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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 March 31, 1998
Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________________ to _________________
Commission file number 000-20731
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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 .
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The number of the registrant's common shares outstanding as of May 15, 1998
was 5,356,024
Transitional Small Business Disclosure Format (check one):
Yes No X .
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PHOTRAN CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
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 15
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature page 17
Exhibit Index 18
</TABLE>
1
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS (Unaudited)
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,531 $ 46,107
Accounts receivable 589,118 722,113
Inventory 632,685 387,000
Prepaid expense 107,380 37,814
Marketable securities, restricted 2,250,000
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Total current assets 1,370,714 3,443,034
PROPERTY AND EQUIPMENT, net 18,675,641 18,535,149
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$ 20,046,355 $ 21,978,183
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt,
notes payable, and capital lease obligations $ 3,552,252 $ 5,613,143
Borrowings under line of credit 561,490
Accounts payable 1,601,263 1,804,846
Accrued expenses 645,972 713,893
Customer advances and arbitration settlement payable 1,578,006 2,724,538
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Total current liabilities 7,938,983 10,856,420
LONG TERM DEBT, NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS, less current portion 1,464,707 1,023,653
LITGATION SETTLEMENT ACCRUAL (Note 5) 2,000,000
COMMITMENTS AND CONTINGENCIES (Notes 5 and 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,
5,356,024 and 5,230,303 shares issued and outstanding,
respectively 25,179,092 24,824,175
Common stock issuable under arbitration settlement 925,000
Accumulated deficit (17,461,427) (14,726,065)
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Total shareholders' equity 8,642,665 10,098,110
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$ 20,046,355 $ 21,978,183
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</TABLE>
See notes to financial statements.
2
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PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
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<S> <C> <C>
REVENUES $ 1,949,542 $ 567,951
COST OF SALES 1,668,351 917,732
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Gross profit (loss) 281,191 (349,781)
OPERATING EXPENSES:
Process and product development and engineering 303,891 147,725
General and administrative 492,192 276,618
Selling and marketing 102,654 156,567
Other nonrecurring charges 198,710
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Total operating expenses 898,737 779,620
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LOSS FROM OPERATIONS (617,546) (1,129,401)
INTEREST EXPENSE (INCOME), net 19,904 (1,938)
LITIGATION SETTLEMENT EXPENSE (Note 5) 2,100,000
OTHER INCOME, net (2,088) (3,785)
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NET LOSS $(2,735,362) $(1,123,678)
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BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.52) $ (0.22)
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,278,382 5,155,770
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</TABLE>
See notes to financial statements.
3
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PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,735,362) $(1,123,678)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization - property and
equipment 292,472 178,682
Non-cash litigation settlement expense 2,000,000
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (170,365) (29,025)
Inventory (245,685) 167,217
Equipment held for sale (545,722)
Prepaid expenses (69,566) (51,694)
Accounts payable (203,583) 52,372
Accrued expenses 13,907 (460,363)
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Cash used in operating activities (1,118,182) (1,812,211)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (305,049) (803,092)
Purchases of investments (2,250,000)
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Cash used in investing activities (305,049) (3,053,092)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 700,000 4,500,000
Payments of notes payable and long-term debt (101,627) (57,825)
Borrowings under line of credit, net 561,490
Common stock issued 258,792 4,000
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Cash provided by financing activities 1,418,655 4,446,175
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DECREASE IN CASH (4,576) (419,128)
CASH AT BEGINNING OF PERIOD 46,107 2,038,955
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CASH AT END OF PERIOD $ 41,531 $ 1,619,827
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</TABLE>
See notes to financial statements.
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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 of normal recurring adjustments (except the
litigation settlement accrual), which are, in the opinion of management,
necessary for a fair presentation. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31,
1998. Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation. These reclassifications
had no effect on net loss or shareholders' equity as previously reported.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1997, filed
with the SEC as part of the Company's Annual Report on Form 10-KSB.
The accompanying 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 Company has incurred
cumulative losses aggregating $17,461,427 since its inception, and incurred
negative cash flows from operating activities of $1,118,182 for the quarter
ended March 31, 1998. In addition, at March 31, 1998, the Company had a
working capital deficiency of $6,568,269. These factors, among others,
indicate the Company may be unable to continue as a going concern for a
reasonable period of time.
The 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 described in Note 3,
at March 31, 1998, the Company was not in compliance with the terms of two
lease agreements and has been unable to cure or obtain waivers for the
defaults. Accordingly, the balance of these lease obligations
(approximately $3,100,000) has been classified as a current liability. In
addition, as described in Notes 5 and 6, the Company is currently under
investigation by the Securities and Exchange Commission (SEC), and is the
defendant in a number of legal actions which have been tentatively settled
as of the filing date of this report. However, significant management time
and financial resources could be required to completely resolve these
matters.
The Company's continuation as a going concern is dependent on its ability
to generate sufficient cash flow to meet its obligations including, legal
defense costs which could be significant, on a timely basis, to comply with
the terms and conditions of its financing agreements, to obtain additional
financing or refinancing as may be required, to achieve acceptable
resolutions of the defaulted lease obligations, the SEC investigation and
the various other legal actions, and ultimately attain sales and operating
levels sufficient to support its cost structure.
Management is continuing its efforts to obtain additional financing so the
Company can meet its obligations and sustain its operations. As of March
31, 1998, the Company's principal sources of liquidity included cash and
cash equivalents of $41,531 and net accounts receivable of $589,118, as
well as an $833,000 transaction-specific working capital line of credit
against which there were borrowings of $561,490 outstanding as of March 31,
1998. Subsequent to March 31, 1998, the Company received advances totaling
approximately $2,300,000 from a $3,500,000 first quarter 1998 private debt
placement under which the Company received $700,000 in the first quarter of
1998 (see Note 3). These advances were used primarily to fund the
$1,500,000 settlement with the Company's former Chinese joint venture
partner. The Company believes that its existing sources of liquidity and
anticipated funds from operations, combined with the remaining $500,000 net
proceeds to be received from the private debt placement, will be
insufficient to satisfy the Company's projected working capital and capital
expansion requirements for 1998, and the Company will need to seek
additional
5
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
debt or equity financing. The Company will also require additional debt
or equity financing to resolve the defaults on certain of its leases. As
discussed in Note 3, the Company is attempting to secure additional debt
or equity financing to meet its cash flow needs, including the defaulted
lease obligations. There can be no assurance that the necessary
financing will be available or be available on terms acceptable to the
Company.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Raw materials and supplies at cost $ 695,448 $ 562,254
Finished goods 165,050 65,355
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860,498 627,609
Less obsolescence reserve 227,813 240,609
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$ 632,685 $ 387,000
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</TABLE>
3. LONG-TERM DEBT AND CAPITAL LEASES
In February 1998, the Company issued a $3,500,000 convertible note in a
private financing transaction. As of March 31, 1998, $700,000 in
proceeds had been received by the Company. Additional advances totalling
approximately $2,300,000 were received subsequent to March 31, 1998, and
were used primarily to fund the $1,500,000 settlement with the Company's
former Chinese joint venture partner. The remaining $500,000 will be
advanced by the lender as needed by the Company to sustain its
operations and to complete the construction and installation of the
Company's P-2 and P-3 production lines. The note bears interest at 10
percent per annum and matures in August 1999. All principal and accrued
interest are payable at maturity, but may be prepaid at any time without
penalty. The note and all accrued interest are convertible into shares
of common stock of the Company at the option of the lender at any time
up to 30 days following maturity, at a rate of $4.00 per share. The note
is secured by an interest in substantially all of the fixed assets of
the Company, except the P-3 production line which is the subject of a
sale-leaseback transaction. In connection with this transaction, the
Company issued to the lender five-year warrants which vest in proportion
to the funds advanced to purchase a total of 1,225,000 shares of common
stock of the Company at $4.00 per share. Original issue discount of
approximately $90,000 has been recorded as interest in the first quarter
and has been capitalized to construction in progress.
In October 1997, the Company was unable to continue to make payments on
certain of its lease obligations. As of December 31, 1997, the Company was
in default on two leases which aggregated approximately $5,400,000,
including the sale-lease back transaction on the Company's P-3 line. The
Company has not yet resolved the defaults on these transactions. Under the
terms of the leases, in the event of a default, the Company can be required
to immediately pay all future lease payments under the lease. During the
first quarter of 1998, the lessor demanded payment of such amounts and
requested the trustee holding the $2,250,000 in marketable securities which
were being held as a compensating balance to liquidate the account and
forward the proceeds to the lessor in partial payment of amounts owed by
the Company. The Company is attempting to negotiate a settlement of these
lease obligations at amounts less than the recorded amounts. Settlement of
the lease defaults will require new financing. The Company is in
discussions with prospective lenders to provide the new credit facility to
fund the settlement of the defaulted lease obligations. Management expects
to complete the settlement negotiations and obtain new financing
arrangements during the second quarter of 1998. However, no assurance can
be given that management will be able to negotiate an acceptable settlement
or, if the Company is successful in negotiating an acceptable settlement,
that the financing necessary to extinguish the obligations will be
available, or be available on terms acceptable to the
6
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Company. The remaining gross lease payments, including past due
payments, under these leases of approximately $3,100,000 have been
classified as current liabilities at March 31, 1998.
In the third and fourth quarters of 1997, the Company obtained a loan from
a shareholder who is also a director in the amount of $1,100,000. In
connection with the loan, the Company issued to the shareholder warrants
for the purchase of 110,000 shares of the Company's common stock at a price
of $4.00 per share. The warrants are exercisable between September 1998 and
September 2007. In February 1998, as consideration for extension of the
$1,100,000 loan and modification of the security agreement collateralizing
the loan, the Company issued a warrant to the shareholder to purchase
100,000 shares of common stock of the Company at $4.25 per share. The
warrant is exercisable from February 1999 to September 2007. The estimated
fair value of the warrant, as determined by a third party, is not material.
4. CUSTOMER ADVANCES AND ARBITRATION SETTLEMENT PAYABLE
The Company and its former Chinese joint venture partner, Shenzhen WABO
Group Company Limited (WABO) finalized a negotiated settlement in January
1998 which was approved by the Chinese arbitration board in February 1998.
Under the terms of the settlement, the Company was required to pay WABO
$1,500,000 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 cash portion of this settlement is
recorded as a current liability as of March 31, 1998. The value of the
stock issuable under the settlement is recorded in stockholders' equity as
of March 31, 1998. The cash (see Note 3) and common stock were delivered to
WABO subsequent to March 31, 1998.
5. LITIGATION SETTLEMENT ACCRUAL
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 1997, the court consolidated
these lawsuits into a single action captioned IN RE PHOTRAN CORPORATION
SECURITIES LITIGATION.
In April 1998, all parties to the lawsuit participated in a mediation, and
a tentative settlement was reached, subject to approval by the court. Under
the terms of this tentative settlement, the Company has agreed to pay
$50,000 in cash, issue five-year warrants valued at up to $500,000 (based
on a Black-Scholes valuation) to purchase common stock of the Company for
$4.00 per share, and issue shares of common stock worth $1,725,000 less the
value of shares of the Company's stock being contributed by another
defendant. The Company's estimated liability under this settlement, based
on the market price of the Company's common stock as of the date of the
mediation, is $2,050,000. This estimate is subject to change based on
fluctuations in the market price of the Company's common stock between the
date of the tentative settlement and final approval by the court. The
settlement is also contingent upon the Company's common stock becoming
listed on a stock exchange and the registration of the common stock and the
common stock issuable upon exercise of the warrants within a six-month
period following the date of the tentative settlement.
6. COMMITMENTS AND CONTINGENCIES
In connection with the coating equipment that the Company was building for
sale to its former Chinese joint venture, the Company entered into a
contract with a third party to design and build power supplies to be sold
under the equipment contract, as well as for the Company's own use. The
Company terminated the contract in March 1997. In June 1997, the third
party formally brought an action against the Company in Dakota County
District Court. The third party's demand for damages was $1,300,000.
7
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Subsequent to March 31, 1998, the Company reached a settlement with the
vendor whereby the Company will give the vendor cash and equipment in
exchange for a promissory note payable to the Company. The impact of this
settlement on the quarter ended March 31, 1998 was a charge of $50,000,
which has been recorded as litigation settlement expense.
In April 1997, the Securities and Exchange Commission (SEC) informed the
Company that it was conducting a formal investigation with respect to
certain financial and accounting irregularities announced by the Company in
March 1997 relating to fiscal 1996. The Company has submitted documents to
the SEC pursuant to requests from the SEC as part of the investigation. The
SEC has also interviewed current and former employees of the Company. In
the fourth quarter of 1997, the Company was informed by the SEC that is has
expanded its investigation to include certain accounting and financial
reporting irregularities prior to 1996 which the Company announced in
October 1997. The investigation is in the preliminary stages and it is not
possible to determine what impact, if any, the investigation will have on
the Company's financial condition 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 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. In connection with the tentative
settlement reached in the shareholder class action lawsuit discussed in
Note 5 above, the Company and Mr. Stevenson have agreed to dismiss all
claims against each other upon the closing of the settlement of the
shareholder case.
7. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME, which became effective for the Company on January 1, 1998. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. Comprehensive loss for the
three months ended March 31, 1998 and 1997 was $2,735,362 and $1,123,678,
respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
became effective for the Company on January 1, 1998. SFAS No. 131 redefines
how operating segments are determined and requires disclosures about a
company's operating segments. The Company anticipates the adoption of SFAS
No. 131 will not significantly impact the current level of segment
disclosures made by the Company.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The interim financial statements of the Company included within this report
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 March 31, 1998, net sales increased to $1,949,542
from $567,951 for the quarter ended March 31, 1997. Revenues consisted
primarily of gross sales of TN grade ITO coated glass. The increase in
revenue is due to a combination of an 80 percent increase in unit sales and a
per unit selling price increase due to a change in customer mix. During the
first quarter of 1997, the Company's principal customer accounted for 93
percent of the Company's revenues and was supplying the raw glass, paying
only for the coating applied by the Company. In the first quarter of 1998,
this customer accounted for 33 percent of the Company's revenues. Two other
customers who accounted for 34 percent and 27 percent, respectively, of the
Company's revenues, did not supply their own glass and prices charged these
customers were therefore higher. The increase in unit sales is due primarily
to a 50 percent increase in production output from the Company's P-1
production line and in part to the Company's P-2 production line, which began
operating at approximately 30 percent capacity in March 1998.
The Company expects the market price for TN grade ITO coated glass will
remain stable for the foreseeable future. The Company expects to expand its
productive capacity in 1998 with the completion of its P-3 production line,
and is actively pursuing additional selling agents and new customers to
obtain orders to fill this capacity once the line becomes operational. Based
on recent discussions with its Asian selling agents and current customers,
however, management expects a decrease in revenues during the second quarter
of 1998 compared to the first quarter of 1998 due to a slowdown in deliveries
to its current customers. Based on these discussions, management believes
this slowdown is temporary and expects deliveries to existing customers to
resume their previous levels in the third quarter of 1998. In addition,
management anticipates further growth in revenue from the sale of ITO coated
glass in the second half of 1998 following the addition of productive
capacity.
GROSS PROFIT (LOSS)
Gross profit was $281,191 for the quarter ended March 31, 1998, compared
to gross loss of $349,781 for the quarter ended March 31, 1997. The
improvement in margins was due primarily to the change in customer mix
discussed above, as the Company realized profit on the cost of the glass sold
as well as the cost of the coating. In addition, increased production levels
in 1998 resulted in manufacturing efficiencies which reduced per unit coating
costs by approximately 7 percent. Cost of sales consists of substrate costs,
target material costs, labor and overhead related to the Company's
manufacturing operations.
PROCESS AND PRODUCT DEVELOPMENT
Process and product development and engineering expenses increased to
$303,891 in the first quarter of 1998 from $147,725 in the first quarter of
1997. These expenses consist of personnel costs, consulting, testing,
supplies, facilities and depreciation expenses. The increase in 1998 was due
primarily to increased personnel and facilities expenses incurred while the
Company undertook the installation and manufacturing process development on
its P-2 line. During the first quarter of 1997, certain of the indirect costs
associated with such equipment were capitalized as a cost of equipment being
manufactured for sale. During the second quarter of 1997, the equipment sale
contract was cancelled, and the P-2 line was installed in the Company's
facility. Costs incurred during 1998 related to the installation and
manufacturing process development were expensed. The Company anticipates that
product and process development and
9
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engineering expenses will continue at approximately current levels in the
future as the Company adds productive capacity and develops its manufacturing
processes for new equipment and new products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $492,192 for the
quarter ended March 31, 1998 from $276,618 for the quarter ended March 31,
1997. 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 increased professional fees related to various legal
matters in which the Company is involved. Most of these issues have been
settled, although some only tentatively, and the Company expects future legal
fees to be less than they were during the first quarter of 1998. See further
discussion these matters in Part II, Item 1. Legal Proceedings.
SELLING AND MARKETING
Selling and marketing expenses decreased to $102,654 for the quarter
ended March 31, 1998 from $156,567 for the quarter ended March 31, 1997.
These expenses consisted principally of compensation costs for sales
personnel, commissions, travel expenses, trade show expenses, and freight out
costs. The change is due to decreases in salaries, trade shows and
consulting fees, offset partially by increases in sales commissions to
independent sales agents. Because sales commissions are the most significant
component of this category, the Company expects selling expenses to increase
as revenues increase during the remainder of 1998. The Company also plans to
increase staffing in its sales and marketing department later in 1998 to
better analyze the market demand for the various new products it is planning
to introduce in the future.
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's Chinese 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 deemed to be impaired and costs of $110,788
relating to this equipment that were incurred during the quarter ended March
31, 1997 were written off.
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
future value to the Company at March 31, 1997 has been written down to its
fair value, resulting in an impairment charge of $53,652.
NET INTEREST EXPENSE
For the quarter ended March 31, 1998, the Company had net interest
expense of $19,904 compared to net interest income of $1,938 for the quarter
ended March 31, 1997. The increase in net expense is due largely to the
interest the Company is incurring on borrowings under the working capital
line of credit which the Company obtained in December 1997. Interest on long
term debt being used to finance capital expansion is capitalized into
construction in progress. The Company anticipates that net interest expense
will increase in the future as long-term borrowings increase and as
construction projects become completed and such interest amounts can no
longer be capitalized.
LITIGATION SETTLEMENT EXPENSE
In May of 1997 two separate lawsuits were commenced 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
10
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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 1997, the court consolidated these lawsuits into a single
action captioned IN RE PHOTRAN CORPORATION SECURITIES LITIGATION.
In April 1998, all parties to the lawsuit participated in a mediation, and
a tentative settlement was reached, subject to approval by the court. Under
the terms of this tentative settlement, the Company has agreed to pay $50,000
in cash, issue five-year warrants valued at up to $500,000 (based on a
Black-Scholes valuation) to purchase common stock of the Company for $4.00
per share, and issue shares of common stock worth $1,725,000 less the value
of shares of the Company's stock being contributed by another defendant. The
Company's estimated liability under this settlement, based on the market
price of the Company's common stock as of the date of the mediation, is
$2,050,000. This estimate is subject to change based on fluctuations in the
market price of the Company's common stock between the date of the tentative
settlement and final approval by the court. The settlement is also
contingent upon the Company's common stock becoming listed on a stock
exchange and the registration of the common stock and the common stock
issuable upon exercise of the warrants within a six-month period following
the date of the tentative settlement.
In connection with the coating equipment that the Company was building for
sale to its former Chinese joint venture, the Company entered into a contract
with a third party to design and build power supplies to be sold under the
equipment contract, as well as for the Company's own use. The Company
terminated the contract in March 1997. In June 1997, the third party formally
brought an action against the Company in Dakota County District Court. The
third party's demand for damages was $1,300,000. Subsequent to March 31,
1998, the Company reached a settlement with the vendor whereby the Company
will give the vendor cash and equipment in exchange for a promissory note
payable to the Company. The impact of this settlement on the quarter ended
March 31, 1998 was a charge of $50,000, which has been recorded as litigation
settlement expense.
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 percent 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, 1997, the Company had an NOL carryforward of approximately
$11,900,000 which expires in 2006 through 2012. Due to certain ownership
changes which occurred during the year ended December 31, 1993, the NOL
carryforwards of $700,000 incurred through February 1993, which can be
utilized by the Company on an annual basis, are limited to approximately
$50,000. The annual limitation may be increased for any built-in gains
recognized within five years of the date of the ownership change. Utilization
of the approximately $11,200,000 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cumulative losses aggregating $17,461,427 since
its inception, and incurred negative cash flows from operating activities of
$1,118,182 for the quarter ended March 31, 1998. In addition, at March 31,
1998, the Company had a working capital deficiency of $6,568,269. These
factors, among others, indicate the Company may be unable to continue as a
going concern for a reasonable period of time. The 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.
At March 31, 1998, the Company was not in compliance with the terms of two
lease agreements and has been unable to cure or obtain waivers for the
defaults. The Company has not yet resolved the defaults
11
<PAGE>
on the lease transactions. Under the terms of the leases, in the event of a
default, the Company can be required to immediately pay all future lease
payments under the lease. During the first quarter of 1998, the lessor
demanded payment of such amounts and requested the trustee holding the
$2,250,000 in marketable securities which had been held as a compensating
balance to liquidate the account and forward the proceeds to the lessor in
partial payment of amounts owed by the Company. The Company is attempting to
negotiate a settlement of these lease obligations at amounts less than the
recorded amounts. Settlement of the lease defaults will require new
financing. The Company is in discussions with prospective lenders to provide
the new credit facility to fund the settlement of the defaulted lease
obligations. Management expects to complete the settlement negotiations and
obtain new financing arrangements during the second quarter of 1998. However,
no assurance can be given that management will be able to negotiate an
acceptable settlement or, if the Company is successful in negotiating an
acceptable settlement, that the financing necessary to extinguish the
obligations will be available, or be available on terms acceptable to the
Company.
Management is continuing its efforts to obtain additional funds so the
Company can meet its obligations and sustain its operations. As of March 31,
1998, the Company's principal sources of liquidity included cash and cash
equivalents of $41,531 and net accounts receivable of $589,118, as well as an
$833,000 transaction-specific working capital line of credit against which
there were borrowings of $561,490 outstanding as of March 31, 1998.
Subsequent to March 31, 1998, the Company received advances totaling
approximately $2,300,000 from a $3,500,000 first quarter 1998 private debt
placement (see below). These advances were used primarily to fund the
$1,500,000 settlement with the Company's former Chinese joint venture
partner. The Company believes that its existing sources of liquidity and
anticipated funds from operations, combined with the remaining $500,000 net
proceeds to be received from the private debt placement, will be insufficient
to satisfy the Company's projected working capital and capital expansion
requirements for 1998, and the Company will need to seek additional debt or
equity financing. The Company will also require additional debt or equity
financing to resolve the defaults on certain of its leases. There can be no
assurance that the necessary financing will be available or be available on
terms acceptable to the Company.
The net cash used in operating activities for quarter ended March 31, 1998
was $1,118,182 due principally to the net loss for the period which was
partially offset by non-cash charges for depreciation and litigation
settlement expenses. Increases in accounts receivable and inventory and
decreases in accounts payable also used approximately $600,000 in cash during
the first quarter of 1998. The net cash used in operating activities for the
quarter ended March 31, 1997 was $1,812,211 due principally to the net loss
for the period which was partially offset by non-cash charges for
depreciation expense. Expenditures for equipment held for sale and decreases
in accrued expenses also used approximately $1,000,000 in cash during the
first quarter of 1997.
Cash used in investing activities was $305,049 for the quarter ended
March 31, 1998 compared to $3,053,092 for the quarter ended March 31, 1997.
In both periods, this cash was used for the purchase of equipment and
leasehold improvements. In the quarter ended March 31, 1997, $2,250,000 was
used to purchase investments in connection with the Company's $4,500,000
sale-leaseback of the P-3 line.
Cash provided by financing activities was $1,418,655 during the quarter
ended March 31, 1998, and consisted primarily of borrowings under the
Company's working capital line of credit, and receipt of $700,000 of the
proceeds under a $3,500,000 private debt placement. In February 1998, the
Company issued a $3,500,000 convertible note in a private financing
transaction. As of March 31, 1998, $700,000 in proceeds had been received by
the Company. Additional advances totaling approximately $2,300,000 were
received subsequent to March 31, 1998, and were used primarily to fund the
$1,500,000 settlement with the Company's former Chinese joint venture
partner. The remaining $500,000 will be advanced by the lender as needed by
the Company to sustain its operations and to complete the construction and
installation of the Company's P-2 and P-3 lines. The note bears interest at
10 percent per annum and matures in August 1999. All principal and accrued
interest are payable at maturity, but may be prepaid at any time without
penalty. The note and all accrued interest are convertible into shares of
common stock of the Company at the option of the lender at any time up to 30
days following maturity, at a rate of $4.00 per share. The note is secured by
an interest in substantially all of the fixed assets of the Company, except
the P-3 production line which is the subject of a sale-leaseback transaction.
In connection with this transaction, the Company
12
<PAGE>
issued to the lender five-year warrants which vest in proportion to the funds
advanced to purchase a total of 1,225,000 shares of common stock of the
Company at $4.00 per share.
Cash provided by financing activities of $4,446,175 for quarter ended
March 31, 1997 consisted primarily of $4,500,000 in proceeds from the
Company's sale-leaseback of the P-3 line. Under the terms of the agreement,
the Company received proceeds of $4,500,000 of which $2,250,000 was
restricted and $2,250,000 was available to the Company.
OUTLOOK
During 1997 the Company installed a new management team consisting of its
new President and new Vice Presidents for Finance, Technology, and
Manufacturing. The new management team, together with the Company's Board of
Directors, has taken several steps to refocus the Company's efforts. The
Company terminated several engineering projects that did not directly relate
to the installation of additional coating equipment at the Company's
facilities. In an effort to focus all of the Company's personnel on
manufacturing activities and the development and refinement of core
deposition technologies, in March of 1997 the Company also terminated 21
employees, and reassigned several others. In addition, restructuring of
manufacturing shifts and process modifications made to the P-1 line have
resulted in a significant increase in production output. Moreover, the
Company has expanded its customer base and reduced its dependence on a single
customer. The Company's customer base remains limited, however, and
management is aggressively pursuing additional customers and new product
lines to reduce its exposure to fluctuations in the demand from any one
customer or product.
In 1997 the Company's management and board spent a significant portion
of its time and efforts investigating financial and accounting irregularities
allegedly perpetrated by its former president, restating its financial
statements, and addressing matters relevant to the joint venture arbitration,
the SEC investigation, the securities class action litigation, and the
litigation with its former president. The Company has completed the very
detailed and exhaustive investigation and previously restated its financial
statements to reflect the results of the investigation. In addition, the
Company has reached a favorable settlement with its former joint venture
partner and obtained the resources to fund that settlement. In 1998, the
Company reached tentative settlements with the plaintiffs in the other
litigation matters (see Part II, Item 1 - Legal Proceedings). However, it is
possible that Company management may need to continue to devote time and
resources to obtain the final resolution of such legal matters.
Based on discussions with customers, independent sales representatives
and glass suppliers, the Company believes that the strong demand for its ITO
coated glass will continue in 1998. The Company has experienced some delays
in delivery schedules at the request of its customers during the second
quarter, which has negatively impacted the Company's cash flows in the short
term. Based on discussions with its customers, the Company believes this
slowdown is short-term, and that delivery schedules will resume their
previous levels in the third quarter. The Company has made some cutbacks in
its production staff in an attempt to minimize the impact of the short-term
slowdown, but has determined that the Company will need additional financing
to maintain its timeline for the completion of the P-3 production line. The
Company is currently pursuing such financing with potential investors, but
there can be no assurance that such financing will be available or be
available on terms acceptable to the Company. The Company also is continuing
to work on the development of additional products for introduction in 1998,
however, management expects that TN grade ITO coated glass sales will
continue to generate the majority of the Company's revenues in 1998.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's future operating results may fluctuate significantly due
to factors such as the timing of new product announcements and introductions
by the Company, its major customer and its competitors, market acceptance of
new or enhanced versions of the Company's products, changes in the product or
customer mix, changes in the level of operating expenses, inventory
obsolescence and asset impairments, competitive pricing pressures, the gain
or loss of significant customers, increased product and process development
costs associated with new product introductions, the timely completion of
construction and
13
<PAGE>
installation of new manufacturing equipment, the impact of pending 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.
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, INADEQUATE WORKING
CAPITAL, CURRENT DEFAULT UNDER CAPITAL LEASES 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 which was approved by the Chinese arbitration board in February 1998.
Under the terms of the settlement, the Company paid WABO $1,500,000 in cash
and issued 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 cash and common stock were delivered to WABO subsequent to March
31, 1998.
In connection with the coating equipment that the Company was building for
sale to its former Chinese joint venture, the Company entered into a contract
with a third party to design and build power supplies to be sold under the
equipment contract, as well as for the Company's own use. The Company
terminated the contract in March 1997. In June 1997, the third party formally
brought an action against the Company in Dakota County District Court. The
third party's demand for damages was $1,300,000. Subsequent to March 31,
1998, the Company reached a settlement with the vendor whereby the Company
will provide the vendor cash and equipment in exchange for a promissory note
payable to the Company. The impact of this settlement on the quarter ended
March 31, 1998 was a charge of $50,000, which has been recorded as litigation
settlement expense.
In April 1997, the Securities and Exchange Commission (SEC) informed the
Company that it was conducting an investigation with respect to certain
financial and accounting irregularities announced by the Company in March
1997 relating to fiscal 1996. The Company has submitted documents to the SEC
pursuant to requests from the SEC as part of the investigation. The SEC has
also interviewed current and former employees of the Company. In the fourth
quarter of 1997, the Company was informed by the SEC that is has expanded its
investigation to include certain accounting and financial reporting
irregularities prior to 1996 which the Company announced in October 1997. The
investigation is in the preliminary stages and it is not possible to
determine what impact, if any, the investigation will have on the Company's
financial condition or results of operations.
In May of 1997 two separate lawsuits were commenced 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 1997, the court consolidated these lawsuits into a single
action captioned IN RE PHOTRAN CORPORATION SECURITIES LITIGATION.
In April 1998, all parties to the lawsuit participated in a mediation, and
a tentative settlement was reached, subject to approval by the court. Under
the terms of this tentative settlement, the Company has agreed to pay
$50,000 in cash, issue five-year warrants valued at up to $500,000 to
purchase common stock of the Company for $4.00 per share, and issue shares of
common stock worth $1,725,000 less the value of shares of the Company's stock
being contributed by another defendant. The Company's estimated liability
under this settlement, based on the market price of the Company's common
stock as of the date of the mediation, is $2,050,000. This estimate is
subject to change based on fluctuations in the market price of the Company's
common stock between now and final approval by the court. The settlement is
also contingent upon the Company's common stock becoming listed on a stock
exchange and the registration of the common stock and the common stock
issuable upon exercise of the warrants within a six-month period following
the date of the tentative settlement.
15
<PAGE>
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates 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. In connection with the tentative settlement
reached in the shareholder class action lawsuit discussed above, the Company
and Mr. Stevenson have agreed to dismiss all claims against each other upon
the closing of the settlement of the shareholder case.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October of 1997, the Company became unable to continue making
principal and interest payments on the $4,500,000 lease financing entered
into in the first quarter of 1997. The lender has exercised its rights under
the terms of the lease and accelerated payment of all remaining lease
payments. The Company is currently in default on this lease in the amount of
approximately $3,100,000.
ITEM 6.
a. Exhibits
<TABLE>
<S> <C>
4.14 Amendment of Loan Agreement dated February 9, 1998 between Photran
Corporation and Steven King.
4.15 Form of Stock Purchase Warrant for 100,000 shares of Common Stock,
dated February 9, 1998, granted to Steven King. Identical warrants
to purchase 110,000 shares of common stock at $4.00 per share were
also granted to Mr. King.
4.16 Agreement for Purchase and Sale dated February 9, 1998, between
Photran Corporation and St. James Capital Partners, L.P.
4.17 Convertible Promissory Note dated February 9, 1998, between
Photran Corporation and St. James Capital Partners, L.P.
4.18 Form of Warrant for Purchase of 1,225,000 Shares of Common Stock,
dated February 9, 1998, granted to St. James Capital Partners, L.P.
4.19 Registration Rights Agreement between Photran Corporation and St.
James Capital Partners, L.P. dated February 9, 1998.
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Paul T. Fink
Dated May 15, 1998 ____________________________
Paul T. Fink,
President, Chief Executive Officer
/s/ Judith E. Tucker
____________________________
Judith E. Tucker,
Vice President for Finance and
Administration, Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
<C> <S> <C>
4.14 Amendment of Loan Agreement dated February 9, 1998 between Photran
Corporation and Steven King. 19
4.15 Form of Stock Purchase Warrant for 100,000 shares of Common Stock,
dated February 9, 1998, granted to Steven King. 21
4.16 Agreement for Purchase and Sale dated February 9, 1998, between
Photran Corporation and St. James Capital Partners, L.P. 28
4.17 Convertible Promissory Note dated February 9, 1998, between Photran
Corporation and St. James Capital Partners, L.P. 43
4.18 Form of Warrant for Purchase of 1,225,000 Shares of Common Stock,
dated February 9, 1998, granted to St. James Capital Partners, L.P. 62
4.19 Registration Rights Agreement between Photran Corporation and St.
James Capital Partners, L.P. dated February 9, 1998. 76
27 Financial Data Schedule
</TABLE>
18
<PAGE>
Exhibit 4.14
AMENDMENT OF LOAN AGREEMENT
This Amendment of the Loan Agreement ("Amendment") is made as of February
9, 1998, by and between Photran Corporation, a Minnesota corporation (the
"Company"), and Steven King, a Minnesota resident (the "Investor").
RECITALS
A. The Company and Investor have entered into that certain Loan Agreement
dated September 10, 1997 (the "Loan Agreement").
B. The Company and the Investor have agreed to amend the Loan Agreement
as provided in this Amendment.
NOW, THEREFORE, in consideration of their mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Investor agree
to amend the Loan Agreement as follows:
1. LOAN/PROMISSORY NOTE. Section 1 shall be amended to read as follows:
The Investor agrees to make a loan to the Company of One Million One
Hundred Thousand Dollars ($1,100,000.00) in return for the delivery to
him of 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") with all amendments thereto, 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 amount advanced by the Investor at the rate
equal to three and one-half percent (3.50%) in excess of the
"Reference Rate" announced from time to time by First Bank National
Association, as charged on a daily basis.
2. WARRANTS EXPIRATION DATE. Section 2 is amended to read as follows:
WARRANTS. In consideration of the $1,100,000.00 loan made hereunder,
the Company shall issue to the Investor, with delivery of the
$1,100,000.00 Note, a warrant, in the form attached hereto as Exhibit
C (the "100,000 A Warrant"), to purchase 100,000 shares of Common
Stock, at an initial exercise price equal to $4.00 per share, a
warrant, in the form attached hereto as Exhibit D (the "10,000
Warrant"), to purchase 10,000 shares of Common Stock, at an initial
exercise price equal to $4.00 per share. In consideration of
relinquishment by Investor of
19
<PAGE>
certain rights in the collateral of the Company, the Company shall
issue to the Investor, a warrant, in the form of attached Exhibit E
(the "100,000 B Warrant"), to purchase 100,000 shares of Common
Stock, at an initial exercise price equal to $4.25 per share. The
shares of Common Stock issuable upon exercise of these warrants are
referred to hereinafter as the "Warrant Stock." As additional
consideration for the warrants, Investor shall pay to the Company
an amount equal to $.03 per share of Warrant Stock
contemporaneously with the execution of this Agreement.
3. NOTE. All references in the Agreement to "Note" shall be deemed to refer
to the "Note" as defined herein.
4. CONTINUING EFFECT. Except as amended hereby, the Loan Agreement shall be
and remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed as of the day and year
first above written.
COMPANY: PHOTRAN CORPORATION
By /s/ Paul T. Fink
---------------------------------
Its President
---------------------------------
By
---------------------------------
Its
---------------------------------
INVESTOR By /s/ Steven King
---------------------------------
Steven King
20
<PAGE>
Exhibit 4.15
STOCK PURCHASE WARRANT
To Subscribe For and Purchase
Common Stock of
PHOTRAN CORPORATION
February 9, 1998
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 $4.25 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.
THIS WARRANT IS SUBJECT TO THE RESTRICTION ON TRANSFER SET FORTH AT
THE BOTTOM OF THE LAST PAGE HEREOF.
21
<PAGE>
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 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
22
<PAGE>
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 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
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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 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.
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8. REGISTRATION RIGHTS.
(a) If at any time after February 9, 1999 and prior to February 9, 2000,
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
February 9, 1999, 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, underwriting
discounts and commissions, and transfer taxes for selling holders and any
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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/ Paul T. Fink
--------------------------------
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 4.16
AGREEMENT FOR PURCHASE AND SALE
This Agreement for Purchase and Sale (the "Agreement"), is made and entered
into as of February 9, 1998, by and between Photran Corporation, a Minnesota
corporation ("Seller"), and St. James Capital Partners, L.P., a Delaware limited
partnership ("Purchaser"), and sets forth the terms and conditions of the sale
and purchase of a $3,500,000 10% Convertible Promissory Note, the form of which
is set forth on EXHIBIT A hereto (the "Note").
WHEREAS, Seller desires to issue and sell to Purchaser, and Purchaser
desires to purchase and accept from Seller, the Note, on the terms and subject
to the conditions set forth herein.
WHEREAS, the obligations of Seller under the Note are secured by that
certain Security Agreement dated as of the date hereof, between Seller and
Purchaser (the "Security Agreement"), the form of which is set forth on EXHIBIT
B hereto.
WHEREAS, the provisions of the Note and the Security Agreement are subject
to the terms and conditions set forth in that certain Intercreditor and
Subordination Agreement among Seller, Purchaser, Steven King, Community National
Bank and Henson & Efron, P.A., dated as of the date hereof (the "Intercreditor
and Subordination Agreement"), the form of which is set forth on EXHIBIT C
hereto.
WHEREAS, Seller and Purchaser desire to make certain representations,
warranties and agreements in connection with the purchase and sale of the Note
contemplated hereby.
WHEREAS, Seller desires to sell to Purchaser at the Closing (as defined
herein) warrants to purchase 1,225,000 shares of Seller's Common Stock (the
"Warrants"), no par value (the "Common Stock"), which Warrants shall have the
terms and be subject to the conditions set forth in the form of Warrant (the
"Warrant") attached hereto as EXHIBIT D and shall be subject to the terms and
conditions set forth herein.
WHEREAS, Seller desires to grant to Purchaser certain registration rights
in respect to the shares of Seller's Common Stock that may be acquired on the
exercise of the Warrants and/or conversion of the Note, which registration
rights shall have the terms and be subject to the conditions set forth in the
Registration Rights Agreement (the "Registration Rights Agreement"), the form of
which is set forth on EXHIBIT E hereto (this Agreement, the Note, the Security
Agreement, the Intercreditor and Subordination Agreement, the Warrant and the
Registration Rights Agreement are collectively referred to as the "Transaction
Documents").
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NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 PURCHASE AND SALE OF THE NOTE AND THE WARRANTS. Subject to the terms
of this Agreement, Seller agrees to and does hereby issue, sell and deliver the
Note and the Warrants to Purchaser at the Closing (as defined herein) and
Purchaser agrees to and does hereby purchase and accept the Note and the
Warrants from Seller.
1.2 CONSIDERATION FOR PURCHASE OF THE NOTE. Subject to the terms of this
Agreement, Purchaser hereby agrees to pay to, or on behalf of, Seller, by check
or wire transfer (i) $700,000, on the Closing Date (as defined herein), to the
account of Seller, less any expenses payable or reimbursable by Seller
hereunder, and (ii) $2,800,000, simultaneously with the funding of the
settlement with Shenzen WABO Group Company Limited, $1,500,000 of which shall be
deposited in an account designated by Shenzen WABO Group Company Limited and
$1,300,000 of which shall be deposited in the account of Seller, pursuant to the
Note, as the consideration for the purchase of the Note, less any expenses
payable or reimbursable by Seller hereunder (the "Note Consideration").
1.3 CONSIDERATION FOR PURCHASE OF THE WARRANTS. Subject to the terms of
this Agreement, Purchaser hereby agrees to pay to Seller, by check or wire
transfer to the account of Seller, $36,750 or $.03 per share at Closing, as the
consideration for the purchase of the Warrants (the "Warrant Consideration;" the
Note Consideration and the Warrant Consideration are collectively referred to as
the "Consideration").
1.4 ORIGINATION FEE. Seller agrees to pay Purchaser at Closing, a
one-time origination fee in the amount of $35,000 (the "Origination Fee") for
the payment of the Note Consideration.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
2.1 ORGANIZATION, STANDING AND QUALIFICATION. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as it is
now being conducted. Seller is licensed and qualified to do business as a
foreign corporation in each jurisdiction in which the character of Seller's
properties, owned or leased, or the nature of its activities makes such
qualification or license necessary, except where
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failure to be so qualified or licensed would not have a material adverse
effect on Seller or Seller's properties, financial condition or results of
operations.
2.2 AUTHORITY; NO DEFAULTS. Seller has all requisite corporate power and
authority to enter into the Transaction Documents and to consummate the
transactions contemplated thereby. The execution and delivery of the Transaction
Documents and the consummation of the transactions contemplated thereby have
been duly authorized by all necessary corporate action on the part of Seller.
The Transaction Documents have been executed and delivered by Seller and
constitute the valid and binding obligation of Seller, enforceable in accordance
with their terms, subject to bankruptcy, insolvency, moratorium and other
similar laws affecting creditors' rights generally and general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law). The execution, delivery and performance of the
Transaction Documents do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with or result in a breach of
or the acceleration of any obligation under, or constitute a default or event of
default (or event which, with notice or lapse of time or both, would constitute
a default or event of default) under, any provision of any charter, bylaw,
indenture, mortgage, lien, lease, agreement, contract, instrument, order,
judgment, decree, ordinance or regulation, or any restriction to which any
property of Seller is subject or by which Seller is bound, the effect of which
would be materially adverse to Seller, except as set forth on SCHEDULE 2.2 and
for other obligations of Seller which will have been discharged, written
consents of third parties which will have been obtained and conflicts which will
have been waived in writing on or before the Closing. Seller is not, and Seller
does not have knowledge that it is alleged to be, in material violation or
default of any applicable law, statute, order, rule or regulation promulgated or
judgment entered by any court, administrative agency or commission or other
governmental agency or instrumentality, domestic or foreign (a "Governmental
Entity"), relating to or affecting the operation, conduct or ownership of the
property or business of Seller which violation or default would have a material
adverse effect on Seller.
2.3 APPROVALS. There is no legal impediment to the execution and delivery
of the Transaction Documents by Seller or to the consummation of the
transactions contemplated thereby, and no filing or registration with, or
authorization, consent or approval of, a Governmental Entity, shareholders or
any other third party is necessary for the consummation by Seller of the
transactions contemplated thereby except as may be required to perfect any
security interest granted to Purchaser under the Security Agreement and any
exemption under applicable securities laws.
2.4 ARTICLES OF INCORPORATION AND BYLAWS. Seller has furnished to
Purchaser true and complete copies of its articles of incorporation and bylaws,
each as amended to date and as presently in effect.
2.5 LITIGATION. Except as set forth on SCHEDULE 2.5, as of the date of
this Agreement, there is no suit, action, proceeding or investigation pending
or, to the best knowledge of Seller, threatened against or affecting Seller (or
any of its respective officers or directors in connection
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with the business of Seller), nor is there any outstanding judgment, order,
writ, injunction or decree against Seller, which judgment would have a
material adverse effect on Seller. Seller is not subject to any court order,
writ, injunction, decree, settlement agreement or judgment that contains or
orders any on-going obligations, whether prohibitory or mandatory in nature,
the performance of which would have a material adverse effect on Seller.
2.6 CAPITALIZATION. (a) Seller has authorized capital stock of (a)
24,000,000 shares of Common Stock, no par value, of which, as of the date
hereof, there are 5,219,985 shares issued and outstanding, and (b) 6,000,000
shares of undesignated preferred stock, no par value per share ("Preferred
Stock"), of which, as of the date hereof, no shares are issued and
outstanding. Except as set forth on SCHEDULE 2.6, all of the issued and
outstanding shares of Common Stock were duly and validly issued and are fully
paid and non-assessable. None of the outstanding shares of Common Stock or
Preferred Stock has been issued in violation of any preemptive rights of the
current or past shareholders of Seller. As of the date hereof, Seller has or
will have reserved for issuance (i) an aggregate of 725,000 shares of Common
Stock issuable on exercise of stock options issued to employees, officers,
directors and other persons, 358,750 shares of which are currently subject to
outstanding options, (ii) an aggregate of 1,316,950 shares of Common Stock
issuable on exercise of currently outstanding convertible securities or
convertible promissory notes other than those listed in (i) above and (iii)
an aggregate of 200,000 shares of Common Stock to be issued to Shenzen WABO
Group Company Limited pursuant to the Settlement Agreement between Seller and
Shenzen WABO Group Company Limited (the "WABO Settlement Agreement"). Except
as set forth on SCHEDULE 2.6 or described above in (i), (ii) or (iii), there
are no outstanding options, warrants or rights to subscribe for, or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of Seller
or contracts, commitments, understandings or arrangements by which Seller is
or may be obligated to issue additional shares of its capital stock or
options, warrants, or rights to purchase or acquire any additional shares of
its capital stock.
(b) All of the Common Stock issued on the exercise of the Warrants and the
conversion of the Note will be fully paid, non-assessable and free and clear of
any Encumbrances, except for (i) restrictions on transfer resulting from and
requiring compliance with applicable securities laws and (ii) restrictions on
registration and resale pursuant to the Registration Rights Agreement. As used
in this Agreement, the term "Encumbrance" means and includes (i) any security
interest, mortgage, deed of trust, lien, charge, pledge, proxy, adverse claim,
equity, power of attorney, or restriction of any kind, including but not limited
to, any restriction or servitude on the use, transfer, receipt of income, or
other exercise of any attributes of ownership, and (ii) any Uniform Commercial
Code financing statement or other public filing, notice or record that by its
terms purports to evidence or notify interested parties of any of the matters
referred to in clause (i) that has not been terminated or released by another
proper public filing, notice or record.
2.7 SUBSIDIARIES. The Seller has no subsidiaries.
2.8 SEC DOCUMENTS. Except as set forth on SCHEDULE 2.8, Seller has made
all filings with the Securities and Exchange Commission ("SEC") that it has been
required to make under
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the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), since May
29, 1996. Seller has provided to Purchaser a true, complete and correct copy
of Seller's annual report on Form 10-KSB for the calendar year ended December
31, 1996, together with all amendments thereto, and any and all filings with
the SEC made by Seller (including all requested exhibits to such filings)
since the filing of said Form 10-KSB (all such documents that have been filed
with the SEC since May 29, 1996, as amended, are referred to as the "Seller
SEC Documents"). As of their respective dates, and except as amended, the
Seller SEC Documents complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as the case may be, and none of
the Seller SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of Seller included
in the Seller SEC Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted
by Form 10-QSB) and fairly present (subject, in the case of the unaudited
statements, to normal recurring audit adjustments) the financial position of
Seller as of the dates thereof and the results of its operations and cash
flows for the periods then ended. Except as set forth in the Seller SEC
Documents and SCHEDULE 2.8, since September 30, 1997, (i) there have been no
material adverse changes in Seller's business, operations or financial
condition and (ii) Seller's operations have been conducted in the ordinary
course of business except as disclosed in writing to Purchaser.
2.9 LIABILITIES. Except as set forth in SCHEDULE 2.9, Seller has no
liabilities or obligations, either accrued, absolute, contingent, or otherwise
that have a material adverse effect on the value or business of Seller, and
Seller has no knowledge of any potential liability that it reasonably believes
would likely result in a material adverse effect on the value or business of
Seller, other than those (a) reflected or reserved against in the unaudited
balance sheet of Seller at September 30, 1997 or (b) incurred in the ordinary
course of business since September 30, 1997.
2.10 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Seller holds all approvals,
authorizations, consents, licenses, orders, franchises, rights, registrations
and permits of any type required to operate its business as presently conducted,
except where failure to hold such would not have a material adverse effect on
the business, financial condition or results of operations of Seller. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any revocation,
cancellation, suspension or modification of any such approval, authorization,
consent, license, order, franchise, right, registration or permit.
2.11 TITLE TO ASSETS; ENCUMBRANCES. Except as set forth in SCHEDULE 2.11:
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(a) Seller has good and indefeasible title to its assets, whether
real, personal or intangible, free and clear of all Encumbrances except (i)
liens for current taxes and assessments not yet due or being contested in
good faith by appropriate proceedings, (ii) mechanic's liens arising under
the operation of law for actions contested in good faith or for which
payment arrangements have been made, (iii) liens granted or incurred by
Seller in the ordinary course of its business or financing or lease of
equipment, office space, furniture and computers in the ordinary course of
its business, and (iv) easements, rights of way, encroachments or other
reductions or matters affecting title which do not prevent the assets from
being used for the purpose for which they are currently being used.
(b) There are no parties in possession of any of the assets of Seller
other than personal property held by third parties in the reasonable and
ordinary course of business. Seller enjoys full, free and exclusive use
and quiet enjoyment of its assets and its rights pertaining thereto.
Seller enjoys peaceful and undisturbed possession under all leases under
which it is a lessee, and all such leases are legal, valid and binding
obligations of Seller, enforceable against Seller in accordance with their
respective terms.
2.12 TAXES AND RETURNS. Except as set forth on SCHEDULE 2.12, Seller has
filed all required tax returns and reports. Except as set forth on SCHEDULE
2.12, Seller has paid all taxes, assessments and governmental charges and
penalties which it has incurred, except such as are being or may be contested in
good faith by appropriate proceedings. Seller is not delinquent in the payment
of any tax, assessment or governmental charge. No deficiencies for any taxes
have been proposed, asserted, or assessed against Seller, and no requests for
waivers of the time to assess any such taxes are pending. For the purposes of
this Agreement, the term "tax" (including, with correlative meaning, the terms
"taxes" and "taxable") shall include all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts.
2.13 INSURANCE. Except as set forth on SCHEDULE 2.13, each policy of
property, fire and casualty, product liability, worker's compensation,
professional liability and title insurance and other forms of insurance (except
group, health and life policies) and each bond issued or posted by any person
with respect to any operations or other activities of Seller is, to the
knowledge of Seller, the legal, valid and binding obligation of the insurer or
bond issuer, enforceable in accordance with its terms, and is in an amount and
provides for coverage as is customary in the ordinary business practices of
Seller's industry.
2.14 PATENTS, TRADEMARKS, ETC. Attached hereto as SCHEDULE 2.14 is a
schedule of all patents, trademarks, service marks, works of authorship,
tradenames, brandnames and copyrights, and licenses or other rights with respect
to any of the foregoing, and other licenses, rights or permits, owned or
possessed by Seller, all of which are in good standing, in full force and
effect, and are free and clear of all Encumbrances. SCHEDULE 2.14 also lists
all applications of Seller for any of the foregoing presently on file and
pending or which are presently being prepared for filing
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and all intellectual property necessary for Seller's business as now
conducted and as proposed to be conducted. No patent or patent application
of Seller is involved in any interference proceeding. Seller is not using,
and does not have any plan to manufacture, use or sell anything which would
violate or infringe on any patent or proprietary right (of which Seller is
aware) of any other person, firm or corporation or which would require a
license under any such patent or proprietary right. Seller has not received
any communications alleging that Seller has violated or, by conducting its
business as proposed, would violate any of the patents, trademarks, service
marks, tradenames, copyrights, works of authorship or trade secrets or other
proprietary rights in processes of any other person or entity.
2.15 MATERIAL CONTRACTS AND OBLIGATIONS. Set forth on SCHEDULE 2.15 is a
list of all material agreements of any nature to which Seller is a party or by
which it or any of its properties is bound, including without limitation, all
employment and consulting agreements, loan agreements, leases, purchase
contracts, employee benefit, bonus, pension, stock option, stock purchase and
similar plans and arrangements, and distributor and sales representative
agreements. True and complete copies of such written agreements have been
provided to Purchaser. All such agreements and contracts are valid, binding and
in full force and effect. Seller is not in default on any of the agreements
listed on SCHEDULE 2.15.
2.16 COMPLIANCE. Except as set forth on SCHEDULE 2.16, Seller has complied
in all material respects with all laws, and is not in violation of any charter
or other corporate restrictions or any law, ordinance, requirement, regulation,
judgment, injunction, award, decree, or other order applicable to its business.
There is no term or provision of any mortgage, indenture, contract, agreement or
instrument to which Seller is a party or by which it is bound, any provision of
any state or federal judgment, decree, order, injunction, writ, statute, rule or
regulation applicable to or binding upon Seller, which materially adversely
affects or, to the knowledge of Seller, in the future is reasonably likely to
affect materially and adversely the business, prospects, condition, affairs or
operations of Seller or any of its properties or assets. To the knowledge of
Seller, no employee of Seller is in violation of any term of any employment
contract, patent or other proprietary information disclosure agreement or any
other contract or agreement relating to the employment of such employee with
Seller.
2.17 EMPLOYEES. Seller has complied in all material respects with all
applicable and material state and federal laws respecting employment and
employment practices, terms and conditions of employment, wages and hours and
other laws related to employment, and there are no arrears in the payment of
wages, or social security taxes.
2.18 TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS. Except as set forth on
SCHEDULE 2.18, no shareholder, officer, director or employee of Seller, nor any
"affiliate" or "associate" of such persons (as such terms are defined in the
rules and regulations promulgated under the Securities Act), is presently a
party to any transaction with Seller, including without limitation, any
contract, agreement or other arrangement providing for the employment of,
furnishing of
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services by, rental of real or personal property from or otherwise
requiring payments to, any such person or entity.
2.19 USE OF PROCEEDS. Seller may use the Consideration to fund obligations
in connection with Seller's dispute resolutions with Shenzen WABO Group Company
Limited and to provide working capital required by Seller to expand its
operations and for the general corporate purposes set forth on SCHEDULE 2.19.
2.20 SHAREHOLDER AGREEMENTS. Except as set forth in SCHEDULE 2.20 or as
contemplated by this Agreement, there are no agreements, written or oral,
between Seller and any holder of its capital stock, or, to the knowledge of
Seller, among any holders of its capital stock, relating to the acquisition,
disposition or voting of the capital stock of Seller.
2.21 HAZARDOUS WASTES AND SUBSTANCES. Neither the operations of Seller nor
the use of its assets violates, in any material way, any applicable federal,
state or local law, statute, ordinance, rule, regulation, memorandum of
understanding, order or notice requirement pertaining to the collection,
transportation, storage, treatment, discharge, release or disposal of hazardous
or non-hazardous waste or substances, including without limitation (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C, Sections 9601 ET SEQ.), as amended from time to time on or before the
Closing Date ("CERCLA") (including, without limitation, as amended pursuant to
the Superfund Amendments and Reauthorization Act of 1986), and such regulations
promulgated under CERCLA on or before the Closing Date, (ii) the Resources
Conservation and Recovery Act of 1976 (42 U.S C. Sections 6901 ET SEQ.), as
amended from time to time ("RCRA") on or before the Closing Date, and such
regulations promulgated under RCRA, (iii) any applicable federal, state or local
laws or regulations relating to the environment in effect on the Closing Date
(collectively, the "Applicable Environmental Laws"). None of the operations of
Seller has ever been conducted nor have any of its assets been used in such a
manner as to constitute a material violation of any of the Applicable
Environmental Laws. No notice has been served on Seller by any person or
Governmental Entity regarding any existing, pending or threatened investigation
or inquiry related to violations under any Applicable Environmental Law, or
regarding any claims for corrective action, remedial obligations or contribution
for removal costs or damages under any Applicable Environmental Law, or
regarding the designation of Seller or any of its affiliates as a potentially
responsible party for any facility under the Applicable Environmental Laws, nor
does any fact or circumstance exist which, if disclosed publicly, would be
reasonably likely to result in the service on Seller of any such notice. There
has been no action taken, or omitted to be taken by Seller which has caused, or
would be reasonably likely to cause, a "release" of any "hazardous substance" at
any "facility," without limitation, within the meaning of such terms as defined
in the Applicable Environmental Laws, which release would have a material
adverse effect on the business, financial condition or results of operations of
Seller as a result of enforcement of Applicable Environmental Laws.
2.22 DISCLOSURES. Neither this Agreement nor any Exhibit or Schedule
hereto, nor any certificate or other instrument furnished to Purchaser or its
counsel by Seller in connection with
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the transactions contemplated hereby, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which they were made, not misleading.
2.23 BROKERS AND FINDERS. Seller has not employed any broker or finder or
incurred any liability for any financial advisor fees, brokerage fees,
commissions, or finders' fees, and no broker or finder has acted directly or
indirectly in connection with this Agreement or the transactions contemplated
hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
3.1 ORGANIZATION. Purchaser is a limited partnership duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite partnership power and authority to conduct its business as
it is now being conducted and to enter into and consummate this Agreement and
the transactions contemplated hereby.
3.2 AUTHORITY; NO DEFAULTS. Purchaser has all requisite partnership power
and authority to enter into the Transaction Documents to which Purchaser is a
party and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of the Transaction Documents to which Purchaser is a
party and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary action. The Transaction Documents to
which Purchaser is a party have been duly executed and delivered by Purchaser
and constitute the valid and binding obligations of Purchaser, enforceable in
accordance with their terms, subject to bankruptcy, insolvency, moratorium and
other similar laws affecting creditors' rights generally and general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law). The execution and delivery of the Transaction
Documents to which Purchaser is a party do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with or result
in a breach of or the acceleration of any obligation under, or constitute a
default or an event of default under the partnership agreement of Purchaser or
any other material contract to which the Purchaser is bound, the effect of which
would be materially adverse to Seller.
3.3 APPROVALS. There is no legal impediment to the execution and delivery
of the Transaction Documents to which Purchaser is a party by Purchaser or to
the consummation of the transactions contemplated thereby, and no filing or
registration with, or authorization, consent or approval of, a Governmental
Entity, the partners of Purchaser or any other third party is necessary for the
consummation by Purchaser of the transactions contemplated thereby other than
perfection of the security interest granted to Purchaser as contemplated by the
Security Agreement or consents of any lender of Purchaser.
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3.4 INVESTMENT INTENT. The Note and the Warrants are being acquired for
Purchaser's own account and not with a view to public distribution and Purchaser
acknowledges that the purchase and sale of the Note and the Warrants is intended
to be exempt from registration under the Securities Act by virtue of Section
4(2) of the Securities Act.
3.5 ACCREDITED INVESTOR. The Purchaser is an accredited investor within
the meaning of Rule 501 under the Securities Act.
3.6 RESTRICTED SECURITIES. The Purchaser acknowledges that the Note and
the Warrants have not been registered under the Securities Act and therefore
cannot be sold or transferred unless either they are subsequently registered
under the Securities Act (as well as under any applicable state securities laws)
or an exemption from such registration is available. The Note and the Warrants
will be "restricted securities" under Rule 144 promulgated under the Securities
Act, and unless and until registered under the Securities Act, the Note and the
Warrants may be subject to limitations on resale set forth in Rule 144 or in
administrative interpretations of the Securities Act by the SEC or in other
rules and regulations in effect at the time of the proposed sale or other
disposition of the Note or the Warrants.
3.7 BROKERS AND FINDERS. Purchaser has not employed any broker or finder
or incurred any liability for any financial advisor fees, brokerage fees,
commissions, or finders' fees, and no broker or finder has acted directly or
indirectly in connection with this Agreement or the transactions contemplated
hereby.
ARTICLE IV
THE CLOSING
4.1 TIME AND PLACE. The closing of the purchase and sale of the Note and
the Warrants (the "Closing") will take place on the date agreed to by the
parties (the "Closing Date"), at the offices of Gardere Wynne Sewell & Riggs,
L.L.P., unless another time and place are agreed to by the parties.
4.2 CONDITIONS TO THE CLOSING OBLIGATION OF SELLER. The obligation of
Seller to effect the Closing is subject to Purchaser delivering, or causing to
be delivered, to Seller at the Closing the following payment and the following
executed documents:
4.2.1 $700,000 of the Consideration;
4.2.2 the Agreement;
4.2.3 the Registration Rights Agreement;
4.2.4 the Security Agreement; and
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4.2.5 the Intercreditor and Subordination Agreement.
4.3 CONDITIONS TO THE CLOSING OBLIGATION OF PURCHASER. The obligation of
Purchaser to effect the Closing is subject to Seller delivering, or causing to
be delivered, to Purchaser at the Closing the following payment and the
following executed documents:
4.3.1 copies of the Articles of Incorporation of Seller, and all
amendments thereto, certified by the Secretary of Seller as of the Closing Date;
4.3.2 copies of the bylaws of Seller, and all amendments thereto,
certified by the Secretary of Seller as of the Closing Date;
4.3.3 copies, certified by a certificate of the Secretary of
Seller as of the Closing Date, of resolutions duly adopted by the board of
directors of Seller, authorizing the execution and delivery by Seller of the
Transaction Documents and all other agreements attached hereto as Exhibits or
contemplated herein, the completion of the sale of the Note and Warrants and the
taking of all such other corporate action as shall have been required as a
condition to, or in connection with, the sale of the Note and Warrants;
4.3.4 the Agreement;
4.3.5 the Note;
4.3.6 the Warrant;
4.3.7 the Registration Rights Agreement;
4.3.8 the Security Agreement;
4.3.9 the Intercreditor and Subordination Agreement;
4.3.10 an opinion of Henson & Efron, P.A., counsel to Seller, in
form and substance acceptable to Purchaser and addressing the matters set forth
in Sections 2.1, 2.2, 2.3, 2.5, 2.6 and 2.7;
4.3.11 the Origination Fee; and
4.3.12 an executed copy of the WABO Settlement Agreement, whether
or not such WABO Settlement Agreement has been accepted and approved by the
Arbitration Tribunal duly formed in accordance with the Arbitration Rules of the
China International Economic and Trade Arbitration Commission.
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ARTICLE V
GENERAL PROVISIONS
5.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties and agreements contained in this Agreement shall
survive the Closing.
5.2 NOTICES. All notices or other communications which are required or
may be given under this Agreement shall be in writing and shall be deemed to
have been duly given when delivered in person, transmitted by telecopier (with
receipt confirmed) or mailed by registered or certified mail, postage prepaid,
return receipt requested, to the parties hereto at the address set forth below
(as the same may be changed from time to time by notice similarly given) or the
last known business or residence address of such other person as may be
designated by either party hereto in writing.
(a) If to Seller:
Photran Corporation
21875 Grenada Avenue
Lakeville, Minnesota 55044
Attn: Paul Fink
(b) If to Purchaser:
St. James Capital Partners, L.P.
c/o St. James Capital Corp.
1980 Post Oak Boulevard, Suite 2030
Houston, Texas 77056
Attn: John L. Thompson
5.3 MISCELLANEOUS. This Agreement (i) constitutes the entire agreement
and supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof, (ii) shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns and is not intended to confer
upon any other person any rights or remedies hereunder, and (iii) shall be
governed in all respects, including validity, interpretation and effect, by the
laws of the State of Minnesota.
5.4 PUBLICITY. Seller and Purchaser promptly shall advise and cooperate
with the other prior to issuing, or permitting any of its directors, officers,
employees or agents to issue, any press release with respect to this Agreement
or the transactions contemplated hereby. Notwithstanding the foregoing, without
the prior consent of Purchaser, neither Seller nor any of its directors,
officers, employees or agents shall issue any press release which includes the
name of Purchaser or any of Purchaser's affiliates.
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5.5 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by either of the parties hereto
(whether by operation of law or otherwise) (other than as contemplated pursuant
to Section 3.6 hereof) without the prior written consent of the other party.
5.6 SCHEDULES. All statements contained in any exhibit, schedule,
appendix, certificate or other instrument delivered by or on behalf of the
parties hereto, or in connection with the transactions contemplated hereby, are
an integral part of this Agreement and shall be deemed representations and
warranties hereunder.
5.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which constitutes an original execution and, in the
aggregate, constitute a single document.
5.8 EXPENSE REIMBURSEMENTS. At Closing, Seller will reimburse to
Purchaser all of Purchaser's expenses relating to the negotiation, documentation
and closing of the transactions contemplated by this Agreement, including
without limitation the direct fees and expenses of Purchaser's counsel, and
other direct fees and expenses of Purchaser.
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SELLER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Seller has signed this Agreement as of the date first
written above.
PHOTRAN CORPORATION
By: /s/ Paul T. Fink
-------------------------------------
Paul T. Fink, Chief Executive Officer
-------------------------------------
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PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Purchaser has signed this Agreement as of the date first
written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its
General Partner
By: /s/ Charles E. Underbrink
-------------------------------------
Charles E, Underbrink, CEO
-------------------------------------
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Exhibit 4.17
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND
MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT
AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
PHOTRAN CORPORATION
10% CONVERTIBLE PROMISSORY NOTE
$3,500,000 Minneapolis, Minnesota February 9, 1998
Photran Corporation, a Minnesota corporation (hereinafter called the
"Company," which term includes any directly or indirectly controlled
subsidiaries or successor entities), for value received, hereby promises to
pay to St. James Capital Partners, L.P., a Delaware limited partnership
(hereinafter called "Holder"), or its registered assigns, the principal sum
of Three Million Five Hundred Thousand Dollars ($3,500,000), or so much as is
advanced pursuant to this Note, together with accrued interest on the amount
of such principal sum, payable in accordance with the terms set forth below.
THE OBLIGATIONS OF THE COMPANY CONTAINED IN THIS NOTE ARE SUBJECT TO THE
TERMS OF THAT CERTAIN SECURITY AGREEMENT BETWEEN THE COMPANY AND THE HOLDER
DATED AS OF THE DATE HEREOF (THE "SECURITY AGREEMENT"). THE PROVISIONS OF
THIS NOTE ARE SUBJECT TO THE TERMS OF THAT CERTAIN INTERCREDITOR AND
SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, AMONG THE COMPANY,
HOLDER, STEVEN KING, COMMUNITY NATIONAL BANK AND HENSON & EFRON, P.A. (THE
"INTERCREDITOR AND SUBORDINATION AGREEMENT").
ARTICLE I
DEFINITIONS
For all purposes of this Note, except as otherwise expressly provided or
unless the context otherwise requires: (i) the terms defined in this Article
have the meanings assigned to them in this Article and include the plural as
well as the singular; (ii) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally accepted
accounting principles as promulgated from time to time by the Association of
Independent Certified Public Accountants; and (iii) the words "herein" and
"hereof" and other words of similar import refer to this Note as a whole and
not to any particular Article, Section or other subdivision.
"ADVANCES" shall have the meaning assigned to that term in Article II,
Section A hereof.
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"AGREEMENT FOR PURCHASE AND SALE" means that certain Agreement for
Purchase and Sale between the Company and Holder dated as of the date hereof.
"BOARD OF DIRECTORS" means the board of directors of the Company as
elected from time to time or any duly authorized committee of that board.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Houston, Texas or
Minneapolis, Minnesota are authorized or obligated by law or executive order
to be closed.
"COMMITMENT" means, at the time any determination thereof is to be made,
the commitment of Holder to extend credit to the Company by means of
Advances, which subject to Article III, Section A, shall be an amount equal
to up to $3,500,000.
"COMMON STOCK" means shares of common stock, no par value, of the Company.
"CONVERSION PRICE" means the price per share determined in accordance with
Article IV (as adjusted in accordance with the terms of this Note) at which
shares of Common Stock shall be delivered to Holder upon conversion of this
Note.
"DEFAULT" means any event which is, or after notice or passage of time
would be, an Event of Default.
"DEFAULT RATE" means a rate per annum equal to 15%.
"EVENT OF DEFAULT" has the meaning specified in Article III, Section A.
"INDEBTEDNESS" of any Person means all indebtedness of such Person,
whether outstanding on the date of this Note or hereafter created, incurred,
assumed or guaranteed, (i) for the principal of, premium on and interest on
all debts of the Person whether outstanding on the date of this Note or
thereafter created for money borrowed by such Person (including capitalized
lease obligations), money borrowed by others (including capitalized lease
obligations) and guaranteed, directly or indirectly, by such Person, or
purchase money indebtedness, or indebtedness secured by property at the time
of the acquisition of such property by such Person, for the payment of which
the Person is directly or contingently liable; (ii) for all accrued
obligations of the Person in respect of any contract, agreement or instrument
imposing an obligation upon the Person to pay over funds; (iii) for all trade
debt of the Person; and (iv) for all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any of the
indebtedness referred to in (i), (ii) or (iii) above.
"MATURITY DATE," when used with respect to the Note means the earlier of
(i) the funding of an Outside Financing or (ii) August 9, 1999 (or such
earlier date upon which the Note becomes due and payable).
"NOTE" means this 10% Convertible Promissory Note in the original principal
amount of $3,500,000.
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"OUTSIDE FINANCING" shall be defined as (i) any transaction where the
Company sells or transfers its equity or debt securities for cash whether in
public or private offerings and (ii) any financing from a bank or other
entity acting as a financial institution made to the Company or any
Subsidiary; provided, however, that neither purchase money debt incurred to
finance equipment in the ordinary course of business (or any refinancing
thereof) nor the Small Business Administration loan in the amount of up to
$833,000 from Community National Bank, a national banking corporation, to the
Company dated as of December 31, 1997, shall be considered an Outside
Financing.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company or other entity,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement dated as of the date hereof by and between the Company and Holder.
"SEC" means the United States Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"SUBSIDIARY" means a corporation or other entity in which more than 50% of
the outstanding voting stock or equity interests is owned or controlled,
directly or indirectly, by the Company or any combination of the Company and
one or more other Subsidiaries. For the purposes of this definition, "VOTING
STOCK" means stock or other interests which ordinarily has voting power for
the election of directors, and equity interests means the right to receive
the profits of the entity, when disbursed, or the assets of the entity upon
liquidation or dissolution.
"TRANSACTION DOCUMENTS" means the Note, the Agreement for Purchase and
Sale, the Security Agreement, the Intercreditor and Subordination Agreement,
the Registration Rights Agreement and the Warrants.
"WARRANTS" means those certain warrants to purchase an aggregate of
1,225,000 shares of Common Stock issued by the Company to Holder.
ARTICLE II
COMMITMENT AND ADVANCES
A. ADVANCES. Subject to the terms and conditions and relying on the
representations and warranties set forth herein and in the other Transaction
Documents, Holder agrees to make advances (collectively, the "Advances") to
the Company, at any time and from time to time on and after the date of this
Note to, but excluding, the Maturity Date, up to a principal amount not to
exceed $3,500,000. All Advances shall mature and be due and payable in full
on the Maturity Date. Once repaid, Advances may not be reborrowed. Each
Advance shall be made in accordance with the procedures set forth in Article
II, Section B.
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B. BORROWING PROCEDURES OF ADVANCES. In order to effect an Advance, the
Company shall submit a Request for Advance in writing or by telecopy (or
telephone notice promptly confirmed in writing or by telecopy) to Holder not
later than 10:00 a.m., Houston, Texas time, on the borrowing date specified
in the Request for Advance for such proposed Advance; provided, however, that
Holder shall deliver $700,000 to the Company on the Closing Date (as defined
in the Agreement for Purchase and Sale), less any expenses payable or
reimbursable by the Company pursuant to the Agreement for Purchase and Sale,
without submission of a Request for Advance. The Requests for Advances shall
refer to this Note and specify (x) in sufficient detail, the corporate use of
the proceeds of such proposed Advance, (y) the Business Day upon which the
proceeds of such proposed Advance are to be made available to the Company,
and (z) the principal amount of such proposed Advance. The obligation of
Holder to make any Advance pursuant to a Request for Advance is subject to
the satisfaction of Holder that (i) the proceeds will be used for a proper
purpose and (ii) on the date such Advance is to be made, no Default or Event
of Default then exists (both before and after giving effect to the making of
such proposed Advance).
C. INTEREST ON ADVANCES AND PAYMENT DATES.
1. Subject to the provisions of Article II, Section D, the Advances
shall bear interest at 10% per annum.
2. Interest on each Advance shall be payable by the Company (i) in
respect of each Advance accruing interest at 10%, on the Maturity Date, (ii)
in respect of each Advance accruing interest at the Default Rate, on demand,
and (iii) in respect of all Advances, on any prepayment (on the amount
prepaid), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
D. INTEREST ON OVERDUE AMOUNTS. If the Company fails to pay the
principal of or interest on any Advance or any other amount when due
hereunder, the Company shall on demand from time to time pay interest, to the
extent permitted by law, on such defaulted amount from the date of such Event
of Default up to (but not including) the date of actual payment (after as
well as before judgment) at a rate per annum equal to the Default Rate.
E. VOLUNTARY PREPAYMENT OF ADVANCES. The Company shall have the right at
any time and from time to time to prepay the Advances, in whole or in part,
without penalty or premium, upon at least five (5) Business Day's prior
written notice given to Holder pursuant to Article VII, Section F.
F. MANDATORY REPAYMENT OF ADVANCES.
1. The Company shall repay all outstanding Advances on the Maturity
Date.
2. The Company shall prepay this Note in full on or before the
close of business (Houston, Texas time) on the second Business Day
following the occurrence of an Outside Financing, such prepayment to be
in an amount equal to the net proceeds received by the Company or any
Subsidiary from such Outside Financing, but not to exceed the then
outstanding principal and accrued and unpaid interest on this Note. All
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payments made under this Note shall be applied first to accrued interest,
and the balance, if any, to principal; provided, however, that interest shall
accrue on any remaining principal balance and shall be payable at the rate
provided above.
G. MANNER OF PAYMENT. Both principal and interest are payable by delivery
of checks to Holder at its address as set forth in this Note or wire transfers
pursuant to instructions from Holder. If the date upon which the payment of
principal and interest is required to be made pursuant to this Note occurs other
than on a Business Day, then such payment of principal and interest shall be
made on the next occurring Business Day following said payment date and shall
include interest through said next occurring Business Day.
H. USE OF PROCEEDS.
1. The proceeds of all Advances shall be used to fund
obligations that arise in connection with the Company's dispute
resolutions with Shenzen WABO Group Company Limited and to provide
working capital required by the Company to expand its operations and for
the general corporate purposes set forth on Schedule 2.19 to the
Agreement for Purchase and Sale.
2. No portion of the proceeds of any Advance under this Note
shall be used by the Company in any manner that might cause the
borrowing or the application of such proceeds to violate Regulation G,
Regulation U, Regulation T, or Regulation X or any other regulation of
the Federal Reserve Board or to violate the Securities Exchange Act of
1934, as amended, in each case as in effect on the date or dates of such
borrowing and such use of proceeds.
ARTICLE III
EVENTS OF DEFAULT AND REMEDIES
A. EVENTS OF DEFAULT. An "Event of Default" occurs if:
1. the Company defaults in the payment or a mandatory
prepayment of the principal or interest on the Note when such principal
or interest becomes due and payable; or
2. the Company defaults in the performance of any covenant
made by the Company in the Note, the Agreement for Purchase and Sale or
any of the other Transaction Documents, and such default remains uncured
for a period of 30 days after notice from the Holder, provided that a
default in the performance of any covenant in Sections 8(a), 8(c), 8(d),
8(e), 8(f), 8(h), 8(i), 8(j), 8(k), 8(l), 8(m) or 8(n) of the Security
Agreement or Article VI, Section A of this Note shall be an Event of
Default immediately upon occurrence; or
3. any representation or warranty made by the Company in the
Note, the Agreement for Purchase and Sale or any of the other
Transaction Documents or in any certificate furnished by the Company in
connection with the consummation of the
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transactions contemplated hereby or thereby, is untrue in any material
respect as of the date of making thereof; or
4. the Company or any Subsidiary defaults in the payment when
due (whether by lapse of time, by declaration, by call for redemption or
otherwise) of the principal of or interest on any Indebtedness of the
Company (other than the Indebtedness evidenced by the Note or good-faith
disputes with trade creditors) having an aggregate principal amount in
excess of $100,000 and such default remains uncured for a period of 30
days; or
5. a court of competent jurisdiction enters a final and
non-appealable judgment or judgments against the Company or any
Subsidiary or any property or assets of the Company or any Subsidiary
for the payment of money aggregating $100,000 or more in excess of
applicable insurance coverage; or
6. a court of competent jurisdiction enters (i) a decree or
order for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or (ii) a
decree or order adjudging the Company or any Subsidiary a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect
of the Company or any Subsidiary under any applicable federal or state
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary
or of any substantial part of the property of the Company or any
Subsidiary or ordering the winding up or liquidation of the affairs of
the Company or any Subsidiary; or
7. the Company or any Subsidiary: (i) commences a voluntary
case or proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or any other case or
proceeding to be adjudicated a bankrupt or insolvent; (ii) files a
petition, answer or consent seeking reorganization or similar relief
under any applicable federal or state law; (iii) makes an assignment for
the benefit of creditors; or (iv) admits in writing its inability to pay
its debts generally as they become due; or
8. any person or group (within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended) becomes the
beneficial owner of 25% or more of the total voting power of the Company
and was not the beneficial owner of 25% or more of the total voting
power of the Company as of the date of this Note;
9. the Company or any Subsidiary (i) merges or consolidates
with or into any other Person, unless the Company or such Subsidiary is
the surviving or acquiring party; or (ii) the Company or any Subsidiary
dissolves or liquidates; or (iii) the Company or any Subsidiary sells
all or any substantial portion of its assets.
B. ACCELERATION OF MATURITY. This Note and all accrued interest shall (i)
automatically become immediately due and payable if an Event of Default
described in Article III, Sections (A)(6) through (A)(9) occurs, and (ii)
become immediately due and payable at the option of the Holder in its sole
discretion if any other Event of Default occurs.
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ARTICLE IV
CONVERSION OF NOTE
Subject to and upon compliance with the provisions of this Article, at the
option of Holder, all or any part of this Note may be converted at any time,
at the principal amount hereof together with accrued and unpaid interest
thereon, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock. The Conversion
Price shall initially be $4.00 per share. Notwithstanding anything else to
the contrary set forth herein, the Holder shall have the right to convert
this Note pursuant to the terms set forth herein at any time, including the
30 Business Days following (i) the Maturity Date or (ii) any prepayment
pursuant to Article II, Section E hereof. If Holder elects to convert this
Note after a prepayment has been made pursuant to Article II, Section E, then
Holder shall return all or such portion of the funds paid to Holder as to
which Holder has elected to convert, together with interest at the rate of
10% per annum.
ARTICLE V
ADJUSTMENT OF CONVERSION PRICE
A. ANTI-DILUTION PROVISIONS. The Conversion Price shall be subject to
adjustment from time to time as hereinafter provided. Upon each adjustment of
the Conversion Price, the holder of this Note shall thereafter be entitled to
purchase, at the Conversion Price resulting from such adjustment, the number
of shares of Common Stock obtained by multiplying the Conversion Price in
effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Conversion Price resulting from such adjustment.
B. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF COMMON STOCK.
1. a. If and whenever after the date hereof the Company shall
issue or sell any Common Stock for no consideration or for a
consideration per share less than the Conversion Price then,
forthwith, upon such issuance or sale, the Conversion Price shall
be reduced (but not increased, except as otherwise specifically
provided in this Article V, Section B), to the lower price per
share (calculated to the nearest one-ten thousandth of a cent, but
in any event not less than $.001 per share).
b. Notwithstanding the provisions of this Article V,
Section B, no adjustment shall be made in the Conversion Price in
the event that the Company issues, in one or more transactions, (i)
Common Stock upon exercise of any options issued to officers,
directors or employees of the Company pursuant to a stock option
plan or an employment, severance or consulting agreement as now or
hereafter in effect, in each case approved by the Board of
Directors (provided that the aggregate number of shares of Common
Stock which may be issuable, including options issued prior to the
date hereof, under all such employee plans and agreements shall at
no time exceed 725,000; (ii) Common Stock upon exercise of this
Note or any warrant
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issued pursuant to the terms of the Agreement for Purchase and
Sale; (iii) Common Stock upon exercise of any stock purchase
warrant or option (other than the options referred to in clause (i)
above) or other convertible security outstanding on the date hereof
(other than any shares of Common Stock issuable on conversion of
any promissory note held by any Shareholder of the Company;
PROVIDED, HOWEVER, that no adjustment shall be made in the
Conversion Price in the event that the Company issues Common Stock
on conversion of the convertible promissory note made by the
Company in favor of Steven King, the Chairman of the Board of the
Company, in the principal amount of $200,000, in connection with
the Bridge Loan Agreement dated as of August 8, 1993, as amended
and restated March 15, 1996 and April 9, 1997, and as amended
February 9, 1998, and as it exists as of the date hereof); or (iv)
Common Stock to Shenzen WABO Group Company Limited pursuant to the
Settlement Agreement between the Company and Shenzen WABO Group
Company Limited. In addition, for purposes of calculating any
adjustment of the Conversion Price as provided in this Article V,
Section B, all of the shares of Common Stock issuable pursuant to
any of the foregoing shall be assumed to be outstanding prior to
the event causing such adjustment to be made.
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2. For purposes of this Article V, Section B, the following shall
be applicable:
a. ISSUANCE OF RIGHTS OR OPTIONS. In case at any time after the
date hereof the Company shall in any manner grant (whether directly
or by assumption in a merger or otherwise) any rights to subscribe
for or to purchase, or any options for the purchase of, Common
Stock or any stock or securities convertible into or exchangeable
for Common Stock (such convertible or exchangeable stock or
securities being herein called "Convertible Securities") (other
than warrants, options or convertible securities issued as
consideration for or assumed in conjunction with an acquisition or
to officers, directors, or employees of the acquired entity in
conjunction therewith), whether or not such rights or options or
the right to convert or exchange any such Convertible Securities
are immediately exercisable, and the price per share for which
shares of Common Stock are issuable upon the exercise of such
rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration, if any,
payable to the Company upon the exercise of such rights or options,
or plus, in the case of such rights or options that relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable
upon the exercise of such rights or options or upon the conversion
or exchange of all such Convertible Securities issuable upon the
exercise of such rights or options) shall be less than the
Conversion Price in effect as of the date of granting such rights
or options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon
conversion or exchange of all such Convertible Securities issuable
upon the exercise of such rights or options shall be deemed to be
outstanding as of the date of the granting of such rights or
options and to have been issued for such price per share, with the
effect on the Conversion Price specified in Article V, Section
B(1)(a) hereof. Except as provided in Article V, Section B(2)
hereof, no further adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Stock or of such
Convertible Securities upon exercise of such rights or options or
upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
b. CHANGE IN OPTION PRICE OR CONVERSION RATE. Upon the happening
of any of the following events, namely, if the purchase price
provided for in any right or option referred to in Article V,
Section B(2) above, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities
referred to in Article V, Section B(2)(a) hereof, or the rate at
which any Convertible Securities referred to in Article V, Section
B(2)(a) hereof, are convertible into or exchangeable for Common
Stock shall change (other than under or by reason of provisions
designed to protect against dilution), the Conversion Price then in
effect hereunder shall forthwith be readjusted (increased or
decreased, as the case may be) to the Conversion Price that would
have been in effect at such time had such rights,
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options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or
sold. On the expiration of any such option or right referred to in
Article V, Section B(2)(a) hereof, or on the termination of any
such right to convert or exchange any such Convertible Securities
referred to in Article V, Section B(2)(a) hereof, the Conversion
Price then in effect hereunder shall forthwith be readjusted
(increased or decreased, as the case may be) to the Conversion
Price that would have been in effect at the time of such expiration
or termination had such right, option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or
termination, never been granted, issued or sold, and the Common
Stock issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in Article V,
Section B(2)(a) hereof or the rate at which any Convertible
Securities referred to in Article V, Section B(2)(a) hereof are
convertible into or exchangeable for Common Stock shall be reduced
at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery
of Common Stock upon the exercise of any such right or option or
upon conversion or exchange of any such Convertible Securities, the
Conversion Price then in effect hereunder shall, if not already
adjusted, forthwith be adjusted to such amount as would have
obtained had such right, option or Convertible Securities never
been issued as to such Common Stock and had adjustments been made
upon the issuance of the Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Conversion Price then in
effect hereunder is thereby reduced.
c. CONSIDERATION FOR STOCK. In case at any time Common Stock or
Convertible Securities or any rights or options to purchase any
such Common Stock or Convertible Securities shall be issued or sold
for cash, the consideration therefor shall be deemed to be the
amount received by the Company therefor. In case at any time any
Common Stock, Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities shall be
issued or sold for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be
deemed to be the fair value of such consideration, as determined
reasonably and in good faith by the Board of Directors of the
Company. In case at any time any Common Stock, Convertible
Securities or any rights or options to purchase any Common Stock or
Convertible Securities shall be issued in connection with any
merger or consolidation in which the Company is the surviving
corporation, the amount of consideration received therefor shall be
deemed to be the fair value, as determined reasonably and in good
faith by the Board of Directors of the Company, of such portion of
the assets and business of the nonsurviving corporation as such
Board of Directors may determine to be attributable to such Common
Stock, Convertible Securities, rights or options as the case may
be. In case at any time any rights or options to purchase any
shares of Common Stock or Convertible Securities shall be issued in
connection with the issuance and sale of other securities of the
Company, together consisting of one integral transaction in which
no consideration is allocated to such rights or options by the
parties, such rights or options shall be deemed to have been issued
without consideration.
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d. RECORD DATE. In the case the Company shall take a record of
the holders of its Common Stock for the purpose of entitling them
(i) to receive a dividend or other distribution payable in Common
Stock or Convertible Securities, or (ii) to subscribe for or
purchase Common Stock or Convertible Securities, then such record
date shall be deemed to be the date of the issuance or sale of the
Common Stock or Convertible Securities deemed to have been issued
or sold as a result of the declaration of such dividend or the
making of such other distribution or the date of the granting of
such right of subscription or purchase, as the ease may be.
e. TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned
directly by the Company in treasury, and the disposition of any
such shares shall be considered an issuance or sale of Common Stock
for the purpose of this Article V, Section B.
C. STOCK DIVIDENDS. In case the Company shall declare a dividend or make
any other distribution upon any shares of the Company, payable in Common
Stock or Convertible Securities, any Common Stock or Convertible Securities,
as the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
D. STOCK SPLITS AND REVERSE SPLITS. In the event that the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Shares into
which this Note may be converted immediately prior to such subdivision shall
be proportionately increased, and conversely, in the event that the
outstanding shares of Common Stock shall at any time be combined into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination shall be proportionately increased and the number of Shares
into which this Note may be converted immediately prior to such combination
shall be proportionately reduced. Except as provided in this Article V,
Section D no adjustment in the Conversion Price and no change in the number
of Shares shall be made under this Article V as a result of or by reason of
any such subdivision or combination.
E. REORGANIZATIONS AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets with respect
to or in exchange for their shares, then the following provisions shall apply:
1. As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other
disposition (except as otherwise provided below in Article V,
Section E(3), lawful and adequate provisions shall be made whereby
the holder of this Note shall thereafter have the right to purchase
and receive upon the terms and conditions specified in this Note
and in lieu of the shares immediately theretofore receivable upon
the exercise of the rights represented hereby, such shares of
capital stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding
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shares of such Common Stock equal to the number of shares immediately
theretofore so receivable had such reorganization,
reclassification, consolidation, merger, share exchange or sale not
taken place, and in any such case appropriate provision reasonably
satisfactory to such holder shall be made with respect to the
rights and interests of such holder to the end that the provisions
hereof (including, without limitation, provisions for adjustments
of the Conversion Price and of the number of shares receivable upon
the exercise) shall thereafter be applicable, as nearly as
possible, in relation to any shares of capital stock, securities or
assets thereafter deliverable upon the exercise of this Note.
2. In the event of a merger, share exchange or consolidation of the
Company with or into another Person as a result of which a number of shares
of common stock or its equivalent of the successor Person greater or lesser
than the number of shares of Common Stock outstanding immediately prior to
such merger, share exchange or consolidation are issuable to holders of
Common Stock, then the Conversion Price in effect immediately prior to such
merger, share exchange or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock.
3. The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless
prior to or simultaneously with the consummation thereof the successor
Person (if other than the Company) resulting from such consolidation,
share exchange or merger or the Person purchasing or otherwise
acquiring such assets shall have assumed by written instrument
executed and mailed or delivered to the Holder hereof at the last
address of such Holder appearing on the books of the Company the
obligation to deliver to such Holder such shares of capital stock,
securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to receive, and all other liabilities and
obligations of the Company hereunder. Upon written request by the
Holder hereof, such successor Person will issue a new Note revised to
reflect the modifications in this Note effected pursuant to this
Article V, Section E.
4. If a purchase, tender or exchange offer is made to
and accepted by the holders of 50% or more of the outstanding
shares of Common Stock, the Company shall not effect any
consolidation, merger, share exchange or sale, transfer or other
disposition of all or substantially all of the Company's assets with
the Person having made such offer or with any affiliate of such
Person, unless prior to the consummation of such consolidation,
merger, share exchange, sale, transfer or other disposition the holder
hereof shall have been given a reasonable opportunity to then elect to
receive upon the conversion of this Note either the capital stock,
securities or assets then issuable with respect to the Common Stock or
the capital stock, securities or assets, or the equivalent, issued to
previous holders of the Common Stock in accordance with such offer.
F. ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a
dividend or other distribution payable to all holders of shares of
Common Stock in evidences of Indebtedness of the Company or other
assets of the Company (including, cash (other than regular cash
dividends declared by the Board of Directors), capital stock (other
than Common Stock, Convertible Securities or options or rights
thereto) or other property), the Conversion Price in effect
immediately prior to such declaration of such dividend or other
distribution shall be reduced by an amount equal to the amount of such
dividend or distribution payable per share of Common Stock, in the
case of a cash
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dividend or distribution, or by the fair value of such dividend or
distribution per share of Common Stock (as reasonably determined in
good faith by the Board of Directors of the Company), in the case of
any other dividend or distribution. Such reduction shall be made
whenever any such dividend or distribution is made and shall be
effective as of the date as of which a record is taken for purpose of
such dividend or distribution or, if a record is not taken, the date
as of which holders of record of Common Stock entitled to such
dividend or distribution are determined.
G. DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares
of Common Stock purchasable hereunder shall be required unless such
adjustment would require an increase or decrease of at least one share
of Common Stock purchasable upon conversion of the Note and no
adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least $.01 in
the Conversion Price; provided, however, that any adjustments which by
reason of this Article V, Section G are not required to be made shall
be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest full share
or nearest one hundredth of a dollar, as applicable.
H. NOTICE OF ADJUSTMENT. Whenever the Conversion Price or the
number of Shares issuable upon the conversion of the Note shall be
adjusted as herein provided, or the rights of the holder hereof shall
change by reason of other events specified herein, the Company shall
compute the adjusted Conversion Price and the adjusted number of
Shares in accordance with the provisions hereof and shall prepare an
Officer's Certificate setting forth the adjusted Conversion Price and
the adjusted number of Shares issuable upon the conversion of this
Note or specifying the other shares of stock, securities or assets
receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such
adjustments or other changes are based. The Company shall cause to be
mailed to the Holder hereof copies of such Officer's Certificate
together with a notice stating that the Conversion Price and the
number of Shares purchasable upon conversion of this Note have been
adjusted and setting forth the adjusted Conversion Price and the
adjusted number of Shares purchasable upon conversion of this Note.
I. NOTIFICATIONS TO HOLDERS. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution
(other than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders
of its Common Stock any additional shares of capital stock of any
class or other rights;
(iii) to effect any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another Person, or sale, transfer or
other disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution, liquidation
or winding up of the Company,
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then, in any one or more of such cases, the Company shall give the
holder hereof (a) at least 10 days (but not more than 90 days) prior
written notice of the date on which the books of the Company shall
close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of
any such issuance, reorganization, reclassification, consolidation,
merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or
winding up, at least 10 days (but not more than 90 days) prior written
notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the
case of any such dividend, distribution or subscription rights, the
date on which the holders of Common Stock shall be entitled thereto,
and such notice in accordance with the foregoing clause (b) shall also
specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, as the
case may be.
J. COMPANY TO PREVENT DILUTION.
1. If any event or condition occurs as to which other
provisions of this Article are not strictly applicable or if strictly
applicable would not fairly protect the exercise or purchase rights of
this Note evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely
affect the exercise or purchase rights of the holder hereof under any
provisions of this Note, then the Company shall make such adjustments
in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such exercise and
purchase rights as aforesaid, and any adjustments necessary with
respect to the Conversion Price and the number of shares purchasable
hereunder so as to preserve the rights of the holder hereunder. In no
event shall any such adjustment have the effect of increasing the
Conversion Price as otherwise determined pursuant to this Article
except in the event of a combination of shares of the type
contemplated in Article V, Section D hereof, and then in no event to
an amount greater than the Conversion Price as adjusted pursuant to
Article V, Section D hereof.
2. In furtherance of the anti-dilution protections afforded
Holder pursuant to this Article V, in the event of any dilutive event
described in this Article V as a result of the settlement of any of
the Company's existing or future litigation matters (including, but
not limited to, RADMAN ET AL V. PHOTRAN CORPORATION, DAVID E.
STEVENSON V. PHOTRAN CORPORATION and MIK PHYSICS INCORPORATED V.
PHOTRAN CORPORATION), not only will Holder be afforded an adjustment
to the Conversion Price as set forth in this Article V, but Holder
shall also be entitled to the number of shares issuable upon
conversion of this Note increased by the greater of (i) the ratio
which the Conversion Price immediately before such issuance bears to
the adjusted Conversion Price immediately after such issuance and (ii)
the number of shares that would be equal to the same percentage
ownership by the Holder of the Company after giving effect to the
dilutive event as existed before the occurrence of the dilutive event.
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ARTICLE VI
COVENANTS
The Company covenants and agrees that, so long as this Note is
outstanding:
A. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The Company will
duly and punctually pay or cause to be paid the principal sum of this
Note, together with interest accrued thereon from the date hereof to
the date of payment, in accordance with the terms hereof.
B. CORPORATE EXISTENCE. The Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence, rights (charter and statutory) and franchises;
provided, however, that the Company shall not be required to preserve
any such right or franchise if it shall reasonably determine that the
preservation thereof is no longer desirable in the conduct of its
business.
C. TAXES; CLAIMS; ETC. The Company will, and will cause each
Subsidiary to, promptly pay and discharge all lawful taxes,
assessments, and governmental charges or levies imposed upon it or
upon its income or profits, or upon any of its properties, real,
personal, or mixed, before the same shall become in default, as well
as all lawful claims for labor, materials, and supplies or otherwise
which, if unpaid, might become a lien or charge upon such properties
or any part thereof, and which lien or charge will have a material
adverse effect on the business of the Company; provided, however, that
neither the Company nor any Subsidiary shall be required to pay or
cause to be paid any such tax, assessment, charge, levy, or claim
prior to institution of foreclosure proceedings if the validity
thereof shall concurrently be contested in good faith by appropriate
proceedings and if the Company shall have established reserves deemed
by the Company adequate with respect to such tax, assessment, charge,
levy, or claim.
D. MAINTENANCE OF EXISTENCE AND PROPERTIES. The Company will,
and will cause each Subsidiary to, keep its material properties in
good repair, working order, and condition, ordinary wear and tear
excepted, so that the business carried on may be properly conducted at
all times in accordance with prudent business management.
E. NOTICE OF DEFAULTS. The Company will promptly notify the
Holder in writing of the occurrence of (i) any Event of Default under
this Note, and (ii) any event of default (or if any event of default
would result upon any payment with respect to this Note) with respect
to any Indebtedness as such event of default is defined therein or in
the instrument under which it is outstanding, permitting holders to
accelerate the maturity of such Indebtedness.
F. MERGERS AND ACQUISITIONS. Without the consent of the Holder,
neither the Company nor any Subsidiary will dissolve, liquidate,
consolidate or merge with or sell or transfer all or a substantial
portion of its assets to any Person.
G. COMPLIANCE WITH LAWS. The Company will promptly comply
with all laws, ordinances and governmental rules and regulations to
which it is subject.
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ARTICLE VII
MISCELLANEOUS
A. COLLECTION FEES. If this Note is placed in the hands of an
attorney for collection, and if it is collected through any legal
proceedings at law or in equity or in bankruptcy, receivership or
other court proceedings, the Company hereby undertakes to pay all
costs and expenses of collection including, but not limited to, court
costs and the reasonable attorney's fees of Holder.
B. CONSENT TO AMENDMENTS. This Note may be amended, and the
Company may take any action herein prohibited, or omit to perform any
act herein required to be performed by it, if and only if the Company
shall obtain the written consent to such amendment, action or omission
to act from the holders of a majority of the aggregate principal
amount of the Note.
C. BENEFITS OF NOTE. Nothing in this Note, express or implied,
shall give to any Person, other than the Company, Holder, and their
successors any benefit or any legal or equitable right, remedy or
claim under or in respect of this Note.
D. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Note contained by or on behalf of the Company and the Holder shall
bind and inure to the benefit of the respective successors and assigns
of the Company and Holder.
E. RESTRICTIONS ON TRANSFER. This Note may not be sold or
transferred in the absence of registration or an exemption therefrom
under all applicable securities laws. Notwithstanding the foregoing
provisions of this Section E, Holder may grant a security interest in
this Note to its lender or lenders and as between Holder and its lender
or lenders, this Note is transferable in the same manner and with the
same effect as in the case of a negotiable instrument payable to a
specified Person. Any lender to which Holder grants a security interest
in this Note shall be entitled to exercise all remedies to which it is
entitled by contract or by law, including, without limitation,
transferring this Note into its own name or into the name of any
purchaser at any sale undertaken in connection with enforcement by such
lender of its remedies. Prior to any transfer (other than the grant of
a security interest) as provided herein, the transferor shall provide
written notice to the Company. The Company, however, may treat Holder
as the owner hereof for all purposes until this Note shall have been
surrendered for transfer as hereinafter provided. Upon surrender of
this Note duly executed by Holder or its agent or attorney, the Company
shall execute and deliver a new Note in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Note shall promptly be canceled.
F. NOTICE; ADDRESS OF PARTIES. Except as otherwise provided, all
communications to the Company or Holder provided for herein or with
reference to this Note shall be deemed to have been sufficiently given
or served for all purposes on the third Business Day after being sent
as certified or registered mail, postage and charges prepaid, to the
following addresses: if to the Company: Photran Corporation, 21875
Grenada Avenue, Lakeville, Minnesota 55044, Attn: Paul Fink, or at any
other address designated by the Company in writing to Holder; if to
Holder: St. James Capital Partners, L.P., c/o St. James Capital
Corp., 1980 Post Oak Boulevard, Suite 2030, Houston, Texas
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77056, Attn: John L. Thompson, or at any other address designated by Holder
to the Company in writing.
G. SEPARABILITY CLAUSE. In case any provision in this Note shall
be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions in
such jurisdiction shall not in any way be affected or impaired
thereby; provided, however, such construction does not destroy the
essence of the bargain provided for hereunder.
H. GOVERNING LAW. This Note shall be governed by, and construed
in accordance with, the internal laws of the State of Minnesota
(without regard to principles of choice of law).
I. USURY. It is the intention of the parties hereto to conform
strictly to the applicable laws of the State of Minnesota and the United
States of America, and judicial or administrative interpretations or
determinations thereof regarding the contracting for, charging and
receiving of interest for the use, forbearance, and detention of money
(referred to as "Applicable Law"). The Holder shall have no right to
claim, to charge or to receive any interest in excess of the maximum
non-usurious interest rate permitted by applicable law from time to time
in effect as such law may be interpreted, amended, revised, supplemented
or enacted (the "Maximum Rate"), if any, permitted to be charged on that
portion of the amount representing principal which is outstanding and
unpaid from time to time by Applicable Law. Determination of the rate
of interest for the purpose of determining whether this Note is usurious
under Applicable Law shall be made by amortizing, prorating, allocating
and spreading in equal parts during the period of the actual time of
this Note, all interest or other sums deemed to be interest (referred to
in this Section as "Interest") at any time contracted for, charged or
received from the Company in connection with this Note. Any Interest
contracted for, charged or received in excess of the Maximum Rate
allowed by Applicable Law shall be deemed a result of a mathematical
error and a mistake. If this Note is paid in part prior to the end of
the full stated term of this Note and the Interest received for the
actual period of existence of this Note exceeds the Maximum Rate allowed
by Applicable Law, Holder shall credit the amount of the excess against
any amount owing under this Note or, if this Note has been paid in full,
or in the event that it has been accelerated prior to maturity, Holder
shall refund to the Company the amount of such excess, and shall not be
subject to any of the penalties provided by Applicable Law for
contracting for, charging or receiving Interest in excess of the Maximum
Rate allowed by Applicable Law. Any such excess which is unpaid shall
be canceled.
J. TERMINATION. This Note shall automatically terminate upon (i)
payment in full by the Company (whether by prepayment or payment on
the Maturity Date), (ii) conversion of this Note by the holder hereof
in full or (iii) any combination of prepayment, payment and
conversion, in each case such that no principal or interest under this
Note remains outstanding.
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IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed on the date first above written.
PHOTRAN CORPORATION
By: /s/ Paul T. Fink
------------------------------
Name: Paul T. Fink
Title: Chief Executive Officer
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REQUEST FOR ADVANCE
St. James Capital Partners, L.P.
1980 Post Oak Boulevard, Suite 2030
Houston, Texas 77056
Attn: John L. Thompson
______________ ___, 199_
In accordance with Article II, Section B of that certain 10%
Convertible Promissory Note executed by Photran Corporation, a
Minnesota corporation (the "Company"), in favor of St. James Capital
Partners, L.P., dated as of February 9, 1998, in the original
principal amount of $3,500,000 (the "Note"), the Company hereby
requests an Advance (as defined in the Note) as follows:
The principal amount of such Advance shall be $__________________.
The proceeds of such Advance shall be made available to the Company on
________________, 199_, and such proceeds shall be used for
________________________________________________________, which is a
proper use of proceeds under the Note.
No Default or Event of Default under the Note exists as of the date
hereof.
PHOTRAN CORPORATION
By:
------------------------------
Name:
---------------------------
Title:
--------------------------
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Exhibit 4.18
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD, PLEDGED OR
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
to Purchase Common Stock of
PHOTRAN CORPORATION
Expiring on February 9, 2003
This Warrant to Purchase Common Stock (the "Warrant") certifies that for value
received, St. James Capital Partners, L.P., a Delaware limited partnership, or
its transferees or assignees (the "Holder"), is entitled to purchase from the
Company (as hereinafter defined), in whole or in part, 1,225,000 shares of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
(as hereinafter defined) at an Exercise Price (as hereinafter defined) per share
of $4.00, subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. The number of Warrants (as hereinafter defined), the
number of shares of Common Stock purchasable hereunder, and the Exercise Price
therefor are subject to adjustment as hereinafter set forth. This Warrant and
all rights hereunder shall expire at 5:00 p.m., Houston, Texas time, on February
9, 2003 (the "Expiration Date").
ARTICLE I
DEFINITIONS
As used herein, the following terms shall have the meanings set forth below:
1.1 "COMPANY" shall mean Photran Corporation, a Minnesota
corporation, and shall also include any successor thereto with respect
to the obligations hereunder, by merger, consolidation, share exchange
or otherwise.
1.2 "COMMON STOCK" shall mean and include the Company's Common
Stock, no par value, issued and authorized on the date of the issue of
this Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale,
transfer or other disposition of assets of the character referred to
in Section 4.5 herein, the stock or other securities provided for in
Section 4.5 herein, and (ii) any other shares of Common Stock of the
Company into which such shares of Common Stock may be converted.
1.3 "EXERCISE PRICE" shall mean the purchase price of $4.00 per
share of Common Stock payable upon exercise of the Warrants, as
adjusted from time to time pursuant to the provisions hereof.
1.4 "MARKET PRICE" for any day, when used with reference to Common
Stock, shall mean the
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price of said Common Stock averaged over a period of ten (10)
consecutive Trading Days prior to the date as of which the
determination is to be made determined as follows: (i) the last
reported sale price for the Common Stock on each Trading Day on the
principal securities exchange on which the Common Stock is listed or
admitted to trading or if no such sale takes place on such date, the
average of the closing bid and asked prices thereof as officially
reported, or, if not so listed or admitted to trading on any
securities exchange, the last sale price for the Common Stock on the
National Association of Securities Dealers National Market System or
Small Cap Market on such date, or, if there shall have been no trading
on such date or if the Common Stock shall not be listed on such
system, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any NASD member firm selected
from time to time by the Company for such purpose in each such case,
unless otherwise provided herein; or (ii) if the Common Stock shall
not be listed or admitted to trading as provided in clause (i) above,
the fair market value of the Common Stock as determined in good faith
by the Board of Directors of the Company.
1.5 "NOTE" shall mean the 10% Convertible Promissory Note of the
Company in the amount of $3,500,000 payable to St. James Capital
Partners, L.P. dated as of the date hereof.
1.6 "OUTSTANDING," when used with reference to Common Stock, shall
mean (except as otherwise expressly provided herein) at any date as of
which the number of shares thereof is to be determined, all issued
shares of Common Stock, except shares then owned or held by or for the
account of the Company.
1.7 "PERSON" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company,
trust, estate, unincorporated organization or other entity or
government or any agency or political subdivision thereof.
1.8 "TRADING DAYS" shall mean any days during the course of which
the principal securities exchange on which the Common Stock is listed
or admitted to trading is open for the exchange of securities.
1.9 "WARRANT" shall mean the right upon exercise to purchase one
Warrant Share.
1.10 "WARRANT SHARES" shall mean the shares of Common Stock
purchased or purchasable by the Holder hereof upon the exercise of the
Warrants.
ARTICLE II
EXERCISE OF WARRANTS
2.1 METHOD OF EXERCISE. The Warrants represented hereby may be
exercised by the Holder hereof, at any time and from time to time on
or after the date hereof until 5:00 p.m., Houston, Texas time, on the
Expiration Date. To exercise the Warrants, the Holder hereof shall
deliver to the Company, at the Warrant Office designated herein, (i) a
written notice in the form of the Subscription Notice attached as an
exhibit hereto, stating therein the election of such Holder to
exercise the Warrants in the manner provided in the Subscription
Notice; (ii) payment in full of the Exercise Price (A) in cash or by
bank check for all Warrant Shares purchased hereunder, or (B) through
a "cashless" or "net-issue" exercise of each such Warrant ("Cashless
Exercise"); the Holder shall exchange each Warrant subject to a
Cashless Exercise for that number of Warrant Shares determined by
multiplying the number of Warrant Shares issuable hereunder by a
fraction, the numerator of which shall be the difference between (x)
the Market Price and (y) the Exercise Price for each such Warrant, and
the denominator of which shall be the Market Price; the Subscription
Notice shall set forth the calculation upon which the Cashless
Exercise is based; and (iii) this Warrant. The Warrants shall be
deemed to be exercised on the date of receipt by the Company of the
Subscription Notice, accompanied by payment for the Warrant Shares and
surrender of this Warrant, as aforesaid, and such date is referred to
herein as the "Exercise Date". Upon such exercise, the Company shall,
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as promptly as practicable and in any event within five business days,
issue and deliver to such Holder a certificate or certificates for the
full number of the Warrant Shares purchased by such Holder hereunder,
and shall, unless the Warrants have expired, deliver to the Holder
hereof a new Warrant representing the number of Warrants, if any, that
shall not have been exercised, in all other respects identical to this
Warrant. As permitted by applicable law, the Person in whose name the
certificates for Common Stock are to be issued shall be deemed to have
become a Holder of record of such Common Stock on the Exercise Date
and shall be entitled to all of the benefits of such Holder on the
Exercise Date, including, without limitation, the right to receive
dividends and other distributions for which the record date falls on
or after the Exercise Date and to exercise voting rights with respect
thereto.
2.2 EXPENSES AND TAXES. The Company shall pay all expenses and
taxes (including, without limitation, all documentary, stamp, transfer
or other transactional taxes) other than income taxes attributable to
the preparation, issuance or delivery of the Warrants and of the
shares of Common Stock issuable upon exercise of the Warrants.
2.3 RESERVATION OF SHARES. The Company shall reserve at all times
so long as the Warrants remain outstanding, free from preemptive
rights, out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the exercise of the Warrants, a
sufficient number of shares of Common Stock to provide for the
exercise of the Warrants.
2.4 VALID ISSUANCE. All shares of Common Stock that may be issued
upon exercise of the Warrants will, upon issuance by the Company, be
duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issuance thereof and,
without limiting the generality of the foregoing, the Company shall
take no action or fail to take any action which will cause a contrary
result (including, without limitation, any action that would cause the
Exercise Price to be less than the par value, if any, of the Common
Stock.
2.5 PURCHASE AGREEMENT. The Warrants represented hereby are part
of a duly authorized issuance and sale of warrants to purchase Common
Stock issued and sold pursuant to that certain Agreement for Purchase
and Sale dated as of the date hereof (the "Agreement"), between the
Company and the Holder. The Holder shall be entitled to the rights to
registration under the Securities Act of 1933, as amended (the
"Securities Act") and any applicable state securities or blue sky laws
to the extent set forth in the Registration Rights Agreement between
the Company and the Holder dated as of the date hereof (the
"Registration Rights Agreement"). The terms of the Agreement and the
Registration Rights Agreement are hereby incorporated herein for all
purposes and shall be considered a part of this Warrant as if they had
been fully set forth herein. Notwithstanding the previous sentence, in
the event of any conflict between the provisions of the Agreement or
the Registration Rights Agreement and this Warrant, the provisions of
this Warrant shall control.
2.6 ACKNOWLEDGMENT OF RIGHTS. At the time of the exercise in
accordance with the terms hereof and upon the written request of the
Holder hereof, the Company will acknowledge in writing its continuing
obligation to afford to such Holder any rights (including, without
limitation, any right to registration of the Warrant Shares) to which
such Holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant; provided, however,
that if the Holder hereof shall fail to make any such request, such
failure shall not affect the continuing obligation of the Company to
afford to such Holder any such rights.
2.7 NO FRACTIONAL SHARES. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of this
Warrant. If more than one Warrant shall be presented for exercise at
the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon
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such exercise shall be computed on the basis of the aggregate number
of whole shares of Common Stock purchasable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock
would, except for the provisions of this Section, be issuable on the
exercise of this Warrant, the Company shall pay an amount in cash
calculated by it to be equal to the Market Price of one share of
Common Stock at the time of such exercise multiplied by such fraction
computed to the nearest whole cent.
ARTICLE III
TRANSFER
3.1 WARRANT OFFICE. The Company shall maintain an office for
certain purposes specified herein (the "Warrant Office"), which office
shall initially be the Company's offices at 21875 Grenada Avenue,
Lakeville, Minnesota 55044, and may subsequently be such other office
of the Company or of any transfer agent of the Common Stock in the
continental United States as to which written notice has previously
been given to the Holder. The Company shall maintain, at the Warrant
Office, a register for the Warrants in which the Company shall record
the name and address of the Person in whose name this Warrant has been
issued, as well as the name and address of each permitted assignee of
the rights of the registered owner hereof.
3.2 OWNERSHIP OF WARRANTS. The Company may deem and treat the
Person in whose name the Warrants are registered as the Holder and
owner hereof (notwithstanding any notations of ownership or writing
hereon made by anyone other than the Company) for all purposes and
shall not be affected by any notice to the contrary until presentation
of this Warrant for registration of transfer as provided in this
Article III. Notwithstanding the foregoing, the Warrants represented
hereby, if properly assigned in compliance with this Article III, may
be exercised by an assignee for the purchase of Warrant Shares without
having a new Warrant issued.
3.3 RESTRICTIONS ON TRANSFER OF WARRANTS. Subject to compliance
with the requirements of Section 3.4 hereof, these Warrants may be
transferred, in whole or in part, by the Holder. Subject to the
restrictions set forth in this Section, the Company, from time to
time, shall register the transfer of the Warrants in such books upon
surrender of this Warrant at the Warrant Office properly endorsed or
accompanied by appropriate instruments of transfer and written
instructions for transfer. Upon any such transfer and upon payment by
the Holder or its transferee of any applicable transfer taxes, new
Warrants shall be issued to the transferee and the transferor (as
their respective interests may appear) and the surrendered Warrants
shall be cancelled by the Company. The Company shall pay all taxes
(other than securities transfer taxes or income taxes) and all other
expenses and charges payable in connection with the transfer of the
Warrants pursuant to this Section.
3.3.1 RESTRICTIONS IN GENERAL. The Holder of the Warrants
agrees that it will not transfer the Warrants prior to delivery to the
Company of written notice of such transfer until registration of such
Warrant Shares under the Securities Act and any applicable state
securities or blue sky laws has become effective.
3.4 COMPLIANCE WITH SECURITIES LAWS. Subject to the terms of the
Registration Rights Agreement and Section 3.4.1 hereof, the Holder
understands and agrees that the following restrictions and limitations
shall be applicable to all Warrants and Warrant Shares and to all
resales or other transfers thereof pursuant to the Securities Act:
3.4.1 The Holder of the Warrants agrees that it will not
transfer the Warrant or the Warrant Shares (collectively, the "Seller
Securities") unless registration of the Seller Securities under the
Securities Act and any applicable state securities or blue sky laws
has become effective or the Seller Securities are exempt therefrom.
Notwithstanding the preceding sentence or Section 3.3,
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however, St. James Capital Partners, L.P., as the initial holder of the
Warrants, may transfer the Seller Securities to its partners of record as
of September 30, 1997 at any time and St. James Capital Partners, L.P.
represents that any partner receiving any of the Seller Securities is,
or will be at the time of such transfer, an "Accredited Investor" as
that term is defined in Rule 501(a) of Regulation D as promulgated by
the Securities Exchange Commission under the Securities Act. The
partners of St. James Capital Partners, L.P. shall not be entitled to
transfer the Seller Securities prior to completion of registration of
the Company's Common Stock. St. James Capital Partners, L.P. may at
any time grant a security interest in the Seller Securities to its
lender or lenders. Any lender or lenders to which St. James Capital
Partners, L.P. grants a security interest in the Seller Securities
shall be entitled to exercise all remedies to which it is entitled by
contract or by law, including (without limitation) transferring the
Seller Securities into its own name or into the name of any purchaser
at any sale undertaken in connection with enforcement by such lender
of its remedies. Prior to any transfer (other than the grant of a
security interest) as provided herein, the transferor shall provide
written notice to the Company and an opinion of counsel to the effect
that the proposed transfer is exempt from registration under all
applicable securities laws, all in form and substance reasonably
satisfactory to the Company. The Company shall pay all reasonable
attorneys' fees and costs incurred by the transferor as a result of
rendering such opinion or opinions of counsel. The Company, however,
may treat Holder as the owner hereof for all purposes until the
Warrant or the certificates evidencing the Warrant Shares shall have
been surrendered for transfer as hereinafter provided. Upon surrender
of the Warrant or the certificates evidencing the Warrant Shares duly
executed by Holder or its agent or attorney, the Company shall execute
and deliver a new Warrant or a certificate or certificates for the
Warrant Shares in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and the old
Warrant or certificate or certificates evidencing the Warrant Shares
shall promptly be canceled.
3.4.2 A legend in substantially the following form will be
placed on the certificate(s) evidencing the Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY
OTHER APPLICABLE SECURITIES LAWS."
3.4.3 Stop transfer instructions will be imposed with
respect to the Seller Securities so as to restrict resale or other
transfer thereof, subject to this Section 3.4.
ARTICLE IV
ANTI-DILUTION
4.1 ANTI-DILUTION PROVISIONS. The Exercise Price shall be subject
to adjustment from time to time as provided herein. Upon each
adjustment of the Exercise Price, the Holder of this Warrant shall
thereafter be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares of Common Stock
obtained by multiplying the Exercise Price in effect immediately prior
to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment and dividing the product thereof
by the Exercise Price resulting from such adjustment.
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4.2 ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF COMMON STOCK.
4.2.1 If and whenever after the date hereof the Company
shall issue or sell any Common Stock for no consideration or for a
consideration per share less than the Exercise Price, the Exercise
Price shall be reduced (but not increased, except as otherwise
specifically provided herein) to the lower price per share (calculated
to the nearest one-ten thousandth of a cent, but in any event not less
than $.001 per share).
4.2.2 Notwithstanding the provisions of this Section 4.2,
no adjustment shall be made in the Exercise Price in the event that
the Company issues, in one or more transactions, (i) Common Stock or
convertible securities upon exercise of any options issued to
officers, directors or employees of the Company pursuant to a stock
option plan or an employment, severance or consulting agreement as now
or hereafter in effect, in each case approved by the Board of
Directors (provided that the aggregate number of shares of Common
Stock which may be issuable, including options issued prior to the
date hereof, under all such employee plans and agreements shall at no
time exceed 725,000; (ii) Common Stock upon exercise of the Warrants
or any other warrant issued pursuant to the terms of the Agreement or
otherwise issued to Holder; (iii) Common Stock upon exercise of any
stock purchase warrant or option (other than the options referred to
in clause (i) above) or other convertible security outstanding on the
date hereof (other than any shares of Common Stock issuable on
conversion of any promissory note held by any shareholder of the
Company; provided, however, that no adjustment shall be made in the
Exercise Price in the event the Company issues Common Stock on
conversion of the convertible promissory note made by the Company in
favor of Steven King, the Chairman of the Board of the Company, in the
principal amount of $200,000, in connection with the Bridge Loan
Agreement dated as of August 8, 1993, as amended and restated March
15, 1996 and April 9, 1997, and as amended February 9, 1998, and as it
exists as of the date hereof); or (iv) Common Stock issued to Shenzen
WABO Group Company Limited pursuant to the Settlement Agreement
between the Company and Shenzen WABO Group Company Limited. In
addition, for purposes of calculating any adjustment of the Exercise
Price as provided in this Section, all of the shares of Common Stock
issuable pursuant to any of the foregoing shall be assumed to be
outstanding prior to the event causing such adjustment to be made.
4.2.3 In case at any time after the date hereof the Company
shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any rights to subscribe for or to purchase Common
Stock (including the right to convert any note held by any shareholder
of the Company (in whole or in part) into shares of Common Stock) or
any options, except for options issued to of officers, directors or
employees of the Company pursuant to a stock option plan now or
hereafter in effect, for the purchase of Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such rights or options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which shares of
Common Stock are issuable upon the exercise of such rights or options
or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of
such rights or options, or plus, in the case of such rights or options
that relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon the
conversion or exchange of all such Convertible Securities issuable upon
the exercise of such rights or options) shall be less than the Exercise
Price in effect as of the date of granting such rights or options, then
the total maximum number of shares
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of Common Stock issuable upon the exercise of such rights or options or
upon conversion or exchange of all such Convertible Securities issuable
upon the exercise of such rights or options shall be deemed to be
Outstanding as of the date of the granting of such rights or options
and to have been issued for such price per share, with the effect on
the Exercise Price as specified in Section 4.2.1 hereof. Except as
provided herein, no further adjustment of the Exercise Price shall be
made upon the actual issuance of such Common Stock or of such
Convertible Securities upon exercise of such rights or options or upon
the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities.
4.2.4 If: (i) the purchase price provided for in any right
or option, (ii) the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities or (iii) the rate
at which any Convertible Securities are convertible into or
exchangeable for Common Stock shall be decreased (other than under or
by reason of provisions designed to protect against dilution), the
Exercise Price then in effect shall be decreased to the Exercise Price
that would have been in effect had such rights, options or Convertible
Securities provided for such changed purchase price, additional
consideration or conversion rate at the time initially issued.
4.2.5 In case at any time Common Stock or Convertible
Securities or any rights or options to purchase Common Stock or
Convertible Securities shall be issued or sold for cash, the total
amount of cash consideration shall be deemed to be the amount received
by the Company. If at any time any Common Stock, Convertible
Securities or any rights or options to purchase any such Common Stock
or Convertible Securities shall be issued or sold for consideration
other than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair value of such
consideration, as determined reasonably and in good faith by the Board
of Directors of the Company. If at any time any Common Stock,
Convertible Securities or any rights or options to purchase any Common
Stock or Convertible Securities shall be issued in connection with any
merger or consolidation in which the Company is the surviving
corporation, the amount of consideration received therefor shall be
deemed to be the fair value, as determined reasonably and in good
faith by the Board of Directors of the Company, of such portion of the
assets and business of the non-surviving corporation as such Board of
Directors may determine to be attributable to such Common Stock,
Convertible Securities, rights or options, as the case may be. In case
at any time any rights or options to purchase any shares of Common
Stock or Convertible Securities shall be issued in connection with the
issuance and sale of other securities of the Company, together
consisting of one integral transaction in which no consideration is
allocated to such rights or options by the parties, such rights or
options shall be deemed to have been issued without consideration.
4.2.6 In the case the Company shall take a record of the
Holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock or
Convertible Securities, or (ii) to subscribe for or purchase Common
Stock or Convertible Securities, then such record date shall be deemed
to be the date of the issuance or sale of the Common Stock or
Convertible Securities deemed to have been issued or sold as a result
of the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription
or purchase, as the case may be.
4.2.7 The number of shares of Common Stock outstanding at
any given time shall not include shares owned directly by the Company
in treasury, and the disposition of any such shares shall be
considered an issuance or sale of Common Stock.
4.3 STOCK DIVIDENDS. In case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable
in Common Stock or Convertible Securities, any Common Stock or
Convertible Securities, as the case may be, issuable in payment of
such dividend or
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distribution shall be deemed to have been issued or sold without
consideration.
4.4 STOCK SPLITS AND REVERSE SPLITS. In the event that the
Company shall at any time subdivide its outstanding shares of Common
Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced
and the number of Warrant Shares purchasable pursuant to this Warrant
immediately prior to such subdivision shall be proportionately
increased, and conversely, in the event that the outstanding shares of
Common Stock shall at any time be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased and the number of
Warrant Shares purchasable upon the exercise of this Warrant
immediately prior to such combination shall be proportionately
reduced. Except as provided in this Section 4.4, no adjustment in the
Exercise Price and no change in the number of Warrant Shares shall be
made under this Article IV as a result of or by reason of any such
subdivision or combination.
4.5 REORGANIZATIONS AND ASSET SALES. If any capital
reorganization or reclassification of the capital stock of the
Company, or any consolidation, merger or share exchange of the Company
with another Person, or the sale, transfer or other disposition of all
or substantially all of its assets to another Person shall be effected
in such a way that Holders of Common Stock shall be entitled to
receive capital stock, securities or assets with respect to or in
exchange for their shares, then the following provisions shall apply:
4.5.1 As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale,
transfer or other disposition, lawful and adequate provisions shall be
made whereby the Holder shall thereafter have the right to purchase
and receive upon the terns and conditions specified in these Warrants
and in lieu of the Warrant Shares immediately theretofore receivable
upon the exercise of the rights represented hereby, such shares of
capital stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such
Common Stock equal to the number of Warrant Shares immediately
theretofore so receivable had such reorganization, reclassification,
consolidation, merger, share exchange or sale not taken place, and in
any such case appropriate provision reasonably satisfactory to such
Holder shall be made with respect to the rights and interests of such
Holder to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of
the number of Warrant Shares receivable upon the exercise) shall
thereafter be applicable, as nearly as possible, in relation to any
shares of capital stock, securities or assets hereafter deliverable
upon the exercise of Warrants.
4.5.2 In the event of a merger, share exchange or
consolidation of the Company with or into another Person as a result
of which a number of shares of common stock or its equivalent of the
successor Person greater or lesser than the number of shares of Common
Stock outstanding immediately prior to such merger, share exchange or
consolidation are issuable to Holders of Common Stock, then the
Exercise Price in effect immediately prior to such merger, share
exchange or consolidation shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding
shares of Common Stock.
4.5.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless
prior to or simultaneously with the consummation thereof the successor
Person (if other than the Company) resulting from such consolidation,
share exchange or merger or the Person purchasing or otherwise
acquiring such assets shall have assumed by written instrument
executed and mailed or delivered to the Holder hereof at the last
address of such Holder appearing on the books of the Company the
obligation to deliver to such Holder such shares of capital stock,
securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to receive, and all other liabilities and
obligations of the Company hereunder. Upon written request by the
Holder hereof, such successor person will issue a new Warrant revised
to reflect the modifications in this Warrant effected pursuant to this
Section.
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4.5.4 If a purchase, tender or exchange offer is made to
and accepted by the holders of 50% or more of the outstanding shares
of Common Stock, the Company shall not effect any consolidation,
merger, share exchange or sale, transfer or other disposition of all
or substantially all of the Company's assets with the Person having
made such offer or with any affiliate of such Person, unless prior to
the consummation of such consolidation, merger, share exchange, sale,
transfer or other disposition the Holder hereof shall have been given
a reasonable opportunity to then elect to receive upon the exercise of
the Warrants either the capital stock, securities or assets then
issuable with respect to the Common Stock or the capital stock,
securities or assets, or the equivalent, issued to previous holders of
the Common Stock in accordance with such offer.
4.6 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company
declares a dividend or other distribution payable to all holders of
shares of Common Stock in evidences of indebtedness of the Company or
other assets of the Company (including, cash (other than regular cash
dividends declared by the Board of Directors), capital stock (other
than Common Stock, Convertible Securities or options or rights
thereto) or other property), the Exercise Price in effect immediately
prior to such declaration of such dividend or other distribution shall
be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash
dividend or distribution, or by the fair value of such dividend or
distribution per share of Common Stock (as reasonably determined in
good faith by the Board of Directors of the Company), in the case of
any other dividend or distribution. Such reduction shall be made
whenever any such dividend or distribution is made and shall be
effective as of the date as of which a record is taken for purpose of
such dividend or distribution or, if a record is not taken, the date
as of which Holders of record of Common Stock entitled to such
dividend or distribution are determined.
4.7 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of Common
Stock purchasable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments that are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations shall be made to the
nearest full share or nearest one hundredth of a dollar, as applicable.
4.8 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the
number of Warrant Shares issuable upon the exercise of the Warrants
shall be adjusted as herein provided, or the rights of the Holder
hereof shall change by reason of other events specified herein, the
Company shall compute the adjusted Exercise Price and the adjusted
number of Warrant Shares in accordance with the provisions hereof and
shall prepare an Officer's Certificate setting forth the adjusted
Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock,
securities or assets receivable as a result of such change in rights,
and showing in reasonable detail the facts and calculations upon which
such adjustments or other changes are based, and shall obtain an
opinion of the Company's independent accountants as to the correctness
of such adjustments and calculations and to the effect that such
adjustments and calculations have been made in accordance with the
terms hereof. The Company shall cause to be mailed to the Holder
hereof copies of such Officer's Certificate together with a notice
stating that the Exercise Price and the number of Warrant Shares
purchasable upon exercise of the Warrants have been adjusted and
setting forth the adjusted Exercise Price and the adjusted number of
Warrant Shares purchasable upon the exercise of the Warrants.
4.9 NOTIFICATIONS TO HOLDERS. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution
(other than cash dividends) to the Holders
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of its Common Stock;
(ii) to offer for subscription pro rata to all of the Holders of
its Common Stock any additional shares of capital stock of any class
or other rights;
(iii) to effect any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another Person, or sale, transfer or
other disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the
Holder hereof (a) at least 10 days (but not more than 90 days) prior
written notice of the date on which the books of the Company shall
close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of
any such issuance, reorganization, reclassification, consolidation,
merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or
winding up, at least 10 days (but not more than 90 days) prior written
notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the
case of any such dividend, distribution or subscription rights, the
date on which the Holders of Common Stock shall be entitled thereto,
and such notice in accordance with the foregoing clause (b) shall also
specify the date on which the Holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, as the
case may be.
4.10 COMPANY TO PREVENT DILUTION.
4.10.1 If any event or condition occurs as to which other
provisions of this Article are not strictly applicable or if strictly
applicable would not fairly protect the exercise or purchase rights of
the Warrants evidenced hereby in accordance with the essential intent
and principles of such provisions, or that might materially and
adversely affect the exercise or purchase rights of the Holder hereof
under any provisions of this Warrant, then the Company shall make such
adjustments in the application of such provisions, in accordance with
such essential intent and principles, so as to protect such exercise and
purchase rights as aforesaid, and any adjustments necessary with respect
to the Exercise Price and the number of Warrant Shares purchasable
hereunder so as to preserve the rights of the Holder hereunder. In no
event shall any such adjustment have the effect of increasing the
Exercise Price as otherwise determined pursuant to this Article except
in the event of a combination of shares of the type contemplated in
Section 4.4 hereof, and then, in no event, to an amount greater than the
Exercise Price as adjusted pursuant to Section 4.4 hereof.
4.10.2 In furtherance of the anti-dilution protections
afforded Holder pursuant to this Article IV, in the event of any
dilutive event described in this Article IV as a result of the
settlement of any of the Company's existing or future litigation
matters (including, but not limited to, Radman et al v. Photran
Corporation, David E. Stevenson v. Photran Corporation and MIK Physics
Incorporated v. Photran Corporation), not only will Holder be afforded
an adjustment to the Exercise Price as set forth in Article IV,
Section 4.2, but Holder shall also be entitled to the number of shares
issuable upon exercise of this Warrant increased by the greater of (i)
the ratio which the Exercise Price immediately before such issuance
bears to the adjusted Exercise Price immediately after such issuance
and (ii) the number of shares that would be equal to the same
percentage ownership by the Holder of the Company after giving effect
to the dilutive event as existed before the occurrence of
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the dilutive event.
ARTICLE V
MISCELLANEOUS
5.1 ENTIRE AGREEMENT. This Warrant, the Agreement and the
Registration Rights Agreement contain the entire agreement between the
Holder hereof and the Company with respect to the Warrant Shares
purchasable upon exercise hereof and the related transactions and
supersede all prior arrangements or understandings with respect
thereto.
5.2 GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Minnesota.
5.3 WAIVER AND AMENDMENT. Any term or provision of this Warrant
may be waived at any time by the party which is entitled to the
benefits thereof and any term or provision of this Warrant may be
amended or supplemented at any time by agreement of the Holder hereof
and the Company, except that any waiver of any term or condition, or
any amendment or supplementation, of this Warrant shall be in writing.
A waiver of any breach or failure to enforce any of the terms or
conditions of this Warrant shall not in any way affect, limit or waive
a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Warrant.
5.4 ILLEGALITY. In the event that any one or more of the
provisions contained in this Warrant shall be determined to be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in any
other respect and the remaining provisions of this Warrant shall not,
at the election of the party for whom the benefit of the provision
exists, be in any way impaired.
5.5 COPY OF WARRANT. A copy of this Warrant shall be filed among
the records of the Company.
5.6 NOTICE. Any notice or other document required or permitted to
be given or delivered to the Holder hereof shall be in writing and
delivered at, or sent by certified or registered mail to such Holder
at, the last address shown on the books of the Company maintained at
the Warrant Office for the registration of this Warrant or at any more
recent address of which the Holder hereof shall have notified the
Company in writing. Any notice or other document required or permitted
to be given or delivered to the Company, other than such notice or
documents required to be delivered to the Warrant Office, shall be
delivered at, or sent by certified or registered mail to, the offices
of the Company at 21875 Grenada Avenue, Lakeville, Minnesota 55044,
or such other address within the continental United States of America
as shall have been furnished by the Company to the Holder of this
Warrant.
5.7 LIMITATION OF LIABILITY; NOT SHAREHOLDERS. No provision of
this Warrant shall be construed as conferring upon the Holder hereof
the right to vote, consent, receive dividends or receive notices
(other than as herein expressly provided) in respect of meetings of
shareholders for the election of directors of the Company or any other
matter whatsoever as a shareholder of the Company. No provision
hereof, in the absence of affirmative action by the Holder hereof to
purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any
liability of such Holder for the purchase price of any shares of
Common Stock or as a shareholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
5.8 EXCHANGE, LOSS, DESTRUCTION, ETC. OF WARRANT. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
mutilation or destruction of this Warrant, and in the case of
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any such loss, theft or destruction upon delivery of a bond of
indemnity or such other security in such form and amount as shall be
reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the
Company will make and deliver a new Warrant of like tenor, in lieu of
such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued
under the provisions of this Section 5.8 in lieu of any Warrant
alleged to be lost, destroyed or stolen, or in lieu of any mutilated
Warrant, shall constitute an original contractual obligation on the
part of the Company. This Warrant shall be promptly canceled by the
Company upon the surrender hereof in connection with any exchange or
replacement. The Company shall pay all taxes (other than securities
transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of
Warrants pursuant to this Section 5.8.
5.9 REGISTRATION RIGHTS. The Warrant Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
5.10 HEADINGS. The Article and Section and other headings herein
are for convenience only and are not a part of this Warrant and shall
not affect the interpretation hereof.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name.
Dated: February 9, 1998.
PHOTRAN CORPORATION
By: /s/ Paul T. Fink
----------------------------
Paul T. Fink, CEO
----------------------------
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SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects
to exercise purchase rights represented thereby for, and to purchase
thereunder, _______ shares of the Common Stock covered by such
Warrant, and herewith makes payment in full for such shares, and
requests (a) that certificates for such shares (and any other
securities or other property issuable upon such exercise) be issued in
the name of, and delivered to ________________, and (b) if such shares
shall not include all of the shares issuable as provided in such
Warrant, that a new Warrant of like tenor and date for the balance of
the shares issuable thereunder be delivered to the undersigned.
Date:
------------------------------------
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Exhibit 4.19
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Registration Rights Agreement")
is made as of February 9, 1998, by and between PHOTRAN CORPORATION, a Minnesota
corporation (the "Company"), and ST. JAMES CAPITAL PARTNERS, L.P., a Delaware
limited partnership ("Purchaser").
WHEREAS, on the date hereof, Purchaser acquired from the Company a 10%
Convertible Promissory Note (the "Note") in the original principal amount of
$3,500,000 convertible into shares (the "Note Shares") of the Company's Common
Stock, no par value ("Common Stock");
WHEREAS, on the date hereof, Purchaser received a Warrant (the "Warrant")
to purchase 1,225,000 shares (the "Warrant Shares"; and together with the Note
Shares, the "Shares") of Common Stock, subject to adjustment as provided in the
Warrant;
WHEREAS, the Company wishes to grant Purchaser (and any Holder, as
hereinafter defined) certain registration rights in respect of the Shares, as
set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
"COMMISSION" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"HOLDER" shall mean Purchaser and any transferee of any Warrants or the
Note or holder of any Warrant Shares issued upon exercise of any Warrants or
Note Shares issued upon conversion of the Note.
"REGISTRABLE SECURITIES" shall mean (i) any Shares held now or at any time
hereafter by Purchaser, or any person or entity to whom Purchaser has
transferred such Shares in a private transaction and (ii) any securities which
may be issued or distributed in respect of the Shares by way of a stock
dividend, stock split, spin-off, or other recapitalization, distribution, or
reclassification or in connection with a merger, share exchange, consolidation
or other reorganization. Any Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale by the holder of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement; or (ii) they shall have been distributed to
the public pursuant to Rule 144 (or any successor provision) under the
Securities Act.
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The terms "REGISTER", "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with this
Registration Rights Agreement, including, without limitation, all registration,
qualification and filing fees, exchange listing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
a Holder except all fees and disbursements of counsel for Holder.
"UNDERWRITTEN PUBLIC OFFERING" shall mean a public offering in which the
Common Stock is offered and sold on a firm commitment basis through one or more
underwriters, all pursuant to (i) an effective registration statement under the
Securities Act and (ii) an underwriting agreement between the Company and such
underwriters.
ARTICLE II
REGISTRATION RIGHTS
2.1 DEMAND REGISTRATION.
2.1.1 At any time and from time to time, a Holder or Holders of
Registrable Securities holding in the aggregate at least 50% of the then
existing Registrable Securities may make a one-time written request upon the
Company, to file, within 60 days after such written request is made, with the
Securities and Exchange Commission a shelf registration statement covering the
resale of the Shares on an appropriate form promulgated by the Commission (the
"Registration Statement"). The Company shall use its reasonable best efforts to
cause such Registration Statement to become effective as soon as practicable and
to cause the Shares to be qualified in such state jurisdictions as the Holder
may request.
2.1.2 Except as set forth herein, the Company shall take all
reasonable steps necessary to keep the Registration Statement current and
effective until the earlier of (i) one (1) year or (ii) until all of the
Registrable Securities are transferable pursuant to Rule 144 under the
Securities Act without the volume limitations set forth in such rule.
2.1.3 The Company shall be entitled to require that the parties
refrain from effecting any public sales or distributions of the Registrable
Securities pursuant to a Registration Statement that has been declared effective
by the Commission or otherwise, if the board of directors of the Company
reasonably determines that such public sales or distributions would interfere in
any material respect with any transaction involving the Company that the board
of directors reasonably determines to be material to the
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Company or determines that the Holder of Registrable Securities is an
"insider" with respect to material non-public information. The board of
directors shall, as promptly as practicable, give the Holders of the
Registrable Securities written notice of any such development. In the
event of a request by the board of directors of the Company that the
Holders of Registrable Securities refrain from effecting any public
sales or distributions of the Registrable Securities, the Company shall
be required to lift such restrictions regarding effecting public sales
or distributions of the Registrable Securities as soon as reasonably
practicable after the board of directors shall reasonably determine
public sales or distributions by the Holders of the Registrable
Securities shall not interfere with such transaction, PROVIDED, that in
no event shall any requirement that the Holders of Registrable
Securities refrain from effecting public sales or distributions in the
Registrable Securities extend for more than 90 days.
2.2 PIGGYBACK REGISTRATION.
2.2.1 Subject to the terms hereof, if at any time or from time to
time the Company or any shareholder of the Company shall determine to register
any of its securities (except for registration statements relating to employee
benefit plans or exchange offers), either for its own account or the account of
a security holder, the Company will promptly give to the Holders of Registrable
Securities written notice thereof no less the 10 days prior to the filing of any
registration statement, and include in such registration (and any related
qualification under blue sky laws or other compliance), and in the underwriting
involved therein, if any, such Registrable Securities as such Holders may
request in a writing delivered to the Company within 20 days after the Holders'
receipt of Company's written notice.
2.2.2 The Holders of Registrable Securities may participate in any
number of registrations until all Holders of Registrable Securities have had an
opportunity to register all of the Registrable Securities or until all of the
Registrable Securities are transferable pursuant to Rule 144 under the
Securities Act without the volume limitations set forth in such rule.
2.2.3 If any registration statement is an Underwritten Public
Offering, the right of Holders of Registrable Securities to registration
pursuant to this Section shall be conditioned upon each such Holder
participating in such reasonable underwriting arrangements as the Company shall
make regarding the offering, and the inclusion of Registrable Securities in the
underwriting shall be limited to the extent provided herein. Holders of
Registrable Securities and all other shareholders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other Holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter concludes in its
reasonable judgment that the number of shares to be registered for selling
shareholders (including the Holders of Registrable Securities) would materially
adversely affect such offering, the number of Registrable Securities to be
registered, together with the number of shares of Common Stock or other
securities held by other shareholders proposed to be registered in such
offering, shall be reduced on a pro rata basis based on the number of shares
proposed to be sold by the Holders of Registrable Securities as compared to the
number of shares proposed to be sold by all shareholders. If any Holder of
Registrable Securities disapproves of the terms of any such underwriting, it may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter, delivered not less than 10 days before the effective date. The
Registrable Securities excluded by the managing underwriter or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution
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prior to 120 days after the effective date of the registration statement
relating thereto, or such other shorter period of time as the
underwriters may require.
2.2.4 The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section prior to the effectiveness
of such registration whether or not the Holders of Registrable Securities have
elected to include securities in such registration.
2.3 EXPENSES OF REGISTRATION. All Registration Expenses shall be borne by
the Company. Unless otherwise stated herein, all Selling Expenses relating to
securities registered on behalf of the Holders of Registrable Securities shall
be borne by the Holders of Registrable Securities.
2.4 BEST REGISTRATION RIGHTS. If, on or after the date of this
Registration Rights Agreement, the Company grants to any person with respect to
any security issued by the Company or any of its Subsidiaries registration
rights that provide for terms that are in any manner more favorable to the
Holder of such registration rights than the terms granted to a Holder pursuant
hereto (or if the Company amends or waives any provision of any Agreement
providing registration rights of others or takes any other action whatsoever to
provide for terms that are more favorable to other Holders than the terms
provided to a Holder pursuant hereto) then this Registration Rights Agreement
shall immediately be deemed amended to provide the Holders of Registrable
Securities with any (or all) of such more favorable terms as the Holders of
Registrable Securities shall elect to include herein.
2.5 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep the Holders of Registrable
Securities advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense,
the Company will:
2.5.1 Prepare and file with the Commission a registration
statement with respect to such securities and use its commercially reasonable
efforts to cause such registration statement to become and remain effective
until the distribution described in such registration statement has been
completed;
2.5.2 Furnish to each underwriter such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such underwriter
may reasonably request in order to facilitate the public sale of the shares by
such underwriter, and promptly furnish to each underwriter and the Holders of
Registrable Securities notice of any stop-order or similar notice issued by the
Commission or any state agency charged with the regulation of securities, and
notice of any NASDAQ or securities exchange listing.
2.5.3 Cause the Shares to be listed on NASDAQ and each securities
exchange on which the Common Stock is approved for listing.
2.6 INDEMNIFICATION.
2.6.1 To the extent permitted by law, the Company will
indemnify each Holder of Registrable Securities, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act,
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against all expenses, claims, losses, damages or liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of
any litigation, commenced or threatened, to the extent such expenses, claims,
losses, damages or liabilities arise out of or are based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by
the Company of the Securities Act or any rule or regulation promulgated under
the Securities Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse
each Holder of Registrable Securities, each of its officers and directors and
partners, and each person controlling each Holder of Registrable Securities,
each such underwriter and each person who controls any such underwriter, for
any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action; provided, however, that the indemnity contained herein shall not
apply to amounts paid in settlement of any claim, loss, damage, liability or
expense if settlement is effected without the consent of the Company (which
consent shall not unreasonably be withheld); provided, further, that the
Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission or alleged untrue statement or omission, made in
reliance upon and in conformity with written information furnished to the
Company by a Holder of Registrable Securities, such controlling person or
such underwriter specifically for use therein. Notwithstanding the
foregoing, insofar as the foregoing indemnity relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the Commission at the time the registration statement
becomes effective or in the final prospectus filed with the Commission
pursuant to the applicable rules of the Commission or in any supplement or
addendum thereto, the indemnity agreement herein shall not inure to the
benefit of any underwriter if a copy of the final prospectus filed pursuant
to such rules, together with all supplements and addenda thereto, was not
furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the Securities
Act.
2.6.2 To the extent permitted by law, each Holder of Registrable
Securities will, if securities held by such Holder are included in the
securities as to which such registration, qualification or compliance is being
effected pursuant to terms hereof, indemnify the Company, each of its directors
and officers, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other person selling the Company's securities covered by such registration
statement, each of such person's officers and directors and each person
controlling such persons within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or 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, or any violation by a
Holder of Registrable Securities of any rule or regulation promulgated under the
Securities Act applicable to Holders of Registrable Securities and relating to
action or inaction required of Holders of Registrable Securities in connection
with any such registration, qualification or compliance, and will reimburse the
Company, such other persons, such directors, officers, persons, underwriters or
control persons for any legal or other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
80
<PAGE>
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity
with written information furnished to the Company by such Holder of
Registrable Securities specifically for use therein; provided, however,
that the indemnity contained herein shall not apply to amounts paid in
settlement of any claim, loss, damage, liability or expense if
settlement is effected without the consent of such Holder of Registrable
Securities (which consent shall not be unreasonably withheld).
Notwithstanding the foregoing, the liability of such Holder of
Registrable Securities under this subsection 2.6.2 shall be limited in
an amount equal to the net proceeds from the sale of the Shares sold by
such Holder of Registrable Securities, unless such liability arises out
of or is based on willful conduct by such Holder of Registrable
Securities. In addition, insofar as the foregoing indemnity relates to
any such untrue statement (or alleged untrue statement) or omission (or
alleged omission) made in the preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the Commission at the
time the registration statement becomes effective or in the final
prospectus filed pursuant to applicable rules of the Commission or in
any supplement or addendum thereto, the indemnity agreement herein shall
not inure to the benefit of the Company or any underwriter if a copy of
the final prospectus filed pursuant to such rules, together with all
supplements and addenda thereto, was not furnished to the person or
entity asserting the loss, liability, claim or damage at or prior to the
time such furnishing is required by the Securities Act.
2.6.3 Notwithstanding the foregoing paragraphs 2.6.1 and 2.6.2 of
this Section, each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or as to which the
Indemnifying Party is asserting separate or different defenses, which defenses
are inconsistent with the defenses of the Indemnified Party. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. No Indemnified Party
shall consent to entry of any judgment or enter into any settlement without the
consent of each Indemnifying Party.
2.6.4 If the indemnification provided for in this Section is
unavailable to an Indemnified Party in respect of any losses, claims, damages or
liabilities referred to therein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and the shareholder or shareholders offering
securities in the offering (the "Selling Security Holders") on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and the
Selling
81
<PAGE>
Security Holders on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of material
fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Selling
Security Holders and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company and the Selling Security Holders agree that it
would not be just and equitable if contribution pursuant to this Section
were based solely upon the number of entities from whom contribution was
requested or by any other method of allocation which does not take
account of the equitable considerations referred to above in this
Section. The amount paid or payable by an Indemnified Party as a result
of the losses, claims, damages and liabilities referred to above in this
Section shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim, subject to the
provisions hereof. Notwithstanding the provisions of this Section, no
Selling Security Holder shall be required to contribute any amount or
make any other payments under this Agreement which in the aggregate
exceed the proceeds received by such Selling Security Holder. No person
guilty of fraudulent misrepresentation (within the meaning of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
2.7 CERTAIN INFORMATION.
2.7.1 The Holders of Registrable Securities agree, with respect to
any Registrable Securities included in any registration, to furnish to the
Company such information regarding such Holder, the Registrable Securities and
the distribution proposed by the such Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to herein.
2.7.2 The failure of the Holder of Registrable Securities to
furnish the information requested pursuant to Section 2.7.1 shall not affect the
obligation of the Company to the other Selling Security Holders who furnish such
information unless, in the reasonable opinion of counsel to the Company or the
underwriters, such failure impairs or may impair the legality of the
Registration Statement or the underlying offering.
2.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of Restricted Securities (used herein as defined in Rule 144 under the
Securities Act) to the public without registration, the Company agrees to use
its best lawful efforts to:
2.8.1 Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
during which the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
2.8.2 File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at all times during which the Company is subject to such reporting
requirements); and
2.8.3 So long as any Holder of Registrable Securities owns any
Restricted Securities (as defined in Rule 144 promulgated under the Securities
Act), to furnish to such Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of said
82
<PAGE>
Rule 144 and with regard to the Securities Act and the Exchange Act (at
all times during which the Company is subject to such reporting
requirements), a copy of the most recent annual or quarterly report of
the Company, and such other reports and documents of the Company and
other information in the possession of or reasonably obtainable by the
Company as such Holder of Registrable Securities may reasonably request
in availing itself of any rule or regulation of the Commission allowing
such Holder to sell any such securities without registration.
2.9 TRANSFERABILITY. The rights conferred by this Agreement shall be
freely transferable to any permitted transferee of Registrable Securities.
2.10 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Minnesota.
2.11 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject hereof. This Agreement, or any provision hereof, may be amended,
waived, discharged or terminated upon the written consent of the Company and the
Purchaser.
2.12 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
including Federal Express or similar courier service, addressed (a) if to the
Purchaser: St. James Capital Partners, L.P., c/o St. James Capital Corp., 1980
Post Oak Boulevard, Suite 2030, Houston, Texas 77056, or at such other address
as the Purchaser shall have furnished to the Company in writing, or (b) if to
the Company: to Photran Corporation, 21875 Grenada Avenue, Lakeville, Minnesota
5044, or at such other address as the Company shall have furnished to the
Purchaser. Each such notice or other communication shall for all purposes of
this Agreement be treated as effective upon receipt.
2.13 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any party to this
Agreement shall impair any such right, power or remedy of such party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party to this Agreement, shall be cumulative and not alternative.
2.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2.15 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
83
<PAGE>
2.16 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
84
<PAGE>
THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this agreement
effective upon the date first set forth above.
PHOTRAN CORPORATION
By: /s/ Paul T. Fink
--------------------------
Name: Paul T. Fink
Title: CEO
85
<PAGE>
THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Agreement as of the date
first written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its General Partner
By: /s/ Charles E. Underbrink
--------------------------
Name: Charles E. Underbrink
Title: CEO
86
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 0
<RECEIVABLES> 600,227
<ALLOWANCES> (11,109)
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0
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