________
/ / UCC Filing Fee $______________
/ / Doc. Prep. Fee $______________
/ / Title Fee $______________
/ / Other $______________
TOTAL DUE WITH LEASE $ -0-
--------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL PROVISIONS: See Rider to Equipment Lease Agreement of even date
herewith, the terms of which are incorporated herein. PTF Initial
------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERMS AND CONDITIONS OF LEASE AGREEMENT
1. TERM AND RENT. Lessor agrees to lease the above described equipment (the
"Equipment") to the Lessee for the term and rental as set forth, payment of the
rental installments to begin on the Date of Acceptance. As long as no event of
default exists, Lessor will not interfere with Lessee's possession, use and
quiet enjoyment of the Equipment.
2. PURCHASE AND ACCEPTANCE. Lessee requests Lessor to purchase the Equipment
from the Seller and arrange for delivery to Lessee, at Lessee's expense.
Delivery shall be deemed complete upon the Date of Acceptance. LESSOR SHALL NOT
BE LIABLE FOR LOSS OR DAMAGE OR FOR THE DELAY OR FAILURE OF SELLER TO FILL OR
DELIVER THE ORDER FOR THE EQUIPMENT. THE LESSEE REPRESENTS THAT LESSEE HAS
SELECTED THE EQUIPMENT DESCRIBED ABOVE BEFORE HAVING REQUESTED LESSOR TO
PURCHASE SAME FOR LEASING TO LESSEE.
3. NON-CANCELABLE LEASE. THIS IS A NON-CANCELABLE LEASE. When Lessee signs
and delivers a certificate of acceptance for the Equipment, its obligations to
pay all rent and other amounts when due for the Equipment and otherwise to
perform as required under the lease are unconditional, irrevocable and
independent. These obligations are not subject to cancellation, termination,
modification, repudiation, excuse or substitution by Lessee. Lessee is not
entitled to any abatement, reduction, offset, defense or counterclaim with
respect to these obligations for any reason whatsoever, whether arising out of
default or other claims against Lessor or the manufacturer or supplier of the
Equipment, defects in or damage to the Equipment, its loss or destruction or
otherwise.
4. DISCLAIMER OF WARRANTIES BY LESSOR; RIGHTS OF LESSEE. LESSOR MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING THE
CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY
PARTICULAR PURPOSE, AND, AS TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS-IS."
UNDER NO CIRCUMSTANCES SHALL LESSOR BE RESPONSIBLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS LEASE AND/OR THE EQUIPMENT
THEREUNDER. LESSEE IS ENTITLED TO THE PROMISES AND WARRANTIES, INCLUDING THOSE
OF ANY THIRD PARTY, PROVIDED TO LESSOR BY THE SELLER IN CONNECTION WITH OR AS
PART OF THE CONTRACT BY WHICH LESSOR ACQUIRED THE EQUIPMENT OR THE RIGHT TO
POSSESSION AND USE OF THE EQUIPMENT. LESSEE MAY COMMUNICATE WITH THE SELLER AND
RECEIVE AN ACCURATE AND COMPLETE STATEMENT OF THOSE RIGHTS, PROMISES AND
WARRANTIES, INCLUDING ANY DISCLAIMERS AND LIMITATIONS OF THEM OR OF REMEDIES.
5. CLAIMS AGAINST SELLER; SELLER NOT AN AGENT OF LESSOR. If the Equipment is
not properly installed, does not operate as represented or warranted by the
Seller or is unsatisfactory for any reason, Lessee shall make any claim on
account thereof solely against the Seller and shall nevertheless pay Lessor all
rent payable under this Lease. Lessor agrees to assign to Lessee, solely for
the purpose of making and prosecuting any such claim, any rights it
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT: Lessor and Lessee agree to all the terms of this Lease, including
the terms set forth on the reverse. THIS LEASE SHALL NOT BE BINDING ON LESSOR,
HOWEVER, UNTIL IT HAS BEEN ACCEPTED AND EXECUTED BY AN OFFICER OF LESSOR AT ITS
OFFICE. LESSOR AND LESSEE IRREVOCABLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY
JURY.
Lessor: NBD Equipment Finance, Inc.
----------------------------------------------------------------------
By:
-----------------------------------------------------------------------------
Signature Title
Date
----------------------
Lessee: Photran Corporation
------------------------------------------------------------------------
------------------------------------------------------------------------
By: /s/ Paul T. Fink, CFO
-----------------------------------------------------------------------------
Signature Title
Date 2/13/97
----------------------
DELIVERY AND ACCEPTANCE CERTIFICATE: The undersigned Lessee acknowledges
receipt in good condition of all the Equipment described above and accepts the
Equipment in accordance with all terms and conditions of this Lease. Lessee
agrees that Lessor has fully and satisfactorily performed all covenants and
conditions to be performed by it under this Lease.
Lessee: Photran Corporation
------------------------------------------------------------------------
------------------------------------------------------------------------
By: /s/ Paul T. Fink CFO
----------------------------------------------------------------------------
Signature Title
Date of Acceptance 2/13/97
-----------------
- --------------------------------------------------------------------------------
GUARANTY
In consideration of the Lessor leasing to the Lessee and other good and valuable
consideration, the receipt of which is acknowledged, the undersigned guarantee
performance of all the covenants, conditions, and payments when due, whether by
acceleration or otherwise, of the above Lease by the Lessee. In the event of
default, the undersigned waive notice of any modification, amendment or
extension of the Lease.
The undersigned agree that, if this guaranty is executed by two or more
guarantors, the obligation shall be joint and several. THE UNDERSIGNED
IRREVOCABLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY.
An Individual An Individual
- ------------------------- ------------------------
(Signature) (Signature)
Home Address Home Address
--------------------------- --------------------------
- --------------------------------------- --------------------------------------
Dated: Dated:
-------------------------------- --------------------------------
- --------------------------------------------------------------------------------
<PAGE>
may have against the Seller for breach of warranty or representation respecting
the Equipment. Notwithstanding any fees that must be paid to Seller or any
agent of Seller. Lessee understands and agrees that neither the Seller nor any
agent or employee of the Seller is an agent or employee of the Lessor and that
neither the Seller nor its agent or employee is authorized to waive or alter any
term or condition of this Lease.
6. PAYMENTS. Lessee agrees to pay all Lease payments on the date designated
by Lessor and to pay such other payments and charges as provided in this Lease.
These payments shall be increased by any cost or expense Lessor incurs to
preserve the Equipment or to pay taxes, assessments, fees, penalties, liens or
encumbrances. IF THE COST OF THE EQUIPMENT VARIES FROM THE ESTIMATE UPON WHICH
THIS LEASE IS BASED, LESSEE AUTHORIZES LESSOR TO ADJUST THE LEASE PAYMENTS
PROPORTIONATELY, UPWARD OR DOWNWARD, NOT TO EXCEED TEN PERCENT (10%), TO
COMPENSATE FOR SUCH VARIATION. Each payment will be applied first, at the
Lessor's discretion, to the oldest charge due under the Lease. The acceptance
by Lessor of a smaller sum than due at any time under this Lease shall not
constitute a release or an accord and satisfaction for any greater sum due or to
become due regardless of any endorsement restriction.
7. TITLE; LOCATION OF THE EQUIPMENT; TERMINATION. Title to the Equipment is
in the Lessor and under no circumstances shall pass to Lessee. The Equipment
shall be kept at Lessee's address indicated on this Lease and shall not be
removed without the written consent of Lessor. At the termination of this Lease
or upon Lessee's default, Lessee, at its own expense, shall assemble and deliver
the Equipment to Lessor at such place as Lessor may designate in writing, in
good order and repair, ordinary wear and tear excepted. Lessee shall give
Lessor 90 days written notice prior to termination that it is returning the
Equipment.
8. NO ASSIGNMENT BY LESSEE; ASSIGNMENT BY LESSOR. NEITHER THIS LEASE NOR
LESSEE'S RIGHTS SHALL BE ASSIGNED BY THE LESSEE, NOR SHALL ANY OF THE EQUIPMENT
BE SUBLEASED BY THE LESSEE WITHOUT THE WRITTEN CONSENT OF THE LESSOR. Lessor
may at any time sell or assign all or part of its right, title and interest in
and to this Lease and in and to each item of Equipment and monies to become due
to the Lessor hereunder, and Lessor may grant security interests in the
Equipment, subject to the Lessee's rights therein as set forth in this Lease,
and in such events, all the provisions of this Lease for the benefit of Lessor
shall inure to the benefit of and be exercised by or on behalf of such assignee,
but the assignee, shall not be liable for or be required to perform any of
Lessor's obligations to Lessee. All rental payments due and to become due under
this Lease and assigned by Lessor shall be paid directly to assignee, upon
written notice of such assignment to Lessee and the right of the assignee to the
payment of assigned rentals and performance of all Lessee's obligations and to
exercise any other of Lessor's rights hereunder shall not be subject to any
defense, counterclaim or setoff which the Lessee may have or assert against the
Lessor and the Lessee hereby agrees that it will not assert any such defenses,
setoffs, counterclaims and claims against the assignee.
9. INSURANCE. Lessee shall keep the Equipment insured against loss by fire,
theft and all other hazards (comprehensive coverage) at replacement cost by
insurers and in form, amount and coverage satisfactory to Lessor. Lessee
appoints Lessor as Lessee's attorney in fact to endorse any loss payment or
returned premium check and to make any claim under such insurance. Said
policies shall be endorsed with Lessor as a loss payee and additional insured
and shall contain provisions (a) that such insurance shall not be cancelled
except upon ten days notice to Lessor and (b) that the interest of Lessor shall
not be invalidated by any act of Lessee. The policies of insurance or
endorsement certificates shall be delivered to Lessor within 30 days of the Date
of Acceptance. In the event of loss, destruction or theft of, or damage to, any
of the Equipment, Lessee will immediately notify Lessor.
The loss, destruction, theft of or damage to the Equipment shall not relieve the
Lessee from its obligation to pay the full rentals payable hereunder and
Lessor's remaining residual interest. Any sums collected from insurance for the
total loss of any of the Equipment shall be credited to the final installments
of rent payable hereunder and Lessor's remaining residual interest. If any of
the Equipment is partially damaged, Lessee shall repair such damage at its own
cost and expense and any sums collected on insurance on account of such damage
shall be applied to the cost thereof, but on default of the Lessee in repairing
such damage within 30 days of the occurrence thereof, the sums collected
therefor shall be applied to the last maturing installments of rent payable
hereunder or to the repair of the Equipment at Lessor's sole option.
Lessee shall insure the Lessor and Lessee with respect to liability for personal
injuries, damage to or loss of use of property resulting from the ownership, use
and operation of the Equipment with insurers satisfactory to Lessor in amounts
of at least $500,000 per individual and $1,000,000 per occurrence for personal
injuries and $100,000 for property damage, and deliver the policies or
certificates thereof to Lessor.
If Lessee shall default in obtaining any insurance described above, Lessor may
place such insurance. Any premiums paid by Lessor shall be additional rent
payable on demand with interest at the highest legal rate from the date of
payment. At Lessor's sole option, such amounts together with interest may be
added to the lease balance to be paid by Lessee as additional monthly rental.
10. REPAIRS; USE; ALTERATIONS. Lessee, at its own expense, shall keep the
Equipment maintained in good repair, condition and working order; shall use the
Equipment lawfully and shall not alter the Equipment without the Lessor's prior
written consent. All items which become attached to or a part of the Equipment
become the property of Lessor.
11. TAXES. Lessee shall reimburse the Lessor (or pay directly if, but only if
instructed by Lessor) for all charges and taxes (local, state and federal) which
may now or hereafter be imposed or levied upon the Lease, rental, operation,
leasing, sale, ownership, possession or use of the Equipment excluding all taxes
based upon income or gross receipts of Lessor.
12. DEFAULT. Any of the following shall constitute an event of default by
Lessee: a) Lessee fails to pay when due, any rent or other amount required by
this Lease; b) Lessee breaches any covenant of this Lease or fails to promptly
perform any of its terms or conditions, including but not limited to return of
the Equipment at the expiration of the lease term; c) Lessee makes an assignment
for the benefit of creditors; d) a petition is filed by or against Lessee in
bankruptcy or for the appointment of a receiver; e) dissolution or suspension of
Lessee's usual business; f) Lessee makes a bulk transfer or sale of furniture,
furnishings, fixtures or other equipment or inventory; g) any representation,
warranty, or signature made by Lessee in this Lease or related document is
incorrect, fraudulent or breached; or h) Lessee defaults under the terms of any
agreement or instrument relating to any lease or debt for borrowed money such
that the lessor accelerates the rent or the creditor declares the debt due
before its maturity. Lessee agrees to give Lessor prompt notice upon the
occurrence of a default.
13. LESSOR'S REMEDIES UPON DEFAULT. If an event of default occurs, Lessee's
right to continue in possession of the Equipment shall immediately cease, and
Lessor shall have the right to execute any one or more of the following
remedies in order to protect its interests and reasonably expected profits and
benefits of bargains with the Lessee: a) cancel this Lease; b) take possession
of the Equipment without liability to Lessee for any damages occasioned by such
taking; c) recover from Lessee, with or without repossessing the Equipment, the
sum of (1) accrued and unpaid rent and other amounts payable as of the date of
default, (2) the present value (as of the date of payment) of the rent for the
remaining term of this Lease agreement at 5% per annum; and (3) the residual
value of the Equipment as measured by its anticipated fair market value as of
the expiration of the lease term; provided, however that upon repossession or
surrender of the Equipment, Lessor shall either sell, lease or otherwise dispose
of the Equipment in a commercially reasonable manner, with or without notice and
on public or private bid, and apply the net proceeds (after deducting all
expenses, including attorneys' fees incurred in connection therewith), to the
sum of (2) and (3) above, or Lessor may retain any repossessed Equipment and
credit its fair market value to the sums of (2) and (3) above; or d) exercise
any other right or remedy available to Lessor at law or in equity.
In the event Lessor assigns its right to receive rentals under this agreement
(but not its residual interest) and in the further event of default by Lessee,
Lessee remains liable to Lessor for Lessor's remaining residual interest in the
Equipment as measured above. This liability of Lessee is unconditional and is
not affected by Lessor's assignee repossessing and/or selling the Equipment to
wholly or partially satisfy assignee's right to receive the assigned rentals.
14. RENEWAL. If the Equipment is not delivered to Lessor at the termination
hereof in accordance with paragraph 7, then this Lease shall renew from month to
month upon the same terms and conditions, subject to the right of Lessor or
Lessee to terminate the renewed Lease on 30 days written notice, in which event,
the Equipment shall immediately be returned to Lessor.
15. LATE CHARGES. Without limiting Lessor's remedies above, if Lessee shall
fail to pay any amount of rental or other payment for a period of ten days after
its due date, Lessee agrees to pay Lessor a late charge of 5% of each such
payment or installment, with a minimum late charge of $25.00.
16. FINANCING STATEMENTS. The Lessor is authorized to file a financing
statement signed only by the Lessor in accordance with the Uniform Commercial
Code or one signed by Lessor, as Lessee's attorney in fact.
17. FINANCIAL REPORTS. Upon request by Lessor, Lessee will promptly furnish to
Lessor all financial reports deemed necessary by Lessor.
18. JURISDICTION; VENUE. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF MICHIGAN. LESSEE CONSENTS TO THE JURISDICTION OF THE COURTS OF
MICHIGAN AND TO VENUE IN THE COURTS OF THE COUNTY OF OAKLAND. NO PROVISION
WHICH MAY BE CONSTRUED AS UNENFORCEABLE SHALL IN ANY WAY INVALIDATE ANY OTHER
PROVISION, ALL OF WHICH SHALL REMAIN IN FULL FORCE AND EFFECT.
19. WARRANTIES BY LESSEE. Lessee warrants and represents that: (a) the
Equipment is being leased for business purposes; (b) all signatures are genuine;
(c) the person signing the Lease is authorized to do so; (d) if more than one
Lessee named, the liability of each is agreed to be joint and several.
20. INDEMNITY BY LESSEE. LESSEE AGREES TO INDEMNIFY AND HOLD LESSOR OR ANY
ASSIGNEE HARMLESS FROM ANY AND ALL CLAIMS, ACTIONS, PROCEEDINGS, EXPENSES,
DAMAGES, AND LIABILITIES, INCLUDING ATTORNEYS' FEES, ARISING OUT OF OR IN ANY
MANNER PERTAINING TO THE EQUIPMENT OR THIS LEASE INCLUDING, WITHOUT LIMITATION,
THE OWNERSHIP, SELECTION, POSSESSION, PURCHASE, DELIVERY, INSTALLATION, LEASING,
OPERATION, USE, CONTROL, MAINTENANCE AND RETURN OF THE EQUIPMENT AND THE
RECOVERY OF CLAIMS UNDER INSURANCE POLICIES.
In addition, notwithstanding any other provision of this Lease, if as to any
Equipment the modified accelerated cost recovery system or depreciation
deductions allowed under the Internal Revenue Code of 1986, as amended, (the
"Code") shall be lost, disallowed, eliminated, reduced, recaptured or otherwise
unavailable to Lessor for any reason, then Lessee shall pay to Lessor as
additional rent within 30 days after such a loss an amount which shall be equal
to the sum of (i) the additional federal, state, local and foreign income or any
other taxes payable as a result of such loss, disallowance, elimination,
reduction, recapture or unavailability of accelerated cost recovery or
depreciation deductions plus (ii) the amount of any interest, penalties or
additions to tax payable by the Lessor as a result of such additional tax.
Lessee acknowledges that the Equipment to be leased by Lessor to Lessee pursuant
to this agreement is owned by Lessor ("Owner"). It is the intent of
Owner/Lessor and Lessee that this Lease constitute a true lease for Federal
income tax purposes so that, for the purpose of determining its liability for
Federal income taxes, Owner shall be entitled to the tax benefits as are
provided by the Code to an owner of personal property.
The indemnities given and liabilities assumed by the Lessee pursuant to this
Section 20 shall continue in full force and effect notwithstanding the
expiration or other termination of this Lease.
21. NOTICES. Notice to a party shall be given by certified mail, return
receipt requested.
22. LABELS AFFIXED TO EQUIPMENT. Lessor shall have the right, but not the
obligation, to affix or attach ownership identification labels to the Equipment.
Lessee agrees not to remove any such labels.
23. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses,
including reasonable attorneys' fees and the fees of any collection agencies,
incurred by Lessor in enforcing any of the terms, conditions, or provisions
hereof or in protecting Lessor's rights herein. These costs and expenses shall
include, without limitation, any costs or expenses incurred by the Lessor in any
bankruptcy, reorganization, insolvency or other similar proceeding.
24. ENTIRE AGREEMENT. This Lease constitutes the entire agreement of the
parties in connection with the Equipment. Neither party relies on any other
statements, understandings, representations or assurances, the same, if any,
having been merged into this agreement. This agreement cannot be modified
except by a writing signed by each party. This agreement inures to the benefit
of the heirs, executors, administrators, successors and assigns of the parties.
<PAGE>
<TABLE>
<S><C>
This Financing Statement is presented to Filing Officer Number of additional sheets presented
for filing pursuant to the Uniform Commercial Code.
- ----------------------------------------------------------------------------------------------------------------------------------
Debtor(s) (Last Name First) and Address(es) |Secured Party(ies) and Address(es) | For Filing Officer (Date, Time, Number, and
| | Filing Office)
Photran Corporation |NBD Equipment Finance, Inc. |
21875 Grenada Avenue |151 N. Delaware St., #850 |
Lakeville, MN 55044 |Indianapolis, IN 46024 |
| |
| |
1574923 | |
- ------------------------------------------------------------------------------------|
This Financing Statement covers the |Name and Address of Assignee of Secured|
following types (or items) of property |Party |
(include description of real estate when | |
collateral is crops) | |
| |
1 P1000 thin film vacuum coating | |
line ---------------------------------------|
|
All accessions and proceeds due. |
|
This transaction is a lease between NBD Equipment Finance, Inc. and Photran |
Corporation. This statement is filed for protection only. |
|----------------------------------------------
/x/ Products of Collateral are also covered. (See IC 26-1-9-315) |/ /Debtor is a transmitting utility as defined
| in IC 26-1-9-105.
- ------------------------------------------------------------------------------------------------------------------------------------
Filed with: /x/ Secretary of State MINNESOTA / / Recorder of ________________ County
- ------------------------------------------------------------------------------------------------------------------------------------
Photran Corporation | / / Collateral was brought into this state subject to a security
------------------- | interest in another jurisdiction or the Debtor's location has
| been changed to this state.
By: /s/ Paul T. Fink CFO | /x/ Filed in accordance with a lease agreement signed by the Debtor
----------------------- | authorizing the Secured Party to file this statement.
Signature of Debtor (or Secured Party -----------------------------------------------------------------------
in cases covered by IC 26-1-9-402(2)) NBD Equipment Finance Inc.
FINANCING STATEMENT - STATE FARM 36751(R)
Form UCC-1 Indiana Uniform Commercial Code _____________________________
Approved by: /s/ Joseph H. Hagsett Secretary of State
(5) FILE COPY -- DEBTOR(S) (DO NOT SEND OR SUBMIT TO FILING OFFICER)
- ------------------------------------------------------------------------------------------------------------------------------------
This Financing Statement is presented to Filing Officer Number of additional sheets presented:
for filing pursuant to the Uniform Commercial Code.
- ----------------------------------------------------------------------------------------------------------------------------------
Debtor(s) (Last Name First) and Address(es) |Secured Party(ies) and Address(es) | For Filing Officer (Date, Time, Number, and
| | Filing Office)
Photran Corporation |NBD Equipment Finance, Inc. |
21875 Grenada Avenue |151 N. Delaware St., #850 |
Lakeville, MN 55044 |Indianapolis, IN 46024 |
| |
| |
1574923 | |
- ------------------------------------------------------------------------------------|
This Financing Statement covers the |Name and Address of Assignee of Secured|
following types (or items) of property |Party |
(include description of real estate when | |
collateral is crops) | |
| |
All of Debtor's investment property, | |
financial assets, deposits, securities or ---------------------------------------|
other property relating thereto, carried in Safekeepint Account No. |
(the "Account") maintained with NBD Bank, N.A.'s Investment Division, including |
all Debtor's right, title and interest in any investment property, financial |
assets, deposits, certificates of deposit, monies owing to Debtor and funds which |
may hereafter accumulate in or become withdrawable from or paid out of |
such Account. |----------------------------------------------
/x/ Products of Collateral are also covered. (See IC 26-1-9-315) |/ /Debtor is a transmitting utility as defined
| in IC 26-1-9-105.
- ------------------------------------------------------------------------------------------------------------------------------------
Filed with: /x/ Secretary of State MINNESOTA / / Recorder of ________________ County
- ------------------------------------------------------------------------------------------------------------------------------------
Photran Corporation | / / Collateral was brought into this state subject to a security
------------------- | interest in another jurisdiction or the Debtor's location has
| been changed to this state.
By: /s/ Paul T. Fink CFO | /x/ Filed in accordance with a lease agreement signed by the Debtor
----------------------- | authorizing the Secured Party to file this statement.
Signature of Debtor (or Secured Party -----------------------------------------------------------------------
in cases covered by IC 26-1-9-402(2)) NBD Equipment Finance, Inc.
FINANCING STATEMENT - STATE FORM 36751(R)
Form UCC-1 Indiana Uniform Commercial Code _____________________________
Approved by: /s/ Joseph H. Hagsett Secretary of State
(5) FILE COPY -- DEBTOR(S) (DO NOT SEND OR SUBMIT TO FILING OFFICER)
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
7741 of Photran Corporation on Form S-8 of our report dated April 10, 1997,
appearing in this Annual Report on Form 10-KSB of Photran Corporation for the
year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
May 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,038,955
<SECURITIES> 0
<RECEIVABLES> 614,603
<ALLOWANCES> 8,103
<INVENTORY> 754,572
<CURRENT-ASSETS> 5,056,993
<PP&E> 16,644,840
<DEPRECIATION> 1,198,529
<TOTAL-ASSETS> 20,503,304
<CURRENT-LIABILITIES> 3,734,338
<BONDS> 0
0
0
<COMMON> 25,159,921
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,503,304
<SALES> 2,886,540
<TOTAL-REVENUES> 2,886,540
<CGS> 3,610,288
<TOTAL-COSTS> 3,610,288
<OTHER-EXPENSES> 4,407,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,367
<INCOME-PRETAX> (5,209,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,209,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 71,990
<CHANGES> 0
<NET-INCOME> (5,281,907)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
<PAGE>
EXHIBIT 99.1
March 19, 1997
The Board of Directors
Photran Corporation
21875 Grenada Avenue
Lakeville, MN 55044
Dear Sirs:
Effective immediately I hereby resign from my positions as President, CEO,
Company Director and Chairman of the Board of Directors of Photran Corporation.
Yours truly,
/s/ David E. Stevenson
- ----------------------------------
David E. Stevenson
<PAGE>
March 19, 1997
The Board of Directors
Photran Corporation
21875 Grenada Avenue
Lakeville, MN 55044
Dear Sirs:
Effective immediately I hereby resign from my positions as Officer and Director
of Photran Corporation.
Yours truly,
/s/ Kathleen V. Stevenson
- -------------------------------------
Kathleen V. Stevenson
