<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from __________________ to _________________
Commission file number 000-20731
PHOTRAN CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1697628
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
21875 GRENADA AVENUE
LAKEVILLE, MN 55044
(Address of Principal Executive Offices)
(612) 469-4880
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
--------------- -------------
The number of the registrant's common shares outstanding as of
November 15, 1997 was 5,208,142
Transitional Small Business Disclosure Format (check one):
Yes No X .
--------------- ---------------
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PHOTRAN CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 3. Defaults Upon Senior Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibit Index 16
1
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 106,301 $ 2,038,955
Accounts receivable 371,356 544,340
Inventory 546,628 754,572
Equipment held for sale 907,812
Prepaid expense 10,182 109,540
--------------- ---------------
Total current assets 1,034,467 4,355,219
PROPERTY AND EQUIPMENT, net 18,378,420 14,927,174
MARKETABLE SECURITIES, restricted 2,250,000
--------------- ---------------
$21,662,887 $19,282,393
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt,
notes payable, and capital lease obligations $ 1,301,246 $ 51,592
Accounts payable 670,987 663,411
Accrued expenses 666,386 758,915
Customer advances 2,108,173 2,260,420
Arbitration settlement accrual 689,565
--------------- ---------------
Total current liabilities 5,436,357 3,734,338
LONG TERM DEBT 4,395,999 327,813
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Undesignated stock, no par value, 6,000,000 shares
authorized, no shares issued
Common stock, no par value, 24,000,000 shares authorized,
5,208,142 and 5,154,392 shares issued and outstanding,
respectively 24,742,051 24,622,551
Accumulated deficit (12,911,520) (9,402,309)
--------------- ---------------
Total shareholders' equity 11,830,531 15,220,242
--------------- ---------------
$21,662,887 $19,282,393
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to financial statements.
2
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PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------------
1997 1996 1997 1996
(As Restated (As Restated
See Note 7) See Note 7)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 1,135,462 $ 758,085 $ 2,571,321 $ 2,239,111
COST OF SALES 1,142,765 852,580 3,145,207 2,016,896
---------------------------------- ---------------------------------------
Gross profit (loss) (7,303) (94,495) (573,886) 222,215
OPERATING EXPENSES:
Process and product development and engineering expense 223,591 91,332 425,761 247,702
General and administrative 614,347 172,725 1,383,368 501,021
Selling and marketing 88,964 83,004 335,452 256,733
Arbitration settlement expense (note 6) 689,565 689,565
Other nonrecurring charges 198,710
---------------------------------- ---------------------------------------
Total operating expenses 1,616,467 347,061 3,032,856 1,005,456
---------------------------------- ---------------------------------------
LOSS FROM OPERATIONS (1,623,770) (441,556) (3,606,742) (783,241)
INTEREST (INCOME) EXPENSE, net (20,216) (77,649) (73,548) 167,775
OTHER (INCOME), net (2,675) (23,983)
---------------------------------- ---------------------------------------
LOSS BEFORE
EXTRAORDINARY ITEM (1,600,879) (363,907) (3,509,211) (951,016)
EXTRAORDINARY ITEM -
loss on extinguishment of debt - - - (71,990)
---------------------------------- ---------------------------------------
NET LOSS $(1,600,879) $ (363,907) $(3,509,211) $(1,023,006)
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
NET LOSS PER COMMON SHARE
Loss before extraordinary item $ (0.31) $ (0.07) $ (0.68) $ (0.23)
Extraordinary item (0.02)
----------------- ----------------- ----------------- -----------------
$ (0.31) $ (0.07) $ (0.68) $ (0.25)
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,167,433 5,262,046 5,159,887 4,015,347
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
See notes to financial statements.
3
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PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------
1997 1996
(AS RESTATED
SEE NOTE 7)
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary item $(3,509,211) $ (951,016)
Adjustments to reconcile loss before extraordinary item to cash used in
operating activities:
Depreciation and amortization - property and
equipment 717,186 348,239
Interest expense associated with amortization of
deferred financing costs 120,000
Non-cash arbitration settlement expense 689,565
Non-cash loss on lease restructuring 49,586
Non-cash consulting expense 12,000
Changes in current assets and liabilities that provided (used) cash:
Accounts receivable 20,737 296,382
Inventory 207,944 (51,471)
Equipment held for sale (2,187,311)
Prepaid expenses 99,358 (48,930)
Accounts payable 7,576 (411,869)
Accrued expenses (92,529) (55,760)
Customer advances 500,000
-------------------------------
Cash used in operating activities (1,797,788) (3,033,786)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (3,177,495) (4,443,656)
Purchases of marketable securities (2,250,000)
-------------------------------
Cash used in investing activities (5,427,495) (4,443,656)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 5,500,000
Payments of notes payable and long-debt (314,871) (7,557,308)
Common stock issued 107,500 18,500,444
-------------------------------
Cash provided by financing activities 5,292,629 10,943,136
-------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,932,654) 4,057,744
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,038,955 1,532,361
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 106,301 $ 5,590,105
-------------------------------
-------------------------------
</TABLE>
See notes to financial statements.
4
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and reflect all
adjustments, consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation. Operating
results for the three- and nine-month periods ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1996,
previously filed with the Securities and Exchange Commission (SEC) as part
of the Company's Annual Report on Form 10-KSB/A, as amended.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. 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. As of September 30, 1997, the Company's
principal sources of liquidity included cash and cash equivalents of
$106,301 and net accounts receivable of $371,356. During the fourth quarter
of 1997, the Company received a $100,000 loan from a shareholder, and an
$833,000 transaction-specific working capital export line of credit which
management believes will satisfy the Company's projected working capital
requirements for 1997. The Company will require additional debt or equity
financing in 1998. Management is pursuing the possibility of obtaining
such additional financing, although there can be no assurance that such
financing will be available or be available on terms acceptable to the
Company. If the Company is unable to secure the necessary financing, it
may be required to reduce its current operating level.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1997 1996
---- ----
Raw materials and supplies $546,628 $754,572
-------- --------
-------- --------
3. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
Common Shares in an initial public offering. Net proceeds to the Company
were $16,025,444 after deducting offering costs, including underwriting
commissions, of $1,974,556.
OVERALLOTMENT OPTION - In connection with the Company's initial public
offering of common stock the company issued an option to the underwriters
to purchase up to 300,000 common shares solely to cover overallotments.
This option was exercised in June 1996 resulting in additional net
proceeds of $2,470,000 after deducting offering costs, including
underwriting commissions, of $230,000.
4. EQUIPMENT HELD FOR SALE
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 of which $338,345 and $500,000
is recorded
5
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
as a customer advance at September 30, 1997 and December 31,
1996, respectively. During the second quarter of 1997, the Company reached
an agreement with the customer whereby the Company will keep the equipment
and is refunding the deposit previously received via credits against future
glass purchases by the customer. The cost of this equipment was
reclassified to property and equipment as of June 30, 1997.
5. LONG TERM DEBT
In September 1997, the Company entered into a loan agreement with a
shareholder, whereby the shareholder loaned the Company $1 million. The
loan bears interest at 3.5% over the reference rate, as defined, and is
payable in monthly installments through September 1999. In connection with
the loan, the Company issued to the shareholder warrants for the
purchase of 100,000 shares of the Company's common stock at a price of
$5.00 per share. The warrants are exercisable between September 1998 and
September 2007.
6. COMMITMENTS AND CONTINGENCIES
During the quarter ended December 31, 1996, the Company was informed by its
Chinese joint venture partner, Shenzhen WABO Group Company Limited (WABO),
of their intention to dissolve the joint venture agreement and cancel the
related equipment purchase contract. In April 1997, the Company received
notice that arbitration proceedings have been commenced against it by WABO
in Shenzhen, China claiming approximately $4.4 million plus legal fees and
costs. The Company and WABO finalized a negotiated settlement in January
1998 subject to a final approval by the Chinese arbitration board. Under
the terms of this settlement the Company will pay WABO $1.5 million in cash
and issue 200,000 shares of common stock to settle all claims in connection
with the joint venture contract, the equipment contract, and related
agreements. The total value of this settlement is approximately $2,425,000
based on the market value of the Company's common stock as of January 13,
1998. The Company had previously recorded a liability of $1,735,435 for
amounts due to WABO. The balance of $689,565, has been recorded as an
arbitration settlement expense in the quarter ended September 30, 1997.
In connection with the coating equipment that the Company was building
for sale to the joint venture company, known as the Shenzhen Fortune
Conductive Glass Company, Ltd. (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. On or about June 20, 1997, the third party brought an action
against the Company in Dakota County District Court. 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 $1.3 million in addition to amounts the Company has already paid
under the contract. The Company has denied liability and demanded that the
third party refund all moneys 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 Securities and Exchange Commission (SEC) has informed the Company that
it is conducting a formal investigation with respect to certain financial
and accounting irregularities announced by the Company in March and October
1997 relating to fiscal 1996 and prior years. The investigation is
on-going and it is impossible to determine what impact, if any, the
investigation will have on the Company's financial condition or results of
operations.
In May of 1997 the Company was served with two separate lawsuits against
the Company, certain officers and directors of the Company, and the
Company's former president. These lawsuits were filed by certain purchasers
of the Company's common stock alleging that the Company's actions with
respect to the financial and accounting irregularities announced by the
Company in March of 1997 artificially inflated its stock price between May
29, 1996 and March 24, 1997. The plaintiffs in these actions are seeking
class certification.
Both suits were filed in the United States District Court for the District
of Minnesota. In July of 1997 the court consolidated these lawsuits into a
single action captioned IN RE PHOTRAN CORPORATION SECURITIES LITIGATION.
In November 1997, the lawsuit was amended to make similar allegations
with respect to the disclosures made by the Company in October 1997. The
Company has moved the court for an order to dismiss the action. However,
it is not possible at this time to determine what impact, if any, this
lawsuit will have on the Company's financial position or results of
operations.
6
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name which are currently in
the possession of the Company. In October 1997 the Company filed a
counterclaim alleging that Stevenson had committed fraud and had
damaged the Company and that his shares should be awarded to the
Company. The Company further alleged that Stevenson did not provide
adequate consideration for such shares and that therefore they are not
properly issued. This suit is in the early stages of discovery and it
is not possible to determine what impact, if any, its outcome will have
on the financial condition or results of operations of the Company.
7. RESTATEMENT
As a result of an investigation which was reopened in October 1997 and was
completed in January 1998, the Company has restated previously issued
financial statements. The Company determined that previously recorded
amounts purportedly received in 1991 and 1992 for certain issuances of
common stock to a former officer of the Company were improper. Also in
1991, 1993 and 1995 certain equipment purchases were recorded improperly.
In addition, the Company determined that in 1995 revenues were recorded
for product sales that did not occur.
The Company's financial statements for all affected periods have been
restated to reflect adjustments for these items. The effects of these
adjustments on the financial statements for the three and nine month
periods ended September 30, 1996, are as follows:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED
1996 SEPTEMBER 30, 1996
---------------------------------- ------------------------------------
As As
previously As previously As
reported restated reported restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 758,085 $ 758,085 $ 2,221,191 $ 2,239,111
Cost of sales 855,589 852,580 2,054,501 2,016,896
Gross profit (97,504) (94,495) 166,690 222,215
Loss from operations (444,565) (441,556) (810,190) (783,241)
Interest (income) expense, net (77,649) (77,649) 125,789 167,775
Loss before extraordinary item (366,916) (363,907) (935,979) (951,016)
Net loss (366,916) (363,907) (1,007,969) (1,023,006)
Loss per share before extraordinary item (0.07) (0.07) (0.23) (0.23)
Net loss per share (0.07) (0.07) (0.25) (0.25)
</TABLE>
7
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8. SUBSEQUENT EVENTS
In October 1997, the $1 million shareholder loan was increased by
$100,000 and warrants to purchase an additional 10,000 common shares
were granted to the shareholder.
In October 1997, the Company was unable to continue to make principal
payments on the shareholder note discussed above and certain of its lease
obligations. The Company is currently in default on the shareholder loan
and two leases, including the $4,500,000 lease financing of the P-1000
line. The Company is currently pursuing additional financing and is
negotiating with its creditors to cure these defaults or otherwise
restructure these obligations. Should these negotiations prove
unsuccessful, the Company could be liable for additional interest and
penalties. Such additional amounts may be material to the results of
operations and financial condition of the Company.
In December 1997, the Company obtained an $833,000 transaction-specific
export working capital line of credit.
In January 1998, a shareholder agreed to extend the due date on a $200,000
convertible note to January 1999.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
THIS FORM 10-QSB 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 DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF PENDING AND
THREATENED LITIGATION AND OTHER FACTORS DISCLOSED THROUGHOUT THIS FORM
10-QSB. 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.
Managements' discussion and analysis has been revised to reflect the impact of
the restatement of financial statements discussed in Item 1 above.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. 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.
See further discussion at "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
REVENUES
For the quarter ended September 30, 1997 net sales increased to $ 1,135,462
from $ 758,085 for the quarter ended September 30, 1996. Revenues consisted
primarily of sales of TN grade ITO coated glass. The increase in revenue
is due primarily to strong market demand for the Company's TN grade ITO coated
glass and increased production on the Company's P-1 production line. Total
production for the quarter ended September 30, 1997 increased 222% over the
quarter ended September 30, 1996. Revenue increases were not proportional to the
increase in production because of a decrease in the market price for TN grade
ITO coated glass and because the Company's principal customer began supplying
the raw glass and paying only for the coating applied by the Company. Glass cost
had been approximately 35% of the total unit price. Since the customer is
supplying the glass, revenue has been reduced accordingly.
Revenue from the Company's principal customer accounted for 68% and 71% of
the Company's revenues for the quarters ended September 30, 1997 and 1996,
respectively.. During the quarter ended September 30, 1997 the Company allocated
the increased unit production to new customers for larger substrate sizes which
sell for a higher per unit price than product purchased by the principal
customer.
For the nine months ended September 30, 1997 net sales increased to
$2,571,321 from $2,239,111 for the nine months ended September 30, 1996.
Revenues consisted primarily of sales of TN grade ITO coated glass. The
increase in revenue is due primarily to the increase in unit production
volume of over 150% when compared to the same period of 1996 and the strong
market demand for the Company's TN grade ITO coated glass. The increase in
revenue is not proportional to the increase in unit production due to market
price reductions and a change in sheet size by the Company's principal
customer. In addition, during the first quarter of 1997, the Company's
principal customer began supplying the raw glass and paying only for the
coating applied by the Company. Glass cost had been approximately 35% of the
total unit price. Since the customer is supplying the glass, revenue and cost
of sale has been reduced accordingly. These factors had the combined effect
of reducing the unit price to the Company's principal customer by
approximately 50% from the nine months ended September 30, 1996 to the nine
months ended September 30, 1997.
The Company has been successful in attracting new customers that use
larger sizes of glass that will provide increased revenue per unit for
substantially the same coating cost per unit. These customers are expected to
account for the majority of the Company's future sales of TN grade ITO coated
glass. The Company recently began selling product manufactured on its second
production line and expects to continue to expand its productive capacity in
1998 with the addition of one thin film coating line. 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
1998 following the addition of productive capacity. In addition, the Company has
recently negotiated a 50% per unit price increase with its principal customer.
GROSS PROFIT (LOSS)
Gross loss was $ 7,303 for the quarter ended September 30, 1997, compared
to gross loss of $94,495 for the quarter ended September 30, 1996. Cost of sales
consists of substrate costs, target material costs, labor and overhead related
to the Company's manufacturing operations. For the quarter ended September 30,
1997 depreciation expense increased by $61,000 due to a change in estimate used
in computing depreciation. In addition, the Company incurred significant costs
associated with the trial production and testing of its second production line
which were included in costs of sales for the quarter. In 1997, the Company also
included costs associated with a second facility in cost of sales.
9
<PAGE>
Gross loss was $ 573,886 for the nine months ended September 30, 1997,
compared to gross profit of $ 222,215 for the nine months ended September 30,
1996. The gross loss was due to a combination of factors, including the shift to
a smaller sheet size by the Company's largest customer, loss of margin on glass
substrates which are now being supplied by the customer, and the market and unit
price decreases discussed above. Target material expense increased by
approximately $180,000 because the Company was using reprocessed scrap material
in the first and second quarters of 1996. Depreciation expense increased by
$160,000 due to a change in estimate used in computing depreciation that the
Company adopted in the fourth quarter of 1996. In addition, the Company incurred
manufacturing overhead for facilities which were not included in cost of sales
in 1996 and the significant costs associated with the trial production and
testing of its second production line.
The Company expects that the combination of per unit price increases
negotiated with its largest customer, higher margin orders from new customers
and increased production from its new production line will provide significant
improvements in gross margins in future periods.
PROCESS AND PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Process and product development and engineering expenses increased to
$223,591 for the quarter ended September 30, 1997 from $91,332 for the
quarter ended September 30, 1996. These expenses consisted of personnel
costs, consulting, testing, supplies and depreciation expenses as well as
indirect costs of building the Company's production equipment, such as rent,
utilities, and real estate taxes on non-production facilities. The increase
during 1997 is due in part to the fact that some of these expenses were
capitalizable as costs of equipment being built for sale in 1996. Now that
the Company is keeping such lines for its own use, these costs must be
expensed. Also during the third quarter of 1997, the Company restructured an
equipment lease as part of its continued refocusing of the Company's
operations, resulting in a loss on the lease transaction of $49,586, which
has also been recorded as an engineering expense during the quarter.
Process and product development and engineering expenses increased to
$425,761 for the nine months ended September 30, 1997 from $247,702 for the
nine months ended September 30, 1996. The increase is due largely to the
factors discussed for the quarter ended September 30, 1997.
The Company expects that product and process development expenditures for
new product research and improvements in its core deposition technology will
continue at approximately their current level during the fourth quarter of
1997. The indirect costs of the Company's equipment engineering projects is
also likely to continue at approximately the same levels through 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $ 614,347 for the quarter
ended September 30, 1997 from $ 172,725 for the quarter ended September 30,
1996. 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 is
primarily a result of professional fees incurred in connection with an internal
investigation of certain financial and accounting irregularities, the
restatement of certain historical financial statements, and the legal fees
related to the contingencies discussed below and a dispute with the Company's
Chinese joint venture partner.
General and administrative expenses increased to $ 1,383,368 for the
nine months ended September 30, 1997 from $501,021 for the nine months ended
September 30, 1996. The increase is primarily a result of professional fees
incurred in connection with an investigation of certain financial and
accounting irregularities, the restatement of certain historical financial
statements, and the legal fees related to the contingencies discussed below
and a dispute with the Company's Chinese joint venture partner. Additional
professional fees will be incurred in the fourth quarter of 1997 and in 1998
in connection with these matters as well as certain litigation described in
Part II, Item 1. Legal Proceedings, and it is possible that such fees could
be material.
10
<PAGE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased to $88,964 for the quarter ended
September 30, 1997 from $83,004 for the quarter ended September 30, 1996.
These expenses consisted principally of compensation costs for sales
personnel, commissions, travel expenses, trade show expenses, and freight out
costs. The costs remained fairly constant because the reduction in sales and
customer support staff and decreases in trade show costs was offset by
increases in sales commissions paid to independent sales representatives on
sales to new customers.
Selling and marketing expenses increased to $ 335,452 for the nine months
ended September 30, 1997 from $256,733 for the nine months ended September
30, 1996. The increase is due primarily to the addition of sales and customer
support staff and increases in trade show, travel and freight costs for the
quarter ended March 31, 1997 as well as increased sales commissions during
1997. Some of the support staff, travel, and trade show expenses were
eliminated during the second and third quarters of 1997.
ARBITRATION SETTLEMENT EXPENSE
During the third quarter of 1997, the Company determined that it was
better able to measure the ultimate liability to the Company's former Chinese
joint venture partner, Shenzhen WABO Group Company, Ltd. (WABO), as the
Company began discussing a negotiated settlement (see China Joint Venture
below). The total liability is now estimated to be $2,425,000, based on the
terms of the recent settlement agreement. The excess of $689,565 over amounts
previously recorded as a customer advance has been recorded as an arbitration
settlement expense in the quarter ended September 30, 1997.
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's China joint venture partner
notified the Company of its intention to cancel the joint venture agreement 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 charges to the quarter ended March 31, 1997 of
$110,788.
In addition, the Company determined that as a result of refocusing its
operations, a facility it had been leasing was no longer necessary. Leasehold
improvements of $34,270 were written off in connection with the termination of
the lease agreement. Equipment, which was determined to have no future value to
the Company at March 31, 1997, was written down to its fair value, resulting in
an impairment charge of $53,652.
NET INTEREST EXPENSE
For the quarter ended September 30, 1997, the Company had net interest
income of $20,216 compared to net interest income of $77,649 for the quarter
ended September 30, 1996. The decrease was due primarily to the fact that the
Company had invested the excess proceeds of its initial public offering during
the third quarter of 1996, whereas the 1997 quarter contains only the earnings
from the investment of half of the proceeds from the lease financing on the
Company's P-1000 line which was entered into in the first quarter of 1997.
For the nine months ended September 30, 1997, the Company had net interest
income of $73,548 compared to net interest expense of $167,775 for the nine
months ended September 30, 1996. The change was due to the earnings from the
investment of half of the proceeds from the lease financing on the P-1000 line
during 1997, whereas the Company had approximately $8 million in debt
outstanding for the first half of 1996 resulting in much higher interest expense
charges.
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 $7.6 million, which
expires in 2006 through 2010. Due to certain ownership changes which occurred
during the year ended December 31, 1993, 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
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of the date of the ownership change. Utilization of the approximately $6.9
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 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.
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 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 equipment was originally scheduled to be shipped by November 6, 1995.
The project was delayed for several months. The project schedule was
subsequently extended by mutual agreement between the parties. Further delays
prevented the Company from meeting the extended shipment date, which triggered
certain penalty clauses in the agreement. During the quarter ended December 31,
1996, the Company was 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. 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. The Company and WABO negotiated a settlement in January 1998
subject to final approval by the Chinese arbitration board. Under the terms of
this settlement the Company will pay WABO $1.5 million in cash and issue 200,000
shares of common stock to settle all claims in connection with the joint venture
contract, the equipment contract and related agreements. The total value of this
settlement is approximately $2,425,000 based on the market value of the
Company's common stock as of January 13, 1998. The Company had previously
recorded a liability of $1,735,435 for amounts due to WABO. The balance of
$689,565 has been recorded as an arbitration settlement expense in the quarter
ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $ 106,301 and net accounts receivable
of $371,356. The Company believes that its existing sources of liquidity and
anticipated funds from operations will not be sufficient to fund its
operations for the next twelve months. During the fourth quarter of 1997, the
Company received an additional of $100,000 as a loan from a shareholder, and
an $833,000 transaction-specific working capital export line of credit which
management believes will satisfy the Company's projected working capital
requirements for 1997. The Company will require additional debt or equity
financing in 1998. Management is pursuing the possibility of obtaining such
additional 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 the nine months ended
September 30, 1997 and 1996 was $ 1,797,788 and $3,033,786 respectively. This
decrease was due principally to the $2,187,311 in expenditures on equipment
held for sale in 1996 the expenditures for which are classified as equipment
purchases in 1997 as the Company will now keep the machine it was previously
holding for sale. This decrease in 1997 is partially offset by a larger loss
than in 1996.
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 was recorded as a
customer advance at December 31, 1996. Delivery of the equipment was
originally scheduled for the fourth quarter of 1996. During the second
quarter of 1997, the Company reached an agreement with the customer whereby
the Company will keep the equipment and refund the deposit previously
received via credits against future glass purchases. The balance of the
liability is $338,345 at September 30, 1997.
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Cash used in investing activities was $ 5,427,495 for the nine months
ended September 30, 1997 compared to $4,443,656 for the nine months ended
September 30, 1997. In both periods this cash was used for the purchase of
equipment and leasehold improvements. The increase in 1997 was due to the
purchase of approximately $2.3 million in restricted investments resulting from
the Company's first quarter 1997 $4,500,000 sale-leaseback of the coating
equipment that was originally intended to be sold to Fortune. These investments
are required to be retained by the Company for the term of the lease. Thus these
funds are not available for use by the Company.
Cash flows from financing activities of $ 5,292,629 for nine months ended
September 30, 1997 consisted primarily of $4,500,000 in proceeds from the
Company's sale-leaseback for the coating equipment that was originally
intended to be sold to Fortune, and a $1 million loan from a shareholder. The
shareholder loan bears interest at 3.5% over the reference rate, as defined,
and is payable in monthly installments through September 1999. In connection
with the loan, the Company issued 100,000 warrants to the shareholders for
the purchase of common stock at $5.00 per share. The warrants are exercisable
between September 1998 and September 2007. Under the terms of the
sale-leaseback agreement, which is recorded as a financing transaction, the
Company received proceeds of $4,500,000 of which $2,250,000 is restricted and
$2,250,000 is available to the Company.
In October 1997, the Company was unable to continue making principal
payments on the shareholder note discussed above and certain of its lease
obligations. As a result, the Company is in default on the shareholder loan and
two leases, including the $4,500,000 lease financing of the P-1000 line. The
Company is pursuing additional financing and is negotiating with its creditors
to cure these defaults or otherwise restructure these obligations. Should these
negotiations prove unsuccessful, the Company could be liable for additional
interest and penalties. Such additional amounts may be material to the results
of operations and financial condition 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 principal 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
installation and operation of new manufacturing equipment, results of
litigation, and general economic conditions. All of the above factors are
difficult for the Company to forecast, and these and 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 and operating results.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company was
informed by WABO of its intention to dissolve its joint venture agreement with
the Company and cancel the related equipment purchase contract. In April 1997,
the Company received notice that arbitration proceedings have been commenced
against it by WABO in Shenzhen, China claiming approximately $4.4 million plus
legal fees and costs. The Company and WABO finalized a negotiated settlement in
January 1998 subject to final approval by the Chinese arbitration board. Under
the terms of this settlement the Company will pay WABO $1.5 million in cash and
issue 200,000 shares of common stock to settle all claims in connection with the
joint venture contract, the equipment contract, and related agreements. The
total value of this settlement is approximately $2,425,000 based on the market
value of the Company's common stock as of January 13, 1998. The Company had
previously recorded a liability of $1,735,435 for amounts due to WABO. The
balance of $689,565 has been recorded as an arbitration settlement expense in
the quarter ended September 30, 1997.
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. On or about June 20, 1997,
the third party brought an action against the Company in Dakota County
District Court. 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 $1.3 million in addition to amounts the
Company has already paid under the contract. The Company has denied liability
and demanded that the third-party refund all moneys 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 be ultimately paid.
The Securities and Exchange Commission (SEC) has informed the Company
that it is conducting a formal investigation with respect to certain financial
and accounting irregularities announced by the Company in March and October of
1997 relating to fiscal 1996 and prior periods. 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.
In May of 1997 the Company was served with two separate lawsuits
against the Company, certain officers and directors of the Company, and the
Company's former president. These lawsuits were filed by certain purchasers of
the Company's common stock alleging that the Company's actions with respect to
the financial and accounting irregularities announced by the Company in March of
1997 artificially inflated its stock price between May 29, 1996 and March 24,
1997. The plaintiffs in these actions are seeking class certification.
Both suits were filed in the United States District Court for the
district of Minnesota. In July of 1997 the court consolidated these lawsuits
into a single action captioned IN RE PHOTRAN CORPORATION SECURITIES
LITIGATION. In November 1997, the suit was amended to make similar
allegations with respect to the disclosures made by the Company in October
1997. The Company has moved the court for an order to dismiss the action.
However, it is not possible at this time to determine what impact, if any,
this lawsuit will have on the Company's financial position or results of
operations.
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name and which are currently in the
possession of the Company. In October 1997 the Company filed a counterclaim
alleging that Stevenson had committed fraud and had damaged the Company and
that his shares should be awarded to the Company. The Company further alleged
that Stevenson did not provide adequate consideration for such shares and
that therefore they are not properly issued. This suit is in the early stages
of discovery and it is not possible to determine what impact, if any, its
outcome could have on the financial condition or results of operations of the
Company.
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<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October of 1997, the Company became unable to make principal and
interest payments on the shareholder loan obtained in the third quarter of 1997.
The Company is currently in default on this note in the amount of
approximately $220,000 in principal and interest payments.
Also in October 1997, the Company was unable to continue making
payments on the $4,500,000 lease financing transaction entered into in the
first quarter of 1997. The Company is currently in default on this obligation
in the amount of approximately $400,000.
ITEM 5. OTHER INFORMATION
In August 1997, the Board of Directors elected Paul T. Fink to the
position of President and Chief Executive Officer and elected Judith E.
Tucker to the position of Vice President for Finance and Administration and
Chief Financial Officer. In October 1997, the Board elected Ms. Tucker as
Secretary and Treasurer of the Corporation.
ITEM 6.
a. Exhibits
4.12 Loan agreement dated September 10, 1997 between Photran
Corporation and Steven King.
10.11 Employment contract between Paul T. Fink and Photran
Corporation dated August 1, 1997
10.12 Settlement Agreement between Shenzhen WABO Group Co., Ltd. and
Photran Corporation dated January 17, 1998.
27. Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
The Company did file a Form 8-K on November 5, 1997 concerning its
lawsuit against its former president and founder, David E. Stevenson,
alleging fraud, and announcing the possibility of further historical
financial statement restatements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Paul T. Fink
Dated January 30, 1998 ----------------------------
Paul T. Fink, President
Chief Executive Officer, Treasurer,
Secretary and Director
/s/ Judith E. Tucker
----------------------------
Judith E. Tucker,
Vice President for Finance and
Administration, Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
4.12 Loan Agreement dated September 10, 1997 between Photran 17
Corporation and Steven King.
10.11 Employment Contract between Paul T. Fink and Photran Corporation 33
dated August 1, 1997
10.12 Settlement Agreement between Shenzhen WABO Group Co., Ltd. and 43
Photran Corporation dated January 17, 1998.
27 Financial Data Schedule
16
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LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated as of September 10, 1997, among
Photran Corporation, a Minnesota corporation (the "Company"), and Steven King
(the "Investor").
A. The Company needs cash to fund its operations.
B. The Investor has indicated a willingness to lend the company up to
$1,000,000 (the "Loan") on the terms and conditions set forth in this
Agreement.
Accordingly, in consideration of the foregoing, the mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Investor
hereto agree as follows:
1. LOAN/PROMISSORY NOTE. The Investor agrees to make a loan to the
Company of up to One Million Dollars ($1,000,000.00) in return for the
delivery to him of a promissory note in the form attached hereto as Exhibit A
(the "Note"), accompanied by a Security Agreement in the form of Exhibit B
(the "Security Agreement"), securing repayment of the Note. The delivery of
the Note shall be made concurrently with the execution of this Agreement by
the Investor. The unpaid principal balance of the Note shall bear interest
from the date of each principal advance by the Investor at the rate equal to
three and one-half percent (3.50%) in excess of "Reference Rate" announced
from time to time by First Bank National Association, as charged on a daily
basis.
2. WARRANTS. In consideration of the loan made hereunder, the Company
shall issue to the Investor, with the delivery of the Note, a warrant, in the
form attached hereto as Exhibit C (the "Warrant"), to purchase 100,000 shares
of Common Stock, at an initial exercise price equal to $5.00 per share. The
Warrant shall be exercisable for a period commencing twelve (12) months
following the date hereof. The shares of Common Stock issuable upon exercise
of the Warrant are referred to hereinafter as the "Warrant Stock."
3. REPAYMENT AND SECURITY. The Loan shall be repayable in accordance
with the terms of the Note and secured by the assets and as provided in the
Security Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to the Investor that this
Agreement, the Security Agreement, and the Warrant have been duly
authorized by all necessary corporate action on behalf of the
Company and by any required shareholder action, have been duly
executed and delivered by an authorized officer of the Company, and
are legal, valid and binding agreements on the part of the Company
enforceable against the Company in accordance with their respective
terms.
17
<PAGE>
(b) The Warrant Stock has been reserved for issuance and, when issued
upon exercise of the Warrant, will be duly authorized, validly
issued and outstanding, fully paid, nonassessable and free and
clear of all pledges, liens, encumbrances and restrictions.
(c) Except as set forth on the attached Schedule to the Loan Agreement,
neither the execution nor delivery of, nor the performance or
compliance with, this Agreement, the Note, the Warrant, or the
Security Agreement, nor the consummation of the transactions
contemplated hereby or thereby will, with or without the giving of
notice or passage of time, or both, result in any breach of, or
constitute a default under, or result in the imposition of any lien
or encumbrance upon any asset or property of the Company, pursuant
to any agreement or other instrument to which the Company is a
party or by which it or any of its properties, assets or rights is
bound or affected, and will not violate the Articles of
Incorporation or Bylaws of the Company.
(d) No consent, authorization, approval, permit or order of or filing
with any governmental or regulatory authority is required under
current laws and regulations in connection with the execution and
delivery of this Agreement, the Warrant, the Note, or the Security
Agreement, or the offer, sale or delivery of the Warrant Stock.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
represents and warrants to the Company as follows:
(a) The Note, the Warrant, and the Warrant Stock being acquired are
being purchased for investment for the Investor's own account and not with
the view to, or for resale in connection with, any distribution or public
offering thereof. The Investor understands that none of the Note, the
Warrant or the Warrant Stock has been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws by
reason of their contemplated issuance in transactions exempt from the
registration requirements of the Securities Act and applicable state
securities laws and that the reliance of the Company and others upon these
exemptions is predicated in part upon this representation by the Investor.
The Investor further understands that the Note, the Warrant, and the Warrant
Stock may not be transferred or resold without registration under the
Securities Act and any applicable state securities laws, or an exemption from
the requirements of the Securities Act and applicable state securities laws.
(b) The Investor's principal residence is located in the State of
Minnesota. The Investor qualifies as an "accredited investor," as defined in
Rule 501 of Regulation D under the Securities Act. The Investor acknowledges
that the Company has made available to the Investor at a reasonable time
prior to the execution of this Agreement the opportunity to ask questions and
receive answers concerning the terms and conditions of the sale of securities
contemplated by this Agreement and to obtain any additional information
(which the Company possesses or can acquire without unreasonable effort or
expense) as may be necessary to verify the accuracy of information furnished
to the Investor. The Investor is able to bear the loss of the entire
18
<PAGE>
investment in the Note, the Warrant, and the Warrant Stock without any
material adverse effect on the Investor's financial position or prospects,
and has such knowledge and experience of financial and business matters to be
capable of evaluating the merits and risks of the investment to be made
pursuant to this Agreement.
(c) This Agreement has been duly authorized by all necessary action on
the part of the Investor, and is a valid and binding agreement of the
Investor.
6. OTHER.
(a) This Agreement shall be binding upon the Company and the Investor
and their respective successors and assigns, and shall inure to the benefit
of the Company and the Investor and the successors and assigns of the
Investor, except as otherwise specified or set forth herein or in the
Warrant. The Investor may freely assign all or any portion of its rights and
obligations under this Agreement without the consent of the Company. The
Company shall not assign its rights or duties hereunder without the prior
written consent of the Investor. Neither this Agreement nor any provision
hereof may be amended, modified, waived or discharged without the written
consent of the party against whom enforcement of such amendment,
modification, waiver or discharge is sought.
(b) This Agreement, including the schedule and exhibits attached
hereto, constitutes the entire agreement of the parties relative to the
subject matter hereof and supersedes any and all other agreements and
understandings, whether written or oral, relative to the matters discussed
herein.
(c) The Company agrees to pay all costs of the Investor incurred in
connection with the negotiation, execution and delivery of this Agreement and
the documents contemplated hereby.
(d) This Agreement shall be construed and enforced in accordance with
the laws of the State of Minnesota.
(e) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the Company and the Investor have executed this
Agreement effect as of the date first written above.
INVESTOR: PHOTRAN CORPORATION
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------------- By --------------------------------
Its /s/ President
----------------------------------
Print Name: STEVEN KING
Address: 601 7TH STREET SOUTH
Delano, MN 55328
Social Security No. ###-##-####
19
<PAGE>
SCHEDULE TO LOAN AGREEMENT
1. Caterpillar Financial Services Corp., as holder of UCC Financing
Statement #1598363, 6/23/93.
2. Freeport State Bank as holder of UCC Financing Statement #1672786,
5/9/94; and as holder of UCC Financing Statement #1535049, 10/7/92.
3. Textron Financial Corp. as holder of UCC Financing Statement #1749298,
3/31/95; as holder of UCC Financing Statement #1775393, 7/13/95; and as
holder of UCC Financing Statement #1801559, 11/6/95.
4. NBD Equipment Finance, as holder of UCC Financing Statement #1869458,
8/8/96; as holder of UCC Financing Statement #1882035, 10/1/96; as
holder of UCC Financing Statement #1916818, 2/13/97; and as holder of
UCC Financing Statement #1916817, 2/13/97.
5. Associates Commercial Corp., as holder of UCC Financing Statement #1825569.
6. Steven King, as holder of UCC Financing Statement #0263040, 7/14/95
(Dakota County, Minnesota).
20
<PAGE>
PROMISSORY NOTE
$1,000,000.00 Minneapolis, Minnesota
September 10, 1997
FOR VALUE RECEIVED, the undersigned, Photran Corporation (the
"Company"), promises to pay to the order of Steven King (the "Lender"), his
successors and assigns, at his principal office at 601 7th Street South,
Delano, MN 55328, or such other place as the holder may designate in writing
from time to time, the principal sum of One Million Dollars ($1,000,000.00),
in lawful money of the United States, or so much thereof as shall have been
disbursed and not repaid, together with interest from the date hereof on the
unpaid principal balance outstanding from time to time at the rate of
interest equal to the "Reference Rate" announced from time to time by First
Bank National Association on a daily basis, plus three and one-half percent
(3.50%). Principal and interest shall be payable monthly as hereinafter set
forth. All outstanding principal and accrued interest on this Note shall be
due and payable in full at maturity on September 15, 1999.
1. LOAN AGREEMENT. This Note has been issued pursuant to and is
subject to the terms and provisions of the Loan Agreement (the "Loan
Agreement") of even date between the Company and the Lender, and this Note
and the holder hereof are entitled to all the benefits provided for in the
Loan Agreement, or which are referred to therein. The provisions of the Loan
Agreement are incorporated herein by reference with the same force and effect
as if fully set forth herein.
2. PERIODIC PAYMENTS OF PRINCIPAL AND INTEREST. Principal and
interest shall be payable monthly, commencing on October 15, 1997, and on the
same day of each month thereafter, in an amount equal to the sum of
$41,666.67 plus accrued interest on the unpaid principal balance during the
preceding month, until September 15, 1999, when all outstanding principal and
interest shall be due and payable in full.
- -------------------------
THIS NOTE IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
21
<PAGE>
3. PREPAYMENT. This Note may be prepaid in whole or in part at any
time and from time to time without premium or penalty; provided, however,
that the Company shall give the Lender not less than ten (10) days advance
written notice of its intention to make any such prepayment. All prepayments
on this Note shall be applied first to the payment of any costs of collection
that be due hereunder, then to the payment of accrued interest, and the
balance shall be applied to principle.
4. WARRANT AGREEMENT. The Lender has certain rights to purchase
Common Stock of the Company under a Stock Purchase Warrant as provided in the
Loan Agreement.
5. SECURITY DOCUMENTS. This Note is secured by and is subject to the
terms and provisions of a Security Agreement of even date from the Company,
as debtor, to the Lender, as security part (the "Security Agreement").
6. INVESTMENT INTENT. Other than pursuant to registration under
federal and state securities laws or an exemption from such registration,
this Note may not be pledged, assigned or otherwise disposed of (whether
voluntarily or involuntarily). The Company may condition such sale, pledge,
assignment or other disposition on the receipt from the party to whom this
Note is to be so transferred of any representation and agreement reasonably
requested by the Company (provided such request is made within ten days of
the Company receiving notice from the Lender or its assignee of any intent to
transfer) in order to permit such issuance or transfer to be made pursuant to
exemptions from registration under federal and applicable state securities
laws. The Lender, by acceptance hereof, agrees to give written notice to the
company before transferring this Note of the Lender's intention to do so,
describing briefly the manner of the proposed transfer.
7. NOTICES. All demands and notices to be given hereunder shall be
delivered or sent by certified mail, return receipt requested; in the case of
Company, addressed to is corporate headquarters, 21875 Grenada Avenue,
Lakeville, Minnesota 55044, until a new address shall have been substituted
by like notice; and in the case of the Lender, addressed to Lender at the
address written above, until a new address shall have been substituted by
like notice.
8. WAIVERS. The Company hereby waives and releases: (i) demand,
presentment, protest and notice of every kind; and (ii) all procedural
errors, defects, and imperfections in any proceedings instituted by Lender
under this Note, the Loan Agreement, the Security Agreement, (but not
substantive defenses of law).
9. EVENTS OF DEFAULT, REMEDIES. If any installment of principal and
interest hereon is not paid when due, or if any other indebtedness of the
undersigned to the Lender is not paid when due, or if the undersigned is in
default under any other agreement between the undersigned and the Lender, or
if the undersigned shall submit to the Lender any financial statement as
filed with any external regulatory agencies containing information which
shall prove to be materially incorrect in any respect when made, and such
default remains uncured after fifteen days written notice from Lender to
Company, then, in any such event, the Lender may, at its option, declare this
Note to be immediately due and payable, together with all unpaid interest
accrued
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<PAGE>
hereon, without notice or demand. This Note shall also become automatically
due and payable (including unpaid interest accrued hereon) without notice or
demand should a petition be filed by or against the undersigned under the
United States Bankruptcy Code, or if a trustee, receiver or similar officer
is appointed for the undersigned or for the undersigned's property. If this
Note is not paid on the due date, the Lender shall have the right to set off
the indebtedness evidenced by this Note against any indebtedness of the
Lender to the undersigned. The undersigned agrees to pay all costs of
collection, including reasonable attorney's fees and legal expenses, in the
event this Note is not paid when due whether suit is commenced or not,
including costs and expenses in litigation, bankruptcy, or insolvency
proceedings. The undersigned hereby irrevocably submits to the jurisdiction
of the Minnesota District Court, Fourth Division, and the Federal District
Court, District of Minnesota, Fourth Division, over any action or proceeding
arising out of or relating to this Note and agrees that all claims in respect
of such action or proceeding may be heard and determined in any such court.
IN WITNESS WHEREOF, the Company has caused this Note to be executed on
its behalf by its duly authorized officer on the day and year first above
written.
PHOTRAN CORPORATION
By /s/ [ILLEGIBLE]
--------------------------------
Its /s/ President
---------------------------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS NOTE
HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE
LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH
STATE LAWS.
23
<PAGE>
SECURITY AGREEMENT
- ------------------------------------------------------------------------------
DATE: September 10, 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DEBTOR Photran Corporation SECURED Steven King
PARTY
- ------------------------------------------------------------------------------
BUSINESS OR
RESIDENCE 21875 Grenada Avenue ADDRESS 601 7th Street South
ADDRESS
- ------------------------------------------------------------------------------
CITY, STATE & Lakeville, MN 55044 CITY, STATE & Delano. MN 55328
ZIP CODE ZIP CODE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1. SECURITY INTEREST AND COLLATERAL. To secure the payment and performance
of each and every debt, liability and obligation of every type and
description which Debtor may now or at any time hereafter owe to Secured
Party pursuant to that certain Loan Agreement executed by Debtor dated
September 10, 1997 (the "Loan Agreement"), including but not limited to
that certain promissory note referred to therein in amount of
$1,000,000, dated September 10, 1997 (the "Note"), and all renewals,
amendments, and extensions thereof, all such debts, liabilities and
obligations being herein collectively referred to as the "Obligations"),
Debtor hereby grants Secured Party a security interest (herein called
the "Security Interest") in the following property (herein called the
"Collateral").
All equipment of Debtor, whether now owned or hereafter acquired,
including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, farm
machinery and equipment, shop equipment, office and
recordkeeping equipment, parts and tools, and the goods
described in any equipment schedule or list herewith or
hereafter furnished to Secured Party by Debtor (but no such
schedule or list need be furnished in order for the security
interest granted herein to be valid as to all of Debtor's
equipment), except for the P1000 China machine.
together with all substitutions and replacements for and products of any of
the foregoing property not constituting consumer goods and together with
proceeds of any and all of the foregoing property and, in the case of all
tangible Collateral, together with all accessions and, except in the case of
consumer goods, together with (i) all accessories, attachments, parts,
equipment and repairs now or hereafter attached or affixed to or used in
connection with any such goods, and (ii) all warehouse receipts, bills of
lading and other documents of title now or hereafter covering such goods.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants
and agrees that:
(a) Debtor is a corporation.
(b) The Collateral will be used primarily for business purposes.
(c) If any part or all of the tangible Collateral will become so related
to particular real estate as to become a fixture, the real estate
concerned is:
______________________________________________________________
and the name of the record owner is:
______________________________________________________________
(d) Debtor's chief executive office is located at:
______________________________________________________________
or, if left blank, at the address of Debtor shown at the beginning of
this Agreement.
3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents,
warrants and agrees that:
(a) Debtor has (or will have at the time Debtor acquires rights in
Collateral hereafter arising) absolute title to each item of
Collateral free and clear of all security interests, liens and
encumbrances, except the Security Interest, and will defend the
Collateral against all claims or demands of all persons other than
Secured Party. Debtor will not sell or otherwise dispose of the
Collateral or any interest therein without the prior written consent
of Secured Party. If Debtor is a corporation, this Agreement has been
duly and validly authorized by all necessary corporate action, and, if
Debtor is a partnership, the partner(s) executing this Agreement has
(have) authority to act for the partnership.
(b) Debtor will not permit any tangible Collateral to be located in any
state (and, if county filing is required, in any county) in which a
financing statement covering such Collateral is required to be, but
has not in fact been, filed in order to perfect the Security Interest.
(c) Debtor will (i) keep all tangible Collateral in good repair, working
order and condition, normal depreciation excepted, and will, from time
to time, replace any worn, broken or defective parts thereof;
(ii) promptly pay all taxes and other governmental charges levied or
assessed upon or against any Collateral or upon or against the
creation, perfection or continuance of the Security Interest;
(iii) except as provided by the Loan Agreement and for purchase money
security interests incurred in the ordinary course of business, keep
all Collateral free and clear of all security interests, liens and
encumbrances except the Security Interest; (iv) at all reasonable
times, permit Secured Party or its representatives to examine or
inspect any Collateral, wherever located, and to examine, inspect and
copy Debtor's books and records pertaining to the Collateral and its
business and financial condition; (v) keep accurate and complete
records pertaining to the Collateral and pertaining to Debtor's
business and financial condition and submit to Secured Party such
periodic reports concerning the Collateral and Debtor's business and
financial condition as Secured Party may from time to time reasonably
request; (vi) promptly notify Secured Party of any loss of or material
damage to any Collateral; (vii) at all times keep all tangible
Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (in case of Collateral consisting of motor
vehicles) and such other risks and in such amounts as Secured Party
may reasonably request, with any loss payable to Secured Party to the
extent of its interest; (viii) from time to time execute such
financing statements as Secured Party may reasonably require in order
to perfect the Security Interest and, if any Collateral consists of a
motor vehicle, execute such documents as may be required to have the
Security Interest properly noted on a certificate of title; (ix) pay
when due or reimburse Secured Party on demand for all costs of
collection of any of the Obligations and all other out-of-pocket
expenses (including in each case all reasonable attorneys' fees)
incurred by Secured Party in connection with the creation, perfection,
satisfaction, protection, defense or enforcement of the Security
Interest or the creation, continuance, protection, defense or
enforcement of this Agreement or any or all of the Obligations,
including expenses incurred in any litigation or bankruptcy or
insolvency proceedings; (x) execute, deliver or endorse any and all
instruments, documents, assignments, security agreements and other
agreements and writings which Secured Party may at any time reasonably
request in order to secure, protect, perfect or enforce the Security
Interest and Secured Party's rights under this Agreement; (xi) not use
or keep any Collateral, or permit it to be used or kept, for any
unlawful purpose or in violation of any federal, state or local law,
statute or ordinance; and (xii) not permit any tangible Collateral to
become part of or to be affixed to any real property without first
assuring to the reasonable satisfaction of Secured Party that the
Security Interest will be prior and senior to any interest or lien
then held or thereafter acquired by any mortgagee of such real
property of the owner or purchaser of any interest therein. If Debtor
at any time fails to perform or observe any agreement contained in
this Section 3(c), and if such failure shall continue for a period of
ten calendar days after Secured Party gives Debtor written notice
thereof (or, in the case of the agreements contained in clauses (vii)
and (viii) of this Section 3(c), immediately upon the occurrence of
such failure, without notice or lapse of time), Secured Party may (but
need not) perform or observe such agreement on behalf and in the name,
place and stead of Debtor (or, at Secured Party's option, in Secured
Party's own name) and may (but need not) take any and all other
actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens or encumbrances,
the performance of
24
<PAGE>
obligations under contracts or agreements with account
debtors or other obligors, the procurement and maintenance of
insurance, the execution of financing statements, the endorsement of
instruments, and the procurement of repairs, transportation or
insurance); and, except to the extent that the effect of such payment
would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law. Debtor shall thereupon
pay Secured Party on demand the amount of all moneys expended and all
costs and expenses (including reasonable attorneys' fees) incurred by
Secured Party in connection with or as a result of Secured Party's
performing or observing such agreements or taking such actions,
together with interest thereon from the date expended or incurred by
Secured Party at the highest rate then applicable to any of the
Obligations. To facilitate the performance or observance by Secured
Party of such agreements of Debtor, Debtor hereby irrevocably appoints
(which appointment is coupled with an interest) Secured Party, or its
delegate, as the attorney-in-fact of Debtor with the right (but not
the duty) from time to time create, prepare, complete, execute,
deliver, endorse or file, in the name and on behalf of Debtor, any and
all instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Debtor under this Section 3.
4. EVENTS OF DEFAULT. Each of the following occurrences shall constitute
an event of default under this Agreement (herein called "Event of Default"):
(i) an Event of Default shall occur under the Loan Agreement or the Note;
(ii) Debtor shall fail to observe or perform any covenant or agreement herein
binding on it; and (iii) any representation or warranty by Debtor set forth
in this Agreement shall prove materially false or misleading.
5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of
Default under Section 4 and at any time thereafter, Secured Party may
exercise any or more of the following rights and remedies: (i) declare all
unmatured Obligations to be immediately due and payable, and the same shall
thereupon be immediately due and payable, without presentment or other notice
or demand; (ii) exercise and enforce any or all rights and remedies available
upon default to a secured party under the Uniform Commercial Code, including
but not limited to the right to take possession of any Collateral, proceeding
without judicial process or by judicial process (without a prior hearing or
notice thereof, which Debtor hereby expressly waives), and the right to sell,
lease or otherwise dispose of any or all of the Collateral, and in connection
therewith, Secured Party may require Debtor to make the Collateral available
to Secured Party at a place to be designated by Secured Party which is
reasonably convenient to both parties, and if notice to Debtor of any
intended disposition of Collateral or any other intended action is required
by law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 7) at least 10
calendar days prior to the date of intended disposition or other action;
(iii) exercise or enforce any or all other rights or remedies available to
Secured Party by law or agreement against the Collateral, against Debtor or
against any other person or property.
6. OTHER PERSONAL PROPERTY. Unless at the time Secured Party takes
possession of any tangible Collateral, or within seven days thereafter,
Debtor gives written notice to Secured Party of the existence of any goods,
papers or other property of Debtor, not affixed to or constituting a part of
such Collateral, but which are located or found upon or within such
Collateral, describing such property, Secured Party shall not be responsible
or liable to Debtor for any action taken or omitted by or on behalf of
Secured Party with respect to such property without actual knowledge of the
existence of any such property or without actual knowledge that it was
located or to be found upon or within such Collateral.
7. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts,
or chattel paper. Debtor agrees that each provision whose box is checked is
part of this Agreement. This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in the specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise
or enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised singularly
or concurrently, at Secured Party's option, and the exercise or enforcement
of any one such right or remedy shall neither be a condition to nor bar the
exercise or enforcement of any other. All notices to be given to Debtor
shall be deemed sufficiently given if delivered or mailed by registered or
certified mail, postage prepaid, to Debtor at its address set forth above or
at the most recent address shown on Secured Party's records. Secured Party's
due of care with respect to Collateral in its possession (as imposed by law)
shall be deemed fulfilled if Secured Party exercises reasonable care in
physically safekeeping such Collateral or, in the case of Collateral in the
custody or possession of a bailee or other third person, exercises reasonable
care in the selection of the bailee or other third person, and Secured Party
need not otherwise preserve, protect, insure or care for any Collateral.
Secured Party shall not be obligated to preserve any rights Debtor may have
against prior parties, to realize on the Collateral at all or in any
particular manner or order, or to apply any cash proceeds of Collateral in
any particular order of application. This Agreement shall be binding upon
and inure to the benefit of Debtor and Secured Party and their respective
heirs, representatives, successors and assigns and shall take effect when
signed by Debtor and delivered to Secured Party, and Debtor waives notice of
Secured Party's acceptance hereof. Secured Party may execute this Agreement
if appropriate for the purpose of filing, but the failure of Secured Party to
execute this Agreement shall not affect or impair the validity or
effectiveness of this Agreement. A carbon, photographic or other
reproduction of this Agreement or of any financing statement signed by the
Debtor shall have the same force and effects as the original for all purposes
of a financing statement. Except to the extent otherwise required by law,
this Agreement shall be governed by the internal laws of the state named as
part of Secured Party's address above. If any provision or application of
this Agreement is held unlawful or unenforceable in any respect, such
illegality or unenforceability shall not affect other provisions or
applications which can be given effect, and this Agreement shall be construed
as if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All representations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.
Secured Party: Debtor: Photran Corporation
By By /s/ [ILLEGIBLE]
------------------------ -------------------------------
Steven King Its /s/ [ILLEGIBLE]
-------------------------------
25
<PAGE>
STOCK PURCHASE WARRANT
To Subscribe For and Purchase
Common Stock of
PHOTRAN CORPORATION
September 10, 1997
THIS CERTIFIES THAT, for good and valuable consideration received,
Steven King, or his registered assigns, is entitled to subscribe for and
purchase from Photran Corporation (the "Company"), a Minnesota corporation,
100,000 fully paid and nonassessable shares of the Common Stock, no par
value, of the Company (the "Common Stock"), or such greater or lesser number
of such shares as may be determined by the anti-dilution provisions of this
Warrant, at a Warrant exercise price of $5.00 per share, or such greater or
lesser Warrant exercise price as may be determined by the anti-dilution
provisions of this Warrant.
This Warrant has been issued to Steve King by the Company pursuant to
the Loan Agreement of even date, by and between the Company and Steven King
(the "Agreement"), and is subject to the terms and conditions thereof.
This Warrant may be exercised in whole or in part at any time or from
time to time commencing twelve (12) months following the date of issuance of
this Warrant and on or before 5:00 p.m., Minneapolis, Minnesota time, on
September 10, 2007.
This Warrant is subject to the following provisions, terms and
conditions.
1. EXERCISE. The rights represented by this Warrant may be exercised
by the holders hereof, in whole or in part, by written notice of exercise
delivered to the Company and by the surrender of this Warrant (properly
endorsed if required) at the principal office of the Company and upon payment
to it by check of the purchase price for such shares.
2. ISSUANCE OF COMMON STOCK. The Company agrees that the shares of
Common Stock purchased hereby shall be and are deemed to be issued to the
holders hereof as the record owner of such shares as of the close of business
on the date on which this Warrant shall have been surrendered and payment
made for such shares as aforesaid. Certificates for the shares of Common
Stock so purchased shall be promptly delivered to the holders hereof and in
no event later than 10 days after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a new
Warrant representing the number of shares of Common Stock, if any, with
respect to which this Warrant shall not then have been exercised shall also
be delivered to the holders hereof within such time.
3. COVENANTS OF COMPANY. The Company covenants and agrees that all
shares of Common Stock which may be issued upon the exercise of the rights
represented by this Warrant
THIS WARRANT IS SUBJECT TO THE RESTRICTION ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
26
<PAGE>
will, upon issuance, be duly authorized and issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized, and reserved for the purpose
of issue or transfer upon exercise of the subscription rights evidenced by
this Warrant, a sufficient number of shares of its Common Stock to provide
for the exercise of the rights represented by this Warrant.
4. ANTI-DILUTION ADJUSTMENTS. The provisions of this Warrant are
subject to adjustment as provided in this Section 4.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable
in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately
prior to such event shall (until adjusted again pursuant hereto) be
adjusted immediately after such event to a price (calculated to the nearest
full cent) determined by dividing (a) the number of shares of Common Stock
outstanding immediately prior to such event, multiplied by the then
existing Warrant Exercise Price, by (b) the total number of shares of
Common Stock outstanding immediately after such event (including the
maximum number of shares of Common Stock issuable in respect of any
securities convertible into Common Stock), and the resulting quotient shall
be the adjusted Warrant Exercise Price per share. An adjustment made
pursuant to this Subsection shall become effective immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this Subsection, the Holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive shares
of two or more classes of capital stock or shares of Common Stock and other
capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under
this Subsection shall be made to the nearest cent or to the nearest 1/100
of a share, as the case may be. In the event that at any time as a result
of an adjustment made pursuant to this Subsection, the holders of any
Warrant thereafter surrendered for exercise shall become entitled to
receive any shares of the Company other than shares of Common Stock,
thereafter the Warrant Exercise Price of
27
<PAGE>
such other shares so receivable upon exercise of any Warrant shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to
Common Stock contained in this Section 4.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 4(a) above, the Holders of each Warrant shall thereafter (until
another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full
share, obtained by multiplying the number of shares specified in such
Warrant (as adjusted as a result of all adjustments in the Warrant
Exercise Price in effect prior to such adjustment) by the Warrant
Exercise Price in effect prior to such adjustment and dividing the
product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of
a third corporation into the Company), there shall be no adjustment under
Subsection (a) of this Section above but the Holders of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into
the kind and amount of shares of stock and other securities and property
which he would have owned or have been entitled to receive immediately
after such consolidation, merger, statutory exchange, sale, or conveyance
had such Warrant been converted immediately prior to the effective date of
such consolidation, merger, statutory exchange, sale, or conveyance and in
any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section with respect to the
rights and interests thereafter of any Holders of the Warrant, to the end
that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in
relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Warrant. The provisions of
this Subsection shall similarly apply to successive consolidations,
mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the Holders as shown on the books of
the Company, which notice shall state the Warrant Exercise Price resulting
from such adjustment and the increase or decrease, if any, in the number of
shares of Common Stock purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
5. COMMON STOCK, WARRANT SHARES. As used herein, the term "Common
Stock" shall mean and include the Company's currently authorized shares of
Common Stock and shall also include any capital stock of any class of the
Company hereafter authorized which shall not be limited to fixed sum or
percentage of par value in respect of the rights of the holders thereof to
28
<PAGE>
participate in dividends or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution or winding up of the Company;
provided that the shares purchasable pursuant to this Warrant shall include
shares designated as Company Stock of the Company on the date of original
issue of this Warrant or, in the case of any reorganization,
reclassification, consolidation or merger provided for in paragraph 4(g)
above, the stock, securities or assets provided for in such paragraph. As
used herein, the term "Warrant Shares" shall mean the shares which may be
acquired upon the exercise of this Warrant.
6. NO VOTING RIGHTS. This Warrant shall not entitle the holders hereof
to any voting rights or other rights as a shareholder of the Company.
7. SECURITIES LAWS RESTRICTIONS. The holders of this Warrant by
acceptance hereof, acknowledges that this Warrant and the shares of Common
Stock which may be issued pursuant hereto have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any applicable
state securities laws. Any exercise by the holders shall constitute a
representation by the holders that the shares of Common Stock issuable upon
exercise hereof are being acquired for the holders' own account and not with
the view to, or for resale in connection with, any distribution or public
offering thereof in violation of the Securities Act or applicable state
securities laws. The holders of this Warrant, by acceptance hereof, further
represents that it is fully informed as to the applicable limitations upon
any distribution or resale of the shares of Common Stock purchased pursuant
hereto under the Securities Act and applicable state securities laws and
agrees not to distribute or resell any such shares of Common Stock if such
distribution or resale would constitute a violation of the Securities Act or
applicable state securities law.
The holders of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before transferring this Warrant or
transferring any Common Stock issuable or issued upon the exercise hereof of
such holder's intentions as to such proposed transfer and the circumstances
thereof. Promptly upon receiving such notice, the Company shall present
copies thereof to counsel to the company and to special counsel to the
original holders of this Warrant. If in the opinion of each such counsel the
proposed transfer of this Warrant or disposition of shares may be effected
without registration or qualification (under the Securities Act or applicable
state securities laws) of this Warrant or the shares of Common Stock issuable
or issued upon the exercise hereof, the company, as promptly as practicable,
shall notify such holders of such opinion, whereupon such holders shall be
entitled to transfer this Warrant or to dispose of shares of Common Stock
received upon the exercise of this Warrant, all in accordance with the terms
of the notice delivered by such holders to the company, provided that an
appropriate legend respecting the aforesaid restrictions on transfer and
disposition may be endorsed on this Warrant or the certificates for such
shares. The Company hereby indemnifies such holders, in transferring this
Warrant or in disposing of shares received upon the exercise of this Warrant
in reliance upon such notification by the Company, against all liability
which such holders may incur through failure of this Warrant or such shares
of Common Stock to be registered or qualified provided such transfer or
disposition is in accordance with the proposed transfer or disposition.
29
<PAGE>
8. REGISTRATION RIGHTS.
(a) If at any time after September 10, 1998 and prior to the end of the
two-year period following complete exercise of this Warrant or May 29,
2001, whichever occurs earlier, the Company proposes to register under
the 1933 Act (except by a Form S-4 or Form S-8 Registration Statement or
any successor forms thereto) or qualify for a public distribution under
Section 3(b) of the 1933 Act, any of its securities, it will give
written notice to all holders of this Warrant, and any Warrant Shares of
its intention to do so and, on the written request of any such holders
given within twenty (20) days after receipt of any such notice (which
request shall specify the interest in this Warrant or the Warrant Shares
intended to be sold or disposed of by such holders and describe the
nature of any proposed sale or other disposition thereof), the Company
will use its best efforts to cause all such Warrant Shares, the holders
of which shall have requested the registration or qualification thereof,
to be included in such registration statement proposed to be filed by
the Company; provided, however, that if a greater number of Warrant
Shares is offered for participation in the proposed offering than in the
reasonable opinion of the managing underwriter of the proposed offering
can be accommodated without adversely affecting the proposed offering,
then the amount of Warrant Shares proposed to be offered by such Holders
for registration, as well as the number of securities of any other
selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Further, on a one-time basis during the four-year period commencing
September 10, 1998, upon request by the holders or holders of a majority in
interest of this Warrant, and of any Warrant Shares, the Company will
promptly take all necessary steps to register or qualify, under the 1933 Act
and the securities laws of such states as the holders may reasonably request,
such number of Warrant Shares issued and to be issued upon conversion of the
Warrants requested by such holders in their request to the Company. The
Company shall keep effective and maintain any registration, qualification,
notification, or approval specified in this Paragraph (b) for such period as
may be reasonably necessary for such holders or holders of such Warrant
Shares to dispose thereof and from time to time shall amend or supplement the
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 8, the Company shall bear the following
fees, costs, and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and disbursements of counsel for the underwriter or underwriters of such
securities (if the Company is required to bear such fees and disbursements),
all internal expenses, the premiums and other costs of policies of insurance
against liability arising out of the public offering, and legal fees and
disbursements and other expenses of complying with state securities laws of
any jurisdictions in which the securities to be offered are to be registered
or qualified. Fees and disbursements of special counsel and accountants for
the selling holders of this
30
<PAGE>
Warrant, underwriting discounts and commissions, and transfer taxes for
selling holders and any other expenses relating to the sale of securities by
the selling holders not expressly included above shall be borne by the
selling holders.
(d) The Company hereby indemnifies each of the holders of this Warrant
and of any Warrant Shares, against all losses, claims, damages, and
liabilities caused by (1) any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement or Prospectus (and as
amended or supplemented if the Company shall have furnished any amendments
thereof or supplements thereto), any Preliminary Prospectus or any state
securities law filings; (2) any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages, or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such holders
expressly for use therein; and each such holders by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each
of its officers who signs such Registration Statement, and each person, if
any, who controls the Company, within the meaning of Section 15 of the 1933
Act, with respect to losses, claims, damages, or liabilities which are caused
by any untrue statement or alleged untrue statement, omission or alleged
omission contained in information furnished in writing to the Company by such
holders expressly for use therein.
9. MISCELLANEOUS.
(a) Subject to the provisions of paragraph 8 hereof, this Warrant and
all rights hereunder are transferable, in whole or in part, at the principal
office of the Company by the holders hereof in person or by duly authorized
attorney, upon surrender of this Warrant properly endorsed. Each holders of
this Warrant, by taking or holding the same, consents and agrees that the
bearer of this Warrant, when endorsed, may be treated by the Company and all
other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this
Warrant, or to the transfer hereof on the books of the Company, any notice to
the contrary notwithstanding; but until such transfer on such books, the
Company may treat the registered holder hereof as the owner for all purposes.
(b) This Warrant is exchangeable, upon the surrender hereof by the
holders hereof at the principal office of the Company, for new Warrants of
like tenor representing in the aggregate the right to subscribe for and
purchase the number of shares of Common Stock which may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by
said holders hereof at the time of such surrender.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and to be dated as of the date set forth above.
PHOTRAN CORPORATION
By /s/ [ILLEGIBLE]
----------------------------------
Its PRESIDENT
----------------------------------
RESTRICTION OF TRANSFER
The securities evidenced hereby have not been registered under the
Securities Act of 1933 and may not be sold, transferred, assigned, offered,
pledge or otherwise distributed for value unless there is an effective
registration statement under such Act covering such securities or the Company
receives an opinion of counsel satisfactory to the Company stating that such
sale, transfer, assignment, pledge or distribution is exempt from the
registration and prospectus delivery requirements of such Act.
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EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT is dated as of the 1st day of
August, 1997, between Photran Corporation, a Minnesota corporation ("Company"),
and Paul T. Fink, a Minnesota resident ("Executive").
R E C I T A L S
A. Executive is presently employed by the Company in the
capacity of President and Chief Executive Officer.
B. Executive possesses certain unique skills, talents,
contacts, judgment and knowledge of the Company's businesses, strategies,
ethics and objectives.
C. In order to provide for continuity in the executive
management of the Company, which continuity is deemed to be vital to the
continued growth and success of the Company, and in order that the Company
may continue to avail itself of the unique skills, talents, contacts,
judgment and knowledge of Executive, the Company desires to ensure the
retention of Executive in the employ of the Company.
D. Executive desires to be assured of a secure tenure with the
Company, duties and responsibilities commensurate with Executive's education,
experience and background, and salary, bonus, incentive compensation and
other benefits and perquisites at levels that reflect Executive's anticipated
future contributions to the Company.
In consideration of the foregoing premises and the parties' mutual
covenants and undertakings contained in this Agreement, the Company and
Executive agree as follows:
ARTICLE I. DEFINITIONS
Capitalized terms used in this Agreement shall have their defined
meaning throughout the Agreement. The following terms shall have the meanings
set forth below, unless the context clearly requires otherwise.
1.1 "AGREEMENT" means this Executive Employment Agreement, as
from time to time amended.
1.2 "BASE SALARY" means the total annual cash compensation
payable on a regular periodic basis, without regard to voluntary or mandatory
deferrals, as set forth at paragraph 3.1 of this Agreement.
1.3 "BENEFICIARY" means the person or persons designated in
writing to the Company by Executive to receive benefits payable after
Executive's death pursuant to paragraph 3.7 or 3.8 of this Agreement. In the
absence of such designation or in the event that all of the persons so
designated predecease Executive, Beneficiary means the executor,
administrator or personal representative of Executive's estate.
1.4 "BOARD" means the Board of Directors of the Company.
1.5 "CAUSE" has the meaning set forth at paragraph 4.2 of this
Agreement.
1.6 "CHANGE IN CONTROL" shall mean any of the following events:
(a) An acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any
"Person" (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 30% or more of the combined voting power of the Company's then
outstanding Voting Securities; provided, however, that in determining
whether a Change in Control has occurred, the acquisition of Voting
Securities in a "Non-Control Acquisition" (as hereinafter defined)
shall not cause a Change in Control. A "Non-Control Acquisition" shall
mean an acquisition by (i) an employee benefit plan (or a trust forming
a part thereof) maintained by the Company, (ii) the Company, or (iii)
any Person in connection with a Non-Control Transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person acquired Beneficial Ownership of
more
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than the permitted amount of the outstanding Voting Securities as
a result of the acquisition of Voting Securities by the Company which,
by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person,
provided that if a Change in Control would occur (but for the operation
of this sentence) as a result of the acquisition of Voting Securities
by the Company, and after such share acquisition by the Company, the
Subject Person becomes the Beneficial Owner of any additional Voting
Securities which increases the percentage of the then outstanding
Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(b) During any period of two consecutive years,
individuals who at the beginning of such period constitute the
entire Board of Directors (the "Incumbent Board") cease for any
reason to constitute a majority thereof; provided, however, that if
the election, or nomination for election by the Company's
stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for
purposes of this Agreement, be considered as a member of the
Incumbent Board.
(c) Approval by stockholders of the Company if
required, or if not required the approval by the Board, of:
(i) a merger, consolidation, or
reorganization involving the Company, unless such merger,
consolidation, or reorganization is a Non-Control
Transaction;
(ii) a complete liquidation or dissolution of
the Company; or
(iii) an agreement for the sale or other
disposition of all or substantially all of the assets of
the Company to any Person.
1.7 "CONFIDENTIAL INFORMATION" means information that is
proprietary to the Company or proprietary to others and entrusted to the
Company, whether or not trade secrets. Confidential Information includes, but
is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past or current or
anticipated products. Confidential Information also includes, without
limitation, information concerning research, development, purchasing,
accounting, marketing, selling and services. All information that Executive
has a reasonable basis to consider confidential is Confidential Information,
whether or not originated by Executive and without regard to the manner in
which Executive obtains access to this and any other proprietary information.
1.8 "DATE OF TERMINATION" has the meaning set forth at
paragraph 4.6(b) of this Agreement.
1.9 "DISABILITY" means the unwillingness or inability of
Executive to perform Executive's duties under this Agreement because of
incapacity due to physical or mental illness, bodily injury or disease for a
period of six (6) months.
1.10 "GOOD REASON" has the meaning set forth at paragraph 4.3 of
this Agreement.
1.11 "INVENTIONS" means ideas, improvements and discoveries,
whether or not such are patentable or copyrightable, and whether or not in
writing or reduced to practice.
1.12 "NOTICE OF TERMINATION" has the meaning set forth at
paragraph 4.6(a) of this Agreement.
1.13 "PLAN" means any bonus or incentive compensation agreement,
plan, program, policy or arrangement sponsored, maintained or contributed to
by the Company, to which the Company is a party or under which employees of
the Company are covered, including, without limitation, any stock option,
restricted stock or any other equity-based compensation plan, annual or
long-term incentive (bonus) plan, and any employee benefit plan, such as a
thrift, pension, profit sharing, deferred compensation, medical, dental,
disability, accident, life insurance, automobile allowance, perquisite,
fringe benefit, vacation, sick or parental leave, severance or relocation
plan or policy or any other agreement, plan, program, policy or arrangement
intended to benefit employees or executive officers of the Company.
1.14 "SUCCESSOR" has the meaning set forth at paragraph 7.2 of
this Agreement.
1.15 "WORKS OF AUTHORSHIP" means writings, drawings, software,
semiconductor mask works, and any other works of authorship, whether or not
such are copyrightable.
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ARTICLE II. EMPLOYMENT, DUTIES AND TERM
2.1 EMPLOYMENT. Upon the terms and conditions set forth in this
Agreement, the Company hereby employs Executive, and Executive accepts such
employment, as President and Chief Executive Officer of the Company. Except
as expressly provided herein, termination of this Agreement by either party
or by mutual agreement of the parties shall also terminate Executive's
employment by the Company.
2.2 DUTIES. During the term of this Agreement, and excluding
any periods of vacation, sick, disability or other leave to which Executive
is entitled, Executive agrees to devote reasonable attention and time to the
business and affairs of the Company and to perform such duties as determined
from time to time by mutual agreement among Executive and the Board of
Directors of the Company and, to the extent necessary to discharge the
responsibilities assigned to Executive hereunder and under the Company's
By-Laws, as amended from time to time, to use Executive's reasonable best
efforts to perform faithfully and efficiently such responsibilities. During
the term of this Agreement, it shall not be a violation of this Agreement for
Executive to serve on corporate, civic or charitable boards or committees,
deliver lectures, fulfill speaking engagements or teach at educational
institutions and manage personal investments, so long as such activities do
not significantly interfere with the performance of Executive's
responsibilities as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to the extent that any
such activities have been conducted by Executive prior to the date of this
Agreement, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the date of
this Agreement shall not thereafter be deemed to interfere with the
performance of Executive's responsibilities to the Company. Executive shall
comply with the Company's policies and procedures; provided, that to the
extent such policies and procedures are inconsistent with this Agreement, the
provisions of this Agreement shall control.
2.3 CERTAIN PROPRIETARY INFORMATION. If Executive possesses any
proprietary information of another person or entity as a result of prior
employment or relationship, Executive shall honor any legal obligation that
Executive has with that person or entity with respect to such proprietary
information.
2.4 TERM. Subject to the provisions of Article IV, the term of
employment of Executive under this Agreement shall continue until December
31, 1999.
Commencing January 1, 2000 and each January 1 thereafter, the term of
Executive's employment hereunder shall be automatically extended for one (1)
additional year unless on or before the October 31 immediately preceding any
such January 1 either party gives written notice to the other of the cessation
of further extensions, in which case no further automatic extensions shall
occur.
2.5 RETURN OF PROPRIETARY PROPERTY. Executive agrees that all
property in Executive's possession belonging to Company, including without
limitation, all documents, reports, manuals, memoranda, computer print-outs,
customer lists, credit cards, keys, identification, products, access cards,
automobiles and all other property relating in any way to the business of the
Company are the exclusive property of the Company, even if Executive
authored, created or assisted in authoring or creating, such property.
Executive shall return to the Company all such documents and property
immediately upon termination of employment or at such earlier time as the
Company may reasonably request.
ARTICLE III. COMPENSATION, BENEFITS AND EXPENSES
3.1 BASE SALARY. Subject to paragraph 4.7(a), during the term
of Executive's employment under this Agreement and for as long thereafter as
required pursuant to Article IV, the Company shall pay Executive a Base
Salary at an annual rate that is not less than One Hundred Thousand and
00/100 Dollars ($100,000.00) or such higher annual rate as may from time to
time be approved by the Board, such Base Salary to be paid in substantially
equal regular periodic payments in accordance with the Company's regular
payroll practices. If Executive's Base Salary is increased from time to time
during the term of Executive's employment under this Agreement, the increased
amount shall become the Base Salary for the remainder of the term and any
extensions of Executive's term of employment under this Agreement and for as
long thereafter as required pursuant to Article IV, subject to any subsequent
increases. The Board of Directors of the Company shall review Executive's
Base Salary and all other compensation provided for by this Agreement on a
periodic basis (not longer than one year) and shall make such increases or
pay such bonuses as it determines to be appropriate in its sole discretion.
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3.2 OTHER COMPENSATION AND BENEFITS. During the term of
Executive's employment under this Agreement and for as long thereafter as
required pursuant to Article IV, the Company shall continue in full force and
effect all Plans in which Executive is participating as of the date of this
Agreement or in which Executive becomes entitled to participate after the
date of this Agreement (or Plans providing Executive with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect as of
the date of this Agreement or the date as of which Executive first becomes
entitled to participate in such Plan, as the case may be, and shall not take
or omit to take any action that would adversely affect Executive's continued
participation in any such Plans on at least as favorable a basis to Executive
as is the case on the date of this Agreement or the date as of which
Executive first becomes entitled to participate in such Plan, as the case may
be, or which would materially reduce Executive's benefits in the future under
any such Plans or deprive Executive of any material benefit enjoyed by
Executive as of the date of this Agreement or the date as of which Executive
first becomes entitled to participate in such Plan, as the case may be.
Executive shall be entitled to participate in or receive benefits under any
Plan made available by the Company in the future to its executives and key
management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such Plans. Nothing paid to
Executive under any Plan presently in effect or made available in the future
shall be deemed to be in lieu of the Base Salary, bonuses, incentives or
compensation of any other nature otherwise payable to Executive. The Company
shall also procure, for the benefit of Executive and his beneficiaries, a
term life insurance policy with a death benefit in the amount of $250,000,
which policy shall be maintained in full force and effect during the term of
this Agreement.
3.3 VACATION. For the 1997 calendar year and each subsequent
calendar year that begins during the term of Executive's employment under
this Agreement and for each calendar year thereafter as required pursuant to
Article IV of this Agreement, Executive shall be entitled to fifteen (15)
paid vacation days. The time or times at which such vacation days are to be
taken shall be reasonably determined by Executive consistent with Executive's
duties and obligations under this Agreement. Executive shall be entitled to
carry forward up to fifteen (15) unused vacation days per year in the
aggregate. Upon the execution of this Agreement, the Company shall also pay
Executive for twenty (20) currently unused vacation days at his compensation
rate in effect immediately prior to the date hereof.
3.4 BUSINESS EXPENSES. During the term of Executive's
employment under this Agreement and for as long thereafter as required
pursuant to Article IV, the Company shall, in accordance with, and to the
extent of, its uniform policies in effect from time to time, bear all
ordinary and necessary business expenses incurred by Executive in performing
Executive's duties as an executive officer of the Company, including, without
limitation, all travel and living expenses while away from home on business
in the service of the Company, home telephone expenses and entertainment
expenses, provided that Executive accounts promptly for such expenses to the
Company in the manner reasonably prescribed from time to time by the Company.
3.5 AUTOMOBILE. The Company shall pay, or at Executive's
election shall reimburse Executive for, all fees, taxes, costs and expenses
relating to leasing, licensing, insuring and maintaining an automobile for
the exclusive use by Executive and shall furnish gasoline in connection with
any use of such automobile by Executive for Company purposes. Executive shall
be responsible for all payments attributable to traffic violations relating
to Executive's use of such automobile (other than such payments, or the
portion thereof, covered by insurance on such automobile) and shall maintain
the automobile in saleable condition at all times. Executive shall also be
responsible for all costs of fuel related to his personal use of such
automobile as well as all income tax liabilities incurred in connection with
his personal use thereof.
3.6 OFFICE AND FACILITIES. During the term of Executive's
employment under this Agreement, the Company shall furnish Executive with
office space, at least equivalent in size, quality, furnishings and in other
respects to the office space provided as of the date of this Agreement, and
full-time secretarial service, together with such other reasonable facilities
and services as are suitable, necessary and appropriate.
3.7 GRANT OF OPTIONS. The Company shall grant to Executive
options to acquire 100,000 shares of the Company's common stock, no par value
per share. Such options shall be granted pursuant to the Company's 1992 Stock
Option Plan as evidenced by a grant agreement to be entered into between
Executive and the Company simultaneously with the execution of this Agreement.
ARTICLE IV. EARLY TERMINATION
4.1 EARLY TERMINATION. Subject to the respective continuing
obligations of the parties pursuant to Article V, this Article IV sets forth
the terms for early termination of Executive's employment under this
Agreement.
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4.2 TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate this Agreement for Cause. For purposes of this Agreement, "Cause"
means (a) an act or acts of personal dishonesty taken by Executive and
intended to result in substantial personal enrichment of Executive at the
expense of the Company, (b) Executive's breach of any material covenant or
agreement contained in this Agreement, (c) intentional failure or refusal by
Executive to perform any of his duties and responsibilities hereunder, which
failure or refusal is not remedied within a reasonable period after
Executive's receipt of written notice of such failure or refusal from the
Company, or (d) the willful engaging by Executive in illegal conduct that is
materially and demonstrably injurious to the Company. For purposes of this
paragraph 4.2, no act, or failure to act, on Executive's part shall be
considered "dishonest," "willful" or "deliberate" unless done, or omitted to
be done, by Executive in bad faith and without reasonable belief that
Executive's action or omission was in, or not opposed to, the best interest
of the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the advice
of counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best interests of
the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board (excluding
Executive for purposes of determining a majority) at a meeting of the Board
called and held for that purpose (after reasonable notice to Executive and an
opportunity for Executive, together with Executive's counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of the conduct set forth above in this paragraph 4.2 and
specifying the particulars thereof in detail.
4.3 TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may
terminate Executive's employment under this Agreement for Good Reason in
accordance with the ensuing provisions of this paragraph 4.3. Termination by
Executive for "Good Reason" shall mean termination of employment based on any
one or more of the following:
(a) An adverse change in Executive's status or
position as President and Chief Executive Officer of the Company,
including, without limitation, any adverse change in Executive's
status or position as a result of a material diminution in
Executive's duties, responsibilities or authority as of the date of
this Agreement or the assignment to Executive of any duties or
responsibilities which, in Executive's reasonable judgment, are
inconsistent with Executive's status or position, or any removal of
Executive from or any failure to reappoint or reelect Executive to
such positions (except in connection with the termination of
Executive's employment for Cause in accordance with paragraph 4.2
hereof or Disability or death in accordance with paragraph 4.4
hereof);
(b) A reduction by the Company in Executive's Base
Salary as in effect immediately prior to the date of this Agreement
or as the same may be increased from time to time or a change in the
eligibility requirements or performance criteria under any Plan
under which Executive is covered immediately prior to the date of
this Agreement, which adversely affects Executive;
(c) Without replacement by a Plan providing benefits
to Executive equal to or greater than those discontinued, the
failure by the Company to continue in effect, within its maximum
stated term, any Plan in which Executive is participating
immediately prior to the date of this Agreement or the taking of any
action by the Company that would adversely affect Executive's
participation or materially reduce Executive's benefits under any
Plan;
(d) The Company's requiring Executive to be based
anywhere other than the Minneapolis/St. Paul metropolitan area,
except for required travel on the Company's business to an extent
substantially consistent with the business travel obligations which
Executive undertook on behalf of the Company prior to the date of
this Agreement;
(e) The failure by the Company to obtain from
any Successor an assent to this Agreement contemplated by
paragraph 7.2; or
(f) Any breach of this Agreement by the Company other
than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company within a
reasonable period after the Company's receipt of notice thereof from
the Executive.
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Notwithstanding any other provision of this Agreement to the contrary,
any termination by Executive of his employment for any reason during the sixty
(60) day period immediately following a Change-in-Control of the Company shall
be a termination for Good Reason.
4.4 TERMINATION IN THE EVENT OF DEATH OR DISABILITY. The term
of Executive's employment under this Agreement shall terminate in the event
of Executive's death or Disability.
4.5 TERMINATION BY MUTUAL AGREEMENT. The parties may terminate
Executive's employment under this Agreement at any time by mutual written
agreement.
4.6 NOTICE OF TERMINATION; DATE OF TERMINATION. The provisions
of this paragraph 4.6 shall apply in connection with any early termination of
Executive's employment under this Agreement pursuant to this Article IV.
(a) For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provisions in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to
provide the basis for such termination. Any purported termination by
the Company or by Executive pursuant to this Article IV (other than
a termination by mutual agreement pursuant to paragraph 4.5 or
death) shall be communicated by written Notice of Termination to the
other party hereto.
(b) For purposes of this Agreement, "Date of
Termination" shall mean: (1) if Executive's employment is terminated
due to death, the last day of the month first following the month
during which Executive's death occurs; (2) if Executive's employment
is to be terminated for Disability, thirty (30) calendar days after
Notice of Termination is given; (3) if Executive's employment is
terminated by the Company for Cause or by Executive for Good Reason,
the date specified in the Notice of Termination; (4) if Executive's
employment is terminated by mutual agreement of the parties, the
date specified in such agreement; or (5) if Executive's employment
is terminated for any other reason, the date specified in the Notice
of Termination, which in no event shall be a date earlier than
ninety (90) calendar days after the date on which a Notice of
Termination is given, unless an earlier date has been expressly
agreed to by Executive in writing either in advance of, or after,
receiving such Notice of Termination; provided, however, if within
thirty (30) calendar days after giving of a Notice of Termination
the recipient of the Notice of Termination notifies the other party
that a dispute exists concerning the termination, then the Date of
Termination shall be the date on which the dispute is finally
determined, whether by mutual written agreement of the parties, by
final and binding arbitration or by final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom
having expired or no appeal having been perfected). During the
pendency of any such dispute and until the dispute is resolved in
the manner provided in the immediately preceding sentence, the
Company will continue to pay Executive all compensation and benefits
to which he was entitled pursuant to Article III immediately prior
to the time the Notice of Termination is given.
4.7 COMPENSATION UPON TERMINATION, DEATH OR DURING DISABILITY.
(a) During any period that Executive fails to perform
Executive's duties hereunder as a result of incapacity due to
physical or mental illness, bodily injury or disease, Executive
shall continue to receive all Base Salary and other compensation and
benefits to which Executive is otherwise entitled under this
Agreement and any Plan until Executive's Date of Termination.
(b) If Executive's employment under this Agreement is
terminated on account of Disability or death, the Company shall,
within ten (10) calendar days following the Date of Termination, pay
any amounts due to Executive for Base Salary through the Date of
Termination, together with any other unpaid and pro rata amounts to
which Executive is entitled as of the Date of Termination pursuant
to Article III hereof, including, without limitation, amounts which
Executive is entitled under any Plan in accordance with the terms of
such Plan, and further, including, without limitation, a pro rata
portion (prorated through the Date of Termination) of any annual or
long-term bonus or incentive payments (for performance periods in
effect at the Date of Termination) to which Executive would have
been entitled had Executive remained continuously employed through
the end of such performance periods and continued to perform
Executive's duties in the same manner as performed immediately prior
to the Executive's death or disability.
(c) If Executive's employment under this Agreement is
terminated by the Company for Cause or by Executive for other than
Good Reason, the Company shall pay Executive the Base Salary through
the Date of Termination and any amounts to which the Executive is
entitled under any Plan in accordance with the terms of such Plan.
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(d) If Executive's employment under this Agreement is
terminated by the mutual agreement of the parties under paragraph
4.5, the Company shall provide Executive with the payments and
benefits specified in the agreement.
(e) If, in breach of this Agreement, the Company
terminates Executive's employment hereunder (it being understood
that a purported termination for Disability or for Cause which is
disputed and finally determined not to have been proper shall be a
termination by the Company in breach of this Agreement) or if
Executive terminates his employment hereunder for Good Reason for
the unexpired term of this Agreement as determined in accordance
with paragraph 2.3, unless earlier terminated pursuant to paragraph
4.4 or paragraph 4.5, the Company shall, as liquidated damages for
such breach:
(1) continue to pay any amounts due to
Executive for Base Salary in accordance with paragraphs 3.1
at the annual rate in effect thereunder immediately prior
to the Date of Termination (but determined without regard
to any purported reduction in Base Salary which gave rise
to such termination of employment) in the same manner as if
Executive had remained continuously employed for the period
of one (1) year;
(2) cause Executive's continued participation
in all Plans in accordance with paragraph 3.2 of this
Agreement as if Executive remained continuously employed
with the Company throughout the period described in
paragraph 4.7(e)(1) for all purposes, including without
limitation grants, awards, accruals and vesting thereunder;
provided, that, if such continued participation is not
permissible under applicable law, the Company shall provide
Executive with benefits substantially similar to those to
which Executive would have been entitled under those Plans
in which Executive's continued participation is not
permissible; and
(3) continue to (i) provide Executive with
paid vacation in accordance with paragraph 3.3 of this
Agreement, (ii) bear business expenses of Executive in
accordance with paragraph 3.4 with respect to matters
reasonably undertaken by Executive on behalf of the
Company, and (iii) provide Executive with Automobile in
accordance with paragraph 3.5 of this Agreement, all in the
same manner as if Executive had remained continuously
employed throughout the period described in paragraph
4.7(e)(1);
without regard to whether any such compensation or benefits referred to
in clauses (1) through (3) of this subparagraph (e) constitute excess
parachute payments for purposes of Section 280G of the Internal Revenue
Code of 1986, as amended.
(f) The liquidated damages determined pursuant to
subparagraph (e) shall be mitigated to the extent of Executive's
"earned income" within the meaning of Section 911((d)(2)(A) of the
Internal Revenue Code of 1986, as amended, during the remainder of
the period with respect to which such liquidated damages are
required to be paid.
ARTICLE V. CONFIDENTIAL INFORMATION
5.1 PROHIBITIONS AGAINST USE. Executive will not during or
subsequent to the termination of Executive's employment under this Agreement
use or disclose, other than in connection with Executive's employment with
the Company, any Confidential Information to any person not employed by the
Company or not authorized by the Company to receive such Confidential
Information, without the prior written consent of the Company. Executive will
use reasonable and prudent care to safeguard, protect and prevent the
unauthorized use and disclosure of Confidential Information. The obligations
contained in this paragraph 5.1 will survive for as long as the Company in
its sole judgment considers the information to be Confidential Information.
The obligations under this paragraph 5.1 will not apply to any Confidential
Information that is now or becomes generally available to the public through
no fault of Executive or due to Executive's disclosure of any Confidential
Information required by law or judicial or administrative process.
39
<PAGE>
ARTICLE VI. NON-COMPETITION
6.1 NON-COMPETITION. Subject to paragraph 6.2 and 6.3, Executive
agrees that during the term of this Agreement and for a period of one (1)
year following termination of employment for any reason, Executive will not,
anywhere in the world, directly or indirectly, alone or as a partner,
officer, director, shareholder or employee of any other firm or entity,
engage in any commercial activity in competition with any part of the
Company's business as conducted during the term of the Agreement or as of the
date of such termination of employment or with any part of the Company's
contemplated business with respect to which Executive has Confidential
Information as governed by Article V. For purposes of this clause (a),
"shareholder" shall not include beneficial ownership of less than five
percent (5%) of the combined voting power of all issued and outstanding
voting securities of a publicly held corporation whose stock is traded on a
major stock exchange or quoted on NASDAQ.
6.2 EARLY TERMINATION. Notwithstanding paragraph 6.1, if
Executive's employment terminates under circumstances which entitle him to
receive liquidated damages for breach of this Agreement pursuant to paragraph
4.7(e) and the Company fails to provide Executive with any compensation or
benefits due him pursuant to paragraph 4.7(e) and does not remedy such
failure within ten (10) days after receipt of notice of such failure from
Executive, the restrictions set forth in paragraph 6.1 shall cease to apply
to Executive for the remainder of the period to which such restrictions would
otherwise apply notwithstanding any subsequent remedy of such failure by the
Company.
6.3 JUDICIAL MODIFICATION. If any of the foregoing covenants are
deemed by a court of competent jurisdiction to be unenforceable because of
their scope or duration, or the area or subject matter covered thereby, the
Company and Executive agree that the court making such determination shall
have the power to reduce or modify the scope, duration, subject matter and/or
area of such covenant to the extent that allows the maximum scope, duration,
subject matter and area permitted by applicable law.
6.4 COVENANT NOT TO RECRUIT. Executive recognizes that the
Company's workforce constitutes an important and vital aspect of its business
on a world-wide basis. Executive agrees that for a period of two (2) years
following the termination of this Agreement for any reason whatsoever, he
shall not solicit, or assist anyone else in the solicitation of, any of the
Company's then-current employees to terminate their employment with the
Company and to become employed by any business enterprise with which the
Executive may then be associated, affiliated or connected.
ARTICLE VII. GENERAL PROVISIONS
7.1 NO ADEQUATE REMEDY. Notwithstanding paragraph 4.7, the
parties declare that it is impossible to accurately measure in money the
damages which will accrue to either party by reason of a failure to perform
any of the obligations under this Agreement. Therefore, if either party shall
institute any action or proceeding to enforce the provisions hereof, other
than a claim by Executive for a payment pursuant to paragraph 4.7, the party
against whom such action or proceeding is brought hereby waives the claim or
defense that such party has an adequate remedy at law, and such party shall
not assert in any such action or proceeding the claim or defense that such
party has an adequate remedy at law.
7.2 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to
the benefit of any Successor of the Company, and any such Successor
shall absolutely and unconditionally assume all of the Company's
obligations hereunder. Upon Executive's written request, the Company
will seek to have any Successor, by agreement in form and substance
satisfactory to Executive, assent to the fulfillment by the Company
of its obligations under this Agreement. Failure to obtain such
assent at least three (3) business days prior to the time a person
or entity becomes a Successor (or where the Company does not have at
least three (3) business days' advance notice that a person or
entity may become a Successor, within one (1) business day after
having notice that such person or entity may become or has become a
Successor) shall constitute Good Reason for termination by Executive
of employment pursuant to paragraph 4.3. For purposes of this
Agreement, "Successor" shall mean any corporation, individual,
group, association, partnership, firm, venture or other entity or
person that, subsequent to the date hereof, succeeds to the actual
or practical ability to control (either immediately or with the
passage of time), all or substantially all of the Company's business
and/or assets, directly or indirectly, by merger, consolidation,
recapitalization, purchase, liquidation, redemption, assignment,
similar corporate transaction, operation of law or otherwise.
(b) This Agreement and all rights of Executive
hereunder shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors,
administrators, successors, heirs,
40
<PAGE>
distributees, devisees and legatees. If Executive should die while
any amounts would still be payable to Executive hereunder if
Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to Executive's devisee, legatee, or other designee or, if
there be no such designee, to Executive's estate. Executive may not
assign this Agreement, in whole or in any part, without the prior
written consent of the Company.
7.3 DISPUTES. Any dispute, controversy or claim for damages
arising under or in connection with this Agreement shall, in Executive's sole
discretion, be settled exclusively by such judicial remedies as Executive may
seek to pursue or by arbitration in Minneapolis, Minnesota by a panel of
three (3) arbitrators in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entitled on the
arbitrators' award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of Executive's right
to be paid until the Date of Termination during the pendency of any dispute
or controversy arising under or in connection with this Agreement. The
Company shall bear all costs and expenses, including attorney's fees, arising
in connection with any arbitration proceeding pursuant to this paragraph 7.3.
The Company shall be entitled to seek an injunction or restraining order in a
court of competent jurisdiction to enforce the provisions of Article V and VI.
7.4 NOTICES. All notices, requests and demands given to or made
pursuant hereto shall, except as otherwise specified herein, be in writing
and be personally delivered or mailed postage prepaid, registered or
certified U.S. mail, to any party at its address set forth on the last page
of this Agreement. Either party may, by notice hereunder, designate a changed
address. Any notice hereunder shall be deemed effectively given and received:
(a) if personally delivered, upon delivery; or (b) if mailed, on the
registered date or the date stamped on the certified mail receipt.
7.5 WITHHOLDING. To the extent required by any applicable law,
including, without limitation, any federal or state income tax or excise tax
law or laws, the Federal Insurance Contributions Act, the Federal
Unemployment Tax Act or any comparable federal, state or local laws, the
Company retains the right to withhold such portion of any amount or amounts
payable to Executive under this Agreement as the Company (on the written
advice of outside counsel) deems necessary.
7.6 CAPTIONS. The various headings or captions in this Agreement
are for convenience only and shall not affect the meaning or interpretation
of this Agreement.
7.7 GOVERNING LAW. The validity, interpretation, construction,
performance, enforcement and remedies of or relating to this Agreement, and
the rights and obligations of the parties hereunder, shall be governed by the
substantive laws of the State of Minnesota (without regard to the conflict of
laws rules or statutes of any jurisdiction), and any and every legal
proceeding arising out of or in connection with this Agreement shall be
brought in the appropriate courts of the State of Minnesota, each of the
parties hereby consenting to the exclusive jurisdiction of said courts for
this purpose.
7.8 CONSTRUCTION. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
7.9 WAIVERS. No failure on the part of either party to exercise,
and no delay in exercising, any right or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right or
remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right or remedy granted hereby or by any related
document or by law.
7.10 MODIFICATION. This Agreement may not be modified or amended
except by written instrument signed by the parties hereto.
7.11 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding between the parties hereto in reference to all
the matters herein agreed upon. This Agreement replaces in full all prior
employment agreements or understandings of the parties hereto, and any and
all such prior agreements or understandings are hereby rescinded by mutual
agreement.
7.12 COUNTERPARTS. This Agreement may be executed in one (1) or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
41
<PAGE>
7.13 SURVIVAL. The parties expressly acknowledge and agree that
the provisions of this Agreement which by their express or implied terms
extend beyond the termination of Executive's employment hereunder (including,
without limitation, the provisions of paragraph 4.7 (relating to
compensation)) or beyond the termination of this Agreement (including,
without limitation, the provisions of paragraph 5.1 (relating to confidential
information) and Article VI (relating to non-competition)), shall continue in
full force and effect notwithstanding Executive's termination of employment
hereunder or the termination of this Agreement, respectively.
7.14 ATTORNEYS' FEES. The Company shall reimburse Executive for
all reasonable attorneys' fees incurred by Executive in negotiating this
Agreement; provided, however, that such reimbursement obligation shall not
exceed $2,500.
IN WITNESS WHEREOF, the parties hereto have caused this Executive
Employment Agreement to be duly executed and delivered as of the day and year
first above written.
EXECUTIVE COMPANY
PHOTRAN CORPORATION
By
- -------------------------- ----------------------------
Paul T. Fink Its Chairman
Address: Address:
- ---------------------------- 21875 Grenada Avenue
- ---------------------------- Lakeville, Minnesota 55044
42
<PAGE>
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT is made this 17th day of January, 1998 by and between
SHENZHEN WABO GROUP CO., LTD. ("WABO") of 3/F Bao An Building, Shen Nan Zhong
Lu, Shenzhen, Guangdong Province, China and PHOTRAN CORPORATION ("PHOTRAN") OF
21875 Grenada Avenue, Lakeville, Minnesota 55044, U.S.A.
RECITALS
WHEREAS, the parties entered into a Joint Venture Contract dated August 11, 1994
(the "JV Contract") for the establishment of Shenzhen Fortune Conductive Glass
Co., Ltd. (the "JV Company");
WHEREAS, in connection with the establishment of the JV Company various other
contracts were entered into on August 11, 1994, including the Authorized Plant
Site Construction and Purchase Agreement between the JV Company and WABO (the
"Building Contract") and the P-1000 System and Supporting Equipment Authorized
Purchase Agreement between the JV Company and PHOTRAN (the "Equipment
Contract");
WHEREAS, disputes arose during the performance of the JV Contract, the Building
Contract and the Equipment Contract and on February 19, 1997 WABO commenced
arbitration proceedings against PHOTRAN before the China International Economic
and Trade Arbitration Commission, Shenzhen Commission ("CIETAC"); and
WHEREAS, the following friendly negotiations between WABO and PHOTRAN the
parties have agreed to settle amicably and to resolve finally all disputes
between them in accordance with the terms set out in this Settlement Agreement.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. In accordance with the provisions hereafter set forth, WABO and PHOTRAN
hereby agree to fully and finally settle all claims of whatsoever nature arising
between them under or in connection with the JV Contract, the Building Contract,
the Equipment Contract and all other agreements, documents or understandings
between the parties with respect to any aspect of any of the foregoing.
2. In furtherance of the settlement between the parties, PHOTRAN agrees to
provide compensation to WABO in the manner set out below:
(a) PHOTRAN shall pay to WABO US$1,500,000 (One Million Five Hundred Thousand
United States Dollars) in cash. The full amount of the cash payment shall be
remitted by PHOTRAN by telegraphic transfer to the following account:
Bank Name: Bank of China, Shenzhen Branch, Baoan Sub-Branch.
Address: Baoan District of Shenzhen City, The People's Republic of China
Account Number: 0115040004216
Name and Address of the Account Holder: Shenzhen WABO Group Co., Ltd.
3/F, Baoan Bldg., Shennan Zhong Road, Shenzhen, China.
43
<PAGE>
(b) PHOTRAN shall deliver to holders who are residents of the United States
including companies registered in the United States, designated by WABO, stock
certificates of Photran Corporation evidencing ownership of a total of TWO
Hundred Thousand (200,000) shares of the common stock of Photran Corporation as
soon as possible after the execution of this Agreement. Such shares shall be in
unregistered form; provided, however, that PHOTRAN shall promptly and diligently
commence proceedings to register such shares and shall use commercially
reasonable efforts to cause an initial registration statement to be filed with
the U.S. Securities and Exchange Commission within ninety (90) days of the date
of receipt by PHOTRAN of an original copy of the Arbitration Award referred to
in Section 5 below. WABO shall notify PHOTRAN of the names of the designees to
whom the certificates will be issued to provide sufficient time for the issuance
of the stock. PHOTRAN shall issue such shares of stock in full compliance with
its Articles of Incorporation. WABO shall authorize, execute and deliver, and
shall cause each of its designated holders of PHOTRAN stock to authorize,
execute and deliver, all certificates, documents and agreements required by
PHOTRAN to fully comply with the registration procedures in connection with the
issuance of such shares of stock of PHOTRAN.
(c) WABO and PHOTRAN shall share equally the total amount of the arbitration fee
paid by the parties to CIETAC in connection with the arbitration proceedings.
The total amount is US$70,920 (Seventy Thousand Nine Hundred twenty Only United
States Dollars), of which US$7,500 (Seven Thousand Five Hundred United States
Dollars) has been paid by PHOTRAN. PHOTRAN shall remit the balance of its share,
being US$27,960 (Twenty Seven Thousand Nine Hundred Sixty Only United States
Dollars), to WABO in the same manner as specified in subsection (a) above.
Payment of the cash amount referred to in subsection (a) and (c) above shall be
made by PHOTRAN within thirty (30) days of the date of receipt by PHOTRAN of an
original copy of the Arbitration Award referred to in Section 5 below. Delivery
of the stock certificates referred to in subsection (b) above shall be made by
PHOTRAN within thirty (30) days of the date of receipt by PHOTRAN of an original
copy of the Arbitration Award referred to in Section 5 below.
3. WABO and PHOTRAN hereby agree to terminate the JV Contract, and to take
all necessary action so as to cause the Building Contract and Equipment
Contract to be terminated. Immediately after the issuance of the Arbitration
Award referred to in Section 5 below, WABO shall be responsible to conduct
the procedures for dissolution of the JV Company in accordance with the JV
Contract and relevant procedures of Chinese law. PHOTRAN shall have no claim
on the assets of the JV Company in its dissolution, and all outstanding
liabilities of the JV Company (in any) shall be borne by WABO.
4. Upon the effective Date of this Agreement, WABO and PHOTRAN shall
discharge and release each other from any and all rights and obligations
under the JV Contract, the Building Contract and the Equipment Contract and
every other document and agreement related thereto. WABO and PHOTRAN further
discharge and release each other from any and all existing and/or future
claims against each other.
5. Promptly after its execution by WABO and PHOTRAN, this Settlement
Agreement shall be submitted to the Arbitration Tribunal duly formed in
accordance with the Arbitration Rules of China International Economic and
Trade Arbitration Commission ("CIETAC Rules") and to the Secretariat of the
CIETAC, Shenzhen Commission. The Arbitration Tribunal is hereby requested by
the parties to render an Arbitration Award incorporating in their entirety
the terms of this Settlement Agreement in accordance with Article 44 of the
CIETAC Rules. Immediately upon issuance of the Arbitration Award, WABO shall
cause the CIETAC Secretariat to deliver an original copy of the Award to
PHOTRAN.
44
<PAGE>
6. This settlement Agreement is made in both English and Chinese. Both
language versions shall be equally valid. In case of discrepancy, the Chinese
version shall prevail. This Settlement Agreement is made in three originals
with each party keeping one copy and the third copy to be submitted to the
Arbitration Tribunal.
SHENZHEN WABO GROUP COMPANY LTD. PHOTRAN CORPORATION
Signature: Signature
- -------------------------- -------------------------
Authorized Representative Authorized Representative
45
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