-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBjp8ulnq0zTX8l7vrR3iGD0BizKlMefGq82pW5tuRjvCfKy/2r+g4zG+HZQmO1E nfMEY+0Kbi6Vn6SOCMntNg== 0001047469-98-028674.txt : 19980803 0001047469-98-028674.hdr.sgml : 19980803 ACCESSION NUMBER: 0001047469-98-028674 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980729 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPCO TECHNOLOGIES INC CENTRAL INDEX KEY: 0000790708 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 911039211 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16115 FILM NUMBER: 98673211 BUSINESS ADDRESS: STREET 1: 16804 GRIDLEY PLACE CITY: CERRITOS STATE: CA ZIP: 90701 BUSINESS PHONE: 5628606666 MAIL ADDRESS: STREET 1: 16804 GRIDLEY PL CITY: CERRITOS STATE: CA ZIP: 90703 FORMER COMPANY: FORMER CONFORMED NAME: AIRSENSORS INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K / x / Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended April 30, 1998, or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-16115 IMPCO Technologies, Inc. (Exact name of registrant as specified in its charter) DELAWARE 91-1039211 --------------------- ------------------ (State of Incorporation) (IRS Employer ID. No.) 16804 GRIDLEY PLACE, CERRITOS, CALIFORNIA 90703 --------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (562) 860-6666 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock; Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 1998 was $108,206,166. Number of shares outstanding of each of the registrant's classes of common stock, as of June 30, 1998: 7,171,601 shares of Common Stock Documents incorporated by reference: See Item 14 Information required by Part III is incorporated by reference from the definitive proxy statement to be filed pursuant to Regulation 14A or by an amendment hereto, in either case, within 120 days of the end of fiscal year 1998. 2 PART I ------- ITEM 1 - BUSINESS General ------- IMPCO Technologies, Inc. [effective September 15, 1997, AirSensors, Inc. changed its name to IMPCO Technologies, Inc.] (IMPCO) was incorporated in the State of Washington in 1978 and became a Delaware corporation in 1985. IMPCO, together with its subsidiaries, are hereinafter referred to as the "Company." The Company designs, manufactures and markets equipment that allows internal combustion engines to operate on alternative fuels, primarily propane and natural gas. ACQUISITIONS In October 1995, the Company acquired 51% of the outstanding stock of Technisch Bureau Media, B.V., a private company in the Netherlands, from Centradas B.V. for 3,187,500 Dutch Guilders (U.S. $2,023,000). In May 1998, the Company acquired the remaining 49% equity interest from Centradas B.V. for 1,400,000 Dutch Guilders (U.S. $693,000). The company now operates as IMPCO Technologies, B.V. (IMPCO BV). It distributes gaseous fuel carburetion systems, components and related devices for use in internal combustion engines along with catalytic converters for the off-highway industrial market. IMPCO BV services the European marketplace from its headquarters in the Netherlands and through its subsidiaries and facilities in Germany, France and the United Kingdom. IMPCO BV's revenues totaled approximately $11,588,000, $9,203,000 and $5,601,000 in fiscal years 1998, 1997 and 1996, respectively. In April 1996, the Company acquired substantially all of the business assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa for approximately $1,041,000. Garretson is a leading manufacturer of fuel systems, components and related devices that allow small engines of 35 horsepower or less to run on either natural gas or propane. Major product applications include generator sets, industrial equipment and utility engines. In July 1996, the Company through IMPCO Technologies, Pty. Ltd (IMPCO Pty), a wholly-owned subsidiary, acquired certain assets of Ateco Automotive Pty. Ltd. (Ateco), including a 50% ownership interest in Gas Parts (NSW) Pty., for a purchase price of approximately $6,532,000. Ateco distributed IMPCO's gaseous fuel carburetion systems, components and related devices for use in internal combustion engines since 1969. IMPCO Pty services the Australian marketplace from its offices in Melbourne and Sydney. In January 1998, IMPCO Pty acquired the remaining 50% ownership interest in Gas Parts (NSW) Pty. for A$225,000 (U.S. $148,500) in cash. IMPCO Pty's revenues totaled approximately $6,893,000 in fiscal year 1998 and $7,816,000 for 10 months of operations in fiscal year 1997. In December 1997, the Company purchased certain manufacturing equipment and inventory of the Algas Carburetion Division of PGI International at a purchase price of $2,400,000 paid in cash. On the same day, the Company acquired a 90% interest in Industrias Mexicanas de Productos de Combustibles, S. de R.L. de C.V.("Grupo I.M.P.C.O. Mexicano") at a purchase price of $961,000 paid in cash. Immediately prior to the Company's acquisition of its interest in Grupo I.M.P.C.O. Mexicano, Grupo I.M.P.C.O. Mexicano acquired certain assets of the carburetion division of Algas Mexicana, de R.L. de C.V. 3 In December 1997, the Company purchased from the bankruptcy trustee of EDO Canada, Ltd. certain development, testing, quality control and manufacturing equipment used for the manufacture of storage tanks for compressed natural gas. The US$790,000 purchase price was paid in cash. PRODUCTS AND MARKETS The Company's products include fuel management systems and components, including electronic fuel control processors, carburetors, converters or regulators, fuel lock-offs, repair kits or replacement parts and other sundry devices. The Company's products, sold for aftermarket conversions and as original equipment, are used in a variety of motor vehicles, forklifts and small portable to large stationary engines. Worldwide, the products are marketed through distributors and original equipment manufacturers (OEM) under the brand names IMPCO (registered trademark), BEAM(registered trademark), GARRETSON(registered trademark), J&S Carburetion (registered trademark), and Algas. Ease of installation, consistent performance, high quality and safety are attributes of the Company's products. The Company's fuel management systems are designed to offer several levels of technology to meet customer needs. The Adaptive Digital Processor (ADP) uses advanced electronic technology to learn and store key operating characteristics of the specific vehicle. The ADP enhancer complements the ADP with diagnostics and spark timing modules. The Company's Advanced Clean Fuels Technology (ACFT) uses mass sensing hot wire anemometry to calculate the engine's air/fuel mixture. The Company's Heavy Duty Advance Fuel Electronics (HD-AFE) uses patented hot wire anemometry mass sensing of both fuel and air to precisely control lean burn combustion in heavy duty engines utilized in trucks and mass transit vehicles to maximize performance at reduced emissions. During engine operation, an on-board computer adjusts the mixture to achieve optimum results in engine performance to reduce emissions. The Company is also developing a fuel injection system for ultra low emission vehicles. These injectors are designed for vaporized natural gas or vaporized propane for use in the latest engine technologies. The Company's carburetors are designed for use in 5 to 5,000 horsepower engines. The Company's liquid propane gas (LPG) converter is a two stage regulator and vaporizer that regulates the amount of fuel entering the carburetor and then transforms the fuel from a pressurized liquid state to a gaseous vapor by exposing the fuel to near atmospheric pressure. The Company's vacuum and electro- mechanical fuel lock-off devices stop the flow of fuel when engines stop running. The vacuum fuel lock-off has been a popular product with OEM's due to its safety characteristics. During fiscal year 1998, sales of carburetors represented approximately 30% of consolidated product sales, converters approximately 21%, fuel lock-offs approximately 7%, repair kits approximately 17%, electronic control systems approximately 7%, and other products and sundry devices approximately 18%. The product sales mix during fiscal year 1998 was substantially the same as during the prior two fiscal years. The Company's products are sold worldwide to distributors and OEMs and as aftermarket components and/or retrofit systems. In fiscal year 1998 sales in the United States and Canada represented 57% of the Company's consolidated sales. Sales by region are shown below: 4
Fiscal years ended April 30, --------------------------------- 1998 1997 1996 --------- --------- --------- United States and Canada 57% 66% 67% Pacific Rim 13% 11% 10% Europe 19% 12% 16% Latin America 11% 11% 7%
During fiscal year 1998, sales to distributors accounted for approximately 55% of consolidated product sales, sales to OEM customers accounted for approximately 39% and system conversions accounted for approximately 6% of consolidated product sales. Distributors primarily service the aftermarket conversion business and small-volume OEMs, and are generally specialized and privately-owned enterprises. Many domestic distributors have been customers of IMPCO for more than 30 years, and most export distributors have been customers for more than 20 years. Most OEM customers are large engine, vehicle, and forklift manufacturers such as Caterpillar Inc., Clark Material Handling Co., Ford Motor Company, Generac, General Motors Corporation, Kohler Company, Mitsubishi Caterpillar Forklift America, Inc., NACCO Material Handling Group, Onan Corporation, Toyota Industrial Equipment Mfg. Inc. and the Waukesha Engine Division of Dresser Industries, Inc. The Company's older products use vacuum and mechanical controls to regulate engine air/fuel ratios. Motor vehicle carburetors, as well as some ancillary devices, often are mechanical and operate independent of other engine functions. In recent years in more industrially advanced countries, electronically controlled devices have replaced some vacuum actuated mechanical devices to improve the engine performance and to more tightly control the emissions from internal combustion engines. The Company has addressed this change by introducing new electronic devices designed for gaseous fuels that interface with the OEM electronics. To remain competitive, the Company continues to improve its older products and is developing new products. The Company upgraded its ACFT gaseous fuel management system that is based on its mass-sensing technology and proprietary software. ACFT is designed to manage air/fuel ratios to achieve optimum air/fuel mixture and other engine functions. The Company is enhancing its on-board computer utilizing the vehicle-specific software required for the AFE product, a mass-sensor and the necessary hardware for a variety of vehicle types including pickup trucks, vans and passenger cars. The Company is focusing its ACFT marketing efforts on OEMs. The Company is also developing improved technologies including injectors, high and low pressure regulators, on-board diagnostics, high performance 32-bit engine control modules, fuel lockoffs and related components. The Company believes that it will continue to satisfy the differing engine and emission control approaches being used on engines in its domestic and foreign markets. 5 MARKET AND REGULATORY ENVIRONMENT The Company's worldwide market is influenced by environmental laws which regulate emission standards and energy laws which strive for energy independence. In addition, there are certain economic advantages to using alternate gaseous fuels in many countries. Legislation has provided incentives and programs to promote and develop infrastructures for alternative fueled vehicles, some requiring fleet vehicle owners to phase in alternative fueled vehicles and imposed penalties upon failure to meet standards and guidelines. In the United States, the Federal Energy Policy Act of 1992 mandates that 75% of the light duty vehicles acquired by the federal, state and municipal governments by fiscal 2002, and thereafter, be alternative fueled vehicles, and non-government fleet operators of 20 or more vehicles will be required to include at least 20% alternative fueled light duty vehicles in their total vehicle purchases by fiscal 2002. Beginning 2006 and thereafter, 70% of the vehicles acquired by fleet operators of 20 or more must be alternative fueled vehicles. Companies that manufacture retrofit systems for use in California are required to comply with requirements under Title XIII, which require that a certain percentage of retrofit conversions be certified, inspected, carry a product warranty and comply with new emission standards. For vehicle model year 1998 and 1999, the Company will be required to certify all of its retrofit engine families. Manufacturers are also required to conduct 100,000 mile durability tests and comply with in-service emission standards. The Environmental Protection Agency has adopted similar requirements for the entire United States beginning in 2002. Several other states have adopted similar regulations and mandates which are expected to increase the demand for alternative fuels. These include Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa, Kansas, Louisiana, Massachusetts, Missouri, New Hampshire, New Mexico, New York, Oklahoma, Oregon, Texas, Utah, Virginia, Washington and West Virginia. In addition, legislation to foster energy independence and/or reduce pollution is spurning growth in the use of gaseous fuels in countries such as Australia, Mexico, Chile, China, Netherlands, Taiwan, Turkey and Venezuela. STRATEGIC MARKETING PLAN The Company's goal is to retain its position as one of the world's leading suppliers of engine components and systems that allow internal combustion engines to operate on gaseous fuels. A key element of the Company's steady growth has been the diversity of markets that its products serve. The increasing worldwide demand for gaseous alternative fuel management products and systems for motor vehicle uses, material handling equipment, and industrial and heavy duty mobile engines, provides the Company with a broad market foundation and eliminates dependency on a single market segment. The Company's two largest markets, motor vehicle (primarily fleet vehicles) and material handling (primarily forklifts), accounted for approximately 83% of the Company's consolidated product sales in the last fiscal year. See "Products and Markets." Of these two markets, the motor vehicle market is believed to have the greatest potential for significant growth. The Company anticipates that this growth will result from worldwide governmental regulations imposing more stringent emission standards to achieve energy independence. See "Market and Regulatory Environment." 6 The Company's global short-term strategy is to continue its presence in the retrofit market for fleet vehicles and to continue introducing upgrades to its existing products. The Company will also continue its presence in both the retrofit and OEM market by promoting its products to meet the expected demand for equipment which will allow motor vehicle engines to meet the more stringent emission regulations. The Company's strategy for future participation in the U.S. retrofit market will be limited to motor vehicle applications which will provide large potential conversions and can be economically justified. In the long-term, the worldwide demand for alternative fueled vehicles is making it feasible for OEM production. The Company has taken steps to become a preferred OEM supplier for gaseous fuel components. During the last fiscal year, the Company signed a five-year teaming agreement with General Motors Corporation to develop clean gaseous fuel delivery systems for passenger cars and medium- and light-duty trucks. Development programs and the commercialization of OEM vehicles with IMPCO systems is on-going in Mexico, Australia, Japan, China, and South America. In addition, the Company's recent acquisition of EDO's tank technology and equipment will extend the Company's capabilities from tank testing and research and development into the next generation of fuel storage systems. Development of fuel storage technology is an important component of the Company's long-term strategy to be the premier Tier 1 component supplier to automotive OEMs. The Company believes that product quality is essential for OEM recognition and it is continually upgrading its quality assurance program. The Company's aftermarket products are primarily marketed through a network of specialized distributors which the Company expects to continue to utilize for its existing product lines. However, under recent regulations in the U.S., the Company and its installers are required to certify their products and services. To meet these requirements, the Company is seeking new channels of distribution to complement its existing distributor network. The Company has expanded the marketing of its older non-electronically controlled products in countries with less stringent emission standards than those in the United States. This strategy is being applied in Central and South America, Eastern Europe and the Far East. In countries such as Mexico and Taiwan, where the level of emission standards is increasing, but is not as stringent as in the United States, the Company's strategy is to upgrade its older products to improve both emission levels and engine performance. Significant changes are also occurring in the forklift industry. The increased emphasis on emissions and durability will require engine and equipment manufacturers to consider new fuel and engine management products as a part of a complete, certified engine package. The Company is starting to work closer with the OEMs in order to manage this change and meet these new requirements. The Company expects the marketing and distribution of forklift products to continue with a strong OEM focus. The primary growth potential for the industrial engine and heavy duty mobile engine business is in the power generation market and the heavy duty mobile gas engines used in trucks and buses. North American generator set production continues to increase in response to growing global demand. Many of these sets are fueled by propane or natural gas. The growth in the heavy duty mobile engine market will be supported by the increased worldwide government mandates for clean air, such as the Clean air Act of 1990, the Energy Policy Act of 1992 and the EURO 3 European emission standards. The Company has been developing advanced 7 electronic heavy duty fuel systems for a number of heavy duty OEMs for trucks and buses utilizing compressed natural gas and liquefied natural gas. COMPETITION AND OTHER MARKET FACTORS The Company estimates there are approximately twenty-three manufacturers of gaseous fuel delivery components and/or delivery systems. IMPCO, Landi, Tartarini, OMVL, GFI, Koltec & Vialle are estimated to account for over 90% of the world market. The Company has competitors in various worldwide market segments in the motor vehicle gaseous fuel equipment industry. Landi, Tartarini and OMVL are major competitors in the Southern Europe and South America motor vehicle market. Vialle is a competitor in the European and Australian markets. Koltec is a competitor in the Dutch market and the Far East. GFI primarily serves the North American motor vehicle market. Overall, the Company estimates that it has an approximate 35% market share of the world market for gaseous fuel delivery components and/or systems for the motor vehicle market. The Company estimates that it has a greater than 80% market share in the material handling and industrial engine market. Competitors include Nolff Manufacturing and AISAN who combined, have less than a 5% market share. Other competitors are mostly local manufacturers of repair kits and other maintenance components for IMPCO products. To be competitive into the future, the Company believes it will be necessary to continue to enhance its gaseous fuel engine management products utilizing mass-sensing, electronic and electro- mechanical technology. The Company anticipates that the gaseous fuel equipment industry will be experiencing rapid technological changes in the next ten years. This should result in the majority of the existing competitors being limited in the market place because of their lack of adequate capital or their lack of willingness to develop high tech, low emission products now being required by future emissions laws. However, the Company anticipates new competitors will enter the alternative fuel marketplace due to the potential increase in the size of the market. These competitors may include large motor vehicle OEMs who may adapt their existing gasoline technology to alternative fueled vehicles. MANUFACTURING The Company's products are presently manufactured in the Company's facilities in Cerritos and Irvine, California. Manufacturing operations consist largely of mechanical assembly with light machining. A machining facility is also operated in Mt. Pleasant, Iowa. The Company places substantial reliance on outside vendors for parts, components and electronic assemblies. It obtains product components from a variety of domestic motor vehicle and electronic part suppliers and assemblers, diecasters, metal stamping and machine shops. In fiscal year 1998, 10 suppliers accounted for approximately 55% of raw material purchases and one supplier accounted for approximately 18% of such purchases. Material costs represent the major component of cost of sales. Coordination with suppliers for quality control and timely shipment is critical to maximize the Company's inventory management. The Company uses a computerized material requirements planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. 8 The Company has not experienced, and does not expect to experience, any significant difficulty in complying with environmental regulations applicable to its manufacturing processes and facilities. PRODUCT CERTIFICATION The Company must obtain certification from the Environmental Protection Agency (EPA) to sell certain of its products in the United States and from the California Air Resources Board to market certain products in California. In September 1997 EPA modified the phase-in program (Option 3 of EPA Memorandum 1-A) to ease certification requirements for retrofit conversions through model year 1999. California regulations require that all of model year 1997, 1998, and future retrofit conversions be certified, inspected, carry a product warranty and comply with new emission standards. Manufacturers are also required by the EPA and California regulations to conduct 100,000 mile durability tests for retrofit vehicles. Some other states have similar types of regulations. The Company's continued participation in the U.S. retrofit market will be closely monitored as the business transitions to OEM vehicles. The Company seeks product approval by Underwriters Laboratories, Inc. (UL(registered trademark)), the American Gas Association, and international approval services on certain products. While approval is not always required, the Company believes such approval enhances the acceptability of products in the domestic marketplace. Many foreign countries also accept these agency approvals as satisfying "approval for sale" requirements in their markets. PATENTS AND TRADEMARKS The Company holds a number of domestic and foreign patents. While the Company believes that these patents and patent applications protect certain proprietary rights and technologies, there can be no assurance that any existing and future patents will provide such protection. Moreover, the Company believes that its growth and future success are more dependent upon technical expertise and marketing skills than on the ownership of patent rights. Also, other technology exists which performs functions substantially equivalent to the technology covered by the Company's patents and patent applications, and that technology may be used by others without infringing upon the Company's patents. The "IMPCO", "BEAM", "GARRETSON" and "CARBURETION J&S" marks are registered as trademarks on the United States Principal Register. They are also registered in various other countries throughout the world. BACKLOG The Company's backlog consists of anticipated sales of products for which the Company has confirmed orders scheduled for shipments over the next 90 days. Such backlog was approximately $10,894,000 and $11,500,000 at April 30, 1998 and April 30, 1997, respectively. The Company believes that backlog as of any date is not necessarily indicative of future product sales. EMPLOYEES The Company employed 446 persons worldwide as of April 30, 1998. None of the employees are represented by labor unions, and rapport with employees is believed to be good. 9 YEAR 2000 The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems both internally and externally. The Company has completed its assessment of the Year 2000 issue through 1) communication with key customers, suppliers, financial institutions and others with which it conducts business and 2) review of its current internal computer systems to identify potential Year 2000 issues. Based on this assessment, the Company is not aware of any key customer, supplier, or financial institution with inadequate solutions. The Company has developed plans to address system modifications required by December 31, 1999 and these plans basically require the upgrade to new versions of packaged software. The Company plans to have all systems upgraded by December 1998. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. 10 ITEM 2 - PROPERTIES The Company's executive offices and primary manufacturing facilities are located in Cerritos, California and occupy 105,000 square feet in two buildings at a single 4-acre location. The Company's Technology and Automotive OEM Center is located in Irvine, California and occupies 80,000 square feet in one building at a 3-acre location. The Company believes these facilities are adequate for its core product manufacturing operations and OEM development programs and production. The Cerritos site is leased until May 1999, with two 5-year renewal options. The Irvine site is leased until August 2004, with two 5-year renewal options. The Company maintains a research and development facility in a suburb of Seattle, Washington which occupies approximately 10,000 square feet in a portion of an office park building. These premises are leased until December 2000. The Company also owns a machine shop in Mt. Pleasant, Iowa which occupies approximately 16,500 square feet at an industrial site. The Company's facility in Rijswijk, Holland occupies approximately 16,000 square feet and is leased until October 31, 2000, with a five year renewal option. The Company's facility in Cheltenham, Australia occupies approximately 15,000 square feet and is leased until May 31, 2001, with a four year renewal option. The Company's facility in Mexico City, Mexico occupies approximately 3,500 square feet and is leased until December 1998. ITEM 3 - LEGAL PROCEEDINGS The Company is a party to several legal actions, but based on discussions with legal counsel, management does not believe that any of these actions will have a material adverse effect on its business or financial condition. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year ended April 30, 1998. FORWARD-LOOKING STATEMENTS The statements contained in this Part I that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Certain Facors" at the end of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 PART II ------- ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The Nasdaq Stock Market under the symbol "IMCO". All common stock prices are closing prices per The Nasdaq Stock Market.
Fiscal year 1998 Fiscal year 1997 ------------------- ------------------- Quarter Ended High Low High Low ------------- -------- -------- -------- -------- July 31 $ 10 $ 6 7/8 $ 11 1/8 $ 8 October 31 12 5/8 9 5/8 9 7/8 6 January 31 12 3/8 9 1/4 10 7/8 5 3/4 April 30 13 1/8 11 1/4 11 7/8 7 1/2
On June 30, 1998, there were 546 holders of record of the Company's common stock. The Company has never paid dividends on its common stock. It intends to retain future earnings to finance the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future on common stock. The holders of the 1993 Series 1 Preferred Stock are entitled to cumulative cash dividends in an amount equivalent to interest at an annual rate per share (based on a deemed value of $1,000 per share) equal to the Seattle-First National Bank prime rate of interest, plus 1.5%, but not to exceed $105 per share nor be less than $80 per share annually. 12 ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
In thousands, except per share amounts ----------------------------------------------------- Fiscal Years Ended April 30, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Statement of operations data: - ----------------- Net revenue(1) $ 71,083 $ 61,828 $ 51,575 $ 45,231 $ 36,410 Research and development expense 13,337 8,480 7,171 6,197 5,103 Operating income 7,118 4,850 4,132 3,540 3,069 Financing charges 935 1,100 504 292 320 Net income(2) 4,865 3,225 4,671 2,967 2,511 Preferred stock expenses(3) 595 581 610 548 612 Net income applicable to common stock 4,270 2,644 4,061 2,420 1,898 Net income per share(4): Primary .67 .46 .72 .43 .34 Fully diluted .60 .43 .64 .39 .31 Number of shares used in per share computation(4): Basic 6,334 5,722 5,648 5,620 5,515 Diluted 8,155 6,131 7,300 6,272 6,200 Balance sheet data: - -------------------- Total current assets $ 37,492 $ 29,904 $ 24,578 $ 13,626 $ 10,420 Total assets 57,385 47,113 37,728 22,109 17,464 Total current liabilities 11,417 11,656 9,266 5,111 4,810 Long-term obligations 10,594 12,721 8,823 1,855 334 Stockholders' equity 34,305 22,063 19,256 15,143 12,320
- --------------------------- See accompanying notes. NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Includes contract revenue during fiscal year ended April 30, 1998, 1997, 1996, 1995 and 1994, of $8,873,554, $3,391,528, $3,087,229, $1,523,952 and $3,880,416, respectively. See note 12 of the Notes to "Consolidated Financial Statements." (2) Includes an income tax benefit of $1,700,000, due to the reduction in the valuation allowance for deferred tax assets and $318,000 net income from the Company's European subsidiary during the year ended April 30, 1996. See note 5 of the Notes to "Consolidated Financial Statements." (3) Includes dividends on Preferred. (4) During fiscal year 1998, the Company adopted FAS 128, Earnings Per Share, and all prior years have been restated. During fiscal years 1996 and 1998, shares assumed to be issued upon conversion of the Company's preferred stock were included in the calculation since it resulted in a reportable dilution. 13 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Certain Factors" at the end of this discussion and other factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission. All period references are to the Company's fiscal periods ended April 30, 1998, 1997 or 1996, unless otherwise indicated. Overview - --------- IMPCO Technologies, Inc. designs, manufactures and markets equipment that allows internal combustion engines to operate on alternative gaseous fuels, primarily propane and natural gas. The Company's products include fuel management systems and components, and are sold for maintenance, aftermarket conversions and as original equipment on motor vehicles, forklifts and small portable to large stationary engines. Worldwide, the products are marketed through distributors and original equipment manufacturers. Results of Operations - ---------------------- Acquisitions - ------------- In fiscal year 1996, the Company acquired 51% of the outstanding stock of Technisch Bureau Media, B.V. and on May 1, 1998 acquired the remaining 49% interest. Its European subsidiary is now operated under the name IMPCO Technologies, B.V. (IMPCO BV) and had revenues of approximately $11,588,000, $9,203,000 and $5,601,000 in fiscal years 1998, 1997 and 1996, respectively. In fiscal year 1996, the Company acquired substantially all of the business assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa. Garretson is a leading manufacturer of fuelsystems, components and related devices that allow small engines of 35 horsepower or less to run on either natural gas or propane. Major product applications include generator sets, industrial equipment and utility engines. In fiscal year 1997, the Company through IMPCO Technologies, Pty. Ltd (IMPCO Pty), a wholly-owned subsidiary, acquired certain assets of Ateco Automotive Pty. Ltd. (Ateco), including a 50% ownership interest in Gas Parts (NSW) Pty. In fiscal year 1998, IMPCO Pty acquired the remaining 50% ownership interest in Gas Parts (NSW) Pty. IMPCO Pty's consolidated revenues totaled approximately $6,893,000 in fiscal year 1998 and $7,816,000 for 10 months of operations in fiscal year 1997. In fiscal year 1998, the Company purchased certain manufacturing equipment and inventory of the Algas Carburetion Division of PGI International. On the same day, the Company acquired a 90% interest in Industrias Mexicanas de Productos de Combustibles, S. de R.L. de C.V. ("Grupo I.M.P.C.O. Mexicano"). Grupo I.M.P.C.O. Mexicano had revenues of approximately $823,000 in fiscal year 1998. 14 In fiscal year 1998, the Company purchased from the bankruptcy trustee of EDO Canada, Ltd. certain development, testing, quality control and manufacturing equipment used for the manufacture of storage tanks for compressed natural gas. Net Revenue - -------------- The Company's net revenue for fiscal year 1998 increased by $9,255,000 or 15% compared to a $10,253,000 or 20% increase in fiscal year 1997. For the current year, contract revenues, primarily from the General Motors Corporation program, represented $5,482,000 of this increase. Product sales for fiscal year 1998 and 1997 increased by approximately 6% and 21%, respectively. During 1998, the increase in product sales was unfavorably reduced by $2,326,000, or 4% as a result of the negative effects of a strengthening U.S. dollar against foreign currencies. The following table sets forth the Company's product sales by application, (all dollars in thousands):
Fiscal years ended April 30, --------------------------------- 1998 1997 1996 --------- --------- --------- Motor vehicle products $ 21,870 $ 23,784 $ 17,063 Forklifts and other material handling equipment 29,493 23,291 23,316 Small portable to large stationary engines 10,846 11,362 8,108 --------- --------- --------- Total product sales $ 62,209 $ 58,437 $ 48,487 --------- --------- --------- --------- --------- ---------
During fiscal year 1998, net revenue attributable to the Company's motor vehicle products decreased by $1,914,000, or 8%, over 1997. This decrease in motor vehicle product sales was unfavorably impacted by the negative effects of a strengthening U.S. dollar against foreign currencies of $817,000, or 3%. During fiscal year 1997, sales for the motor vehicle products increased by $6,721,000, or 39%, over 1996. The primary reason for the fiscal year 1997 increase was the addition of the Australian subsidiary which increased consolidated revenues by $5,294,000 from 1996 to 1997. The following table sets forth the Company's worldwide motor vehicle product sales by component parts and upfitting systems, (all dollars in thousands):
Fiscal years ended April 30, --------------------------------- 1998 1997 1996 --------- --------- --------- Motor vehicle component parts $ 18,152 $ 20,864 $ 13,982 Motor vehicle upfitting systems 3,718 2,920 3,081 --------- --------- --------- Total motor vehicle products $ 21,870 $ 23,784 $ 17,063 --------- --------- --------- --------- --------- ---------
Sales for the Company's motor vehicle component parts in 1998 decreased $2,712,000, or 13%, as compared with 1997. Thirty percent (30%) of this decrease was attributable to the strengthening of the U.S. dollar. Also, the decrease resulted from lower product sales for aftermarket conversions in the U.S. market due to new regulatory requirements shifting the automotive 15 conversion market to direct OEM upfits. Additionally, the decrease resulted from lower product sales in Australia as a result of a general economic slowdown and unfavorable price differentials between petroleum and alternative fuels which unfavorably impacted the Company's component sales. These decreases were slightly offset by $603,000 in incremental revenues generated by the newly acquired Mexican operation. For fiscal year 1997, the increase in component parts sales, as compared to 1996, was primarily due to incremental revenue of $5,294,000 resulting from its Australian acquisition. Increased sales to Latin America accounted for most of the remaining increase. Management anticipates that revenue attributable to the Company's motor vehicle component parts will be higher during fiscal year 1999 as compared to 1998 primarily as a result of a full year of operations for the Mexican subsidiary and an increase in demand in Latin America. This is a forward-looking statement. See "Certain Factors" below. During fiscal year 1998, revenue attributable to upfitting vehicles with the Company's systems increased by $798,000, or 27%, compared to the previous fiscal year. This upfitting revenue represented sales of 438 mid-year 1997 GM pick-ups upfit with the Company's bi-fuel natural gas fuel system and sales of 880 1998 medium-duty dedicated Liquid Propane Gas (LPG) kits under a cross license agreement with General Motors. During fiscal year 1997, a portion of revenue attributable to upfitting vehicles for aftermarket fleet use in 1997 resulted from a program with Ford Motor Company in which the Company's bi-fuel propane system was utilized in 1996 model year F-150 and F-250 pickup trucks. The Ford program was materially completed during the first quarter of fiscal year 1997. During the third quarter of fiscal year 1997, the Company began converting postal vehicles to compressed natural gas under a $1.5 million Postal Service contract. Deliveries were completed during the fourth quarter of fiscal year 1997. During fiscal year 1996, upfitting revenue primarily resulted from a Postal Service contract to convert postal vehicles to compressed natural gas and initial shipments of the aforementioned 1996 model year F-150 and F-250 Ford trucks utilizing the Company's bi-fuel propane system. Management anticipates that the commercialization by General Motors Corporation of model year 1998 and 1999 Chevrolet and GMC pickup trucks, and other vehicles, with the Company's systems will result in significantly higher upfitting revenue during fiscal year 1999. Although the current labor disputes at General Motors are not impacting the upfit programs that are in process, the length of the disputes could impact future delivery schedules and upfitting revenues. These are forward looking statements. See "Certain Factors" below. During fiscal year 1998, net revenue attributable to the Company's products for forklifts and other material handling equipment increased by approximately $6,202,000, or 27%, over 1997. This increase in forklift related product sales was unfavorably impacted by the negative effects of a strengthening U.S. dollar against foreign currencies of $1,509,000 or 6%. During fiscal year 1998, the Company realized increased revenues of $2.4 million from its European operations which primarily sells material handling equipment. Without the strengthening U.S. dollar, revenues from European operations would have increased $3.9 million for fiscal year 1998. The remaining increase in sales was derived from domestic operations. Both the European and domestic operations realized increases as a result of the general upswing in economic conditions. Total revenue from forklifts and material handling equipment in fiscal year 1997 was comparable to 1996 revenue. Management anticipates that sales for forklifts and other material handling equipment in fiscal year 1999 will be comparable to 1998. Management projects increases in the European market but will be offset by a decline in the Asian market. In addition, it is anticipated in the near future that the California Air Resources Board (CARB) and the Environmental Protection Agency (EPA) will adopt emission requirements for forklifts and other material handling equipment that are similar to those being adopted for 16 the motor vehicle industry. These are forward-looking statements. See "Certain Factors" below. During fiscal year 1998, sales of small portable to large stationary engines decreased $516,000, or 5% over sales in 1997. The decrease is related to new EPA regulations affecting the small engine aftermarket. During fiscal year 1997, sales of small portable to large stationary engines increased $3,254,000, or 40%, over sales in 1996. The increase was attributable to the Garretson product line purchased in April 1996 and to higher demand for large and small power generation units used in power replacement and recreational applications. Management anticipates that revenue from industrial engines in fiscal year 1999 will be higher compared to 1998 levels. This is a forward-looking statement. See "Certain Factors" below. Contract revenue was 12% of total revenue in fiscal year 1998, as compared to 5% and 6% in 1997 and 1996, respectively. During 1998, total contract revenue increased by approximately $5.5 million, or 162%, as compared to 1997. During 1997, total contract revenue increased by approximately $304,000, or 10%, as compared to 1996. These increases were due to the addition of several gaseous fueled vehicle platforms for development under the contract with General Motors Corporation and to development contracts obtained from various federal and state agencies. Contract revenue is principally recognized by the percentage of completion method. Profits expected to be realized on contracts are based on the Company's estimates of total contract sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts. Based on the expected increases in vehicle platforms and new developmental contracts, management anticipates that contract revenues during fiscal year 1999 will be significantly higher than 1998. This is a forward-looking statement. See "Certain Factors" below. During fiscal year 1998, 1997, and 1996 the Company's product revenue was generated in the following geographic regions:
Fiscal years ended April 30, --------------------------------- 1998 1997 1996 --------- --------- --------- United States and Canada 57% 66% 67% Pacific Rim 13% 11% 10% Europe 19% 12% 16% Latin America 11% 11% 7%
Gross Profit Margin - --------------------- The Company's gross profit margin on product sales during fiscal year 1998 was $24,040,000 (39%) compared to $21,095,000 (36%) for the prior year. During the current year, the Company's domestic operations contributed approximately $2.0 million to the increase through higher sales volumes and as a result of a higher gross margin percent realized by lower material costs. The foreign operations contributed approximately $.9 million to the gross margin increase due to the addition of the Mexican operation during 1998, a full year of reporting for the Australian operation, and higher sales volumes at the European operation. The gross profit margin percentage realized at the foreign operations during the current year is comparable to the percentage realized during fiscal year 1997. The Company's gross profit margin on product sales during fiscal year 1997 was $21,095,000 (36%) compared to $16,476,000 (34%) for fiscal year 17 1996. The Company's foreign operations contributed approximately $3.2 million to this increase as a result of a full year of reporting for the European operation and the addition of the Australian operation during fiscal 1997. Favorable market driven sales price adjustments and product mix improvements from domestic operations translated into higher gross profit percents and accounted for the remaining increase in margins from 1996 to 1997. Management anticipates that percent profit margins will continue to be favorably impacted by higher production volumes and volume purchases, but will be offset by the higher revenue and inherently lower upfitting margins as upfitter sales become a larger segment of the Company's business. In addition, gross profit percentages at the foreign operations could be lower in the future as a result of the strengthening U.S. dollar versus foreign currencies. However, as the upfitter business and sales volumes increase, overall gross profits are expected to increase. These are forward-looking statements. See "Certain Factors" below. Research and Development - --------------------------- Research and development (R&D) expense for fiscal year 1998 increased by $4.9 million to $13.3 million, a 57% increase over fiscal year 1997. R&D expense directly related to the GM program increased from $3.0 in 1997 to $4.7 million in 1998. R&D expense for fiscal year 1997 increased by $1.3 million to $8.5 million, an 18% increase over fiscal year 1996. R&D expense directly related to the GM program increased from $1.6 in 1996 to $3.0 million in 1997. The remaining increase in R&D expense was primarily for internally funded product and other contract R&D work with Perkins Technology Limited and the Southern California Air Quality Management District. Management believes the Company's future success depends on its ability to design, develop and market new products that interface successfully with new engine electronic technology, and which meet mandated emission standards. Management anticipates that R&D expense during fiscal year 1999 will be continue to be higher than the levels experienced during fiscal year 1998 due to internally funded development work and new product development under the GM contract and other contract development work. This is a forward-looking statement. See "Certain Factors" below. Selling General and Administrative - ------------------------------------- Selling, general and administrative (SG&A) expense for fiscal year 1998 increased by approximately $1.3 million, or 12%, as compared to the prior fiscal year. This increase was primarily due to the addition of the Mexican subsidiary, inclusion of IMPCO Pty's SG&A expenses for a full fiscal year versus only ten months in the previous fiscal year, and increased administrative expenses from the U.S. operations. These expenses included administrative salaries, incentive compensation, and legal expenses. However, as a percentage of net revenues, SG&A expense decreased from 18% in fiscal year 1997 to 17.5% in the last fiscal year. SG&A expense for fiscal year 1997 increased by approximately $2.9 million, or 35%, as compared to fiscal year 1996. The combined SG&A expenses for the Company's European and Australian operations in 1997 were $4,526,000, compared to $1,357,000 for European expenses only in 1996. SG&A as a percentage of sales increased from 16% to 18% due to the Company's foreign operations. The European facilities distribute alternative fuel products from multiple locations in Europe and incur higher SG&A expenses as a percentage of sales than the Company's domestic operations. 18 Management anticipates that SG&A expense for fiscal year 1999 will be higher than fiscal year 1998 primarily as a result of additional expenses to support anticipated growth in revenues and including a full year of the Mexican operation. However, as a percentage of net revenues, SG&A expense is expected to be lower for fiscal year 1999 as compared to 1998. These are forward-looking statements. See "Certain Factors" below. Financing charges - -------------------- Financing charges for fiscal year 1998 decreased by approximately 15% as compared to 1997. The decrease is attributable to lower borrowings on the Company's line of credit as compared to the prior year and prepayments on long-term borrowings primarily from funds received from the Company's redemption of its common stock purchase warrants. Financing charges for fiscal year 1997 increased by approximately 118% over 1996 due to loans associated with the acquisitions of IMPCO BV and IMPCO Pty, and the increased use of the line of credit. Management anticipates that financing charges for fiscal year 1999 will be lower as compared to the current fiscal year. This is a forward-looking statement. See "Certain Factors" below. Provision for income taxes - -------------------------- The Company's effective income tax rate for fiscal years 1998, 1997, and 1996 were 14.7%, 7.0%, and (37.2%), respectively. Provision for taxes consist primarily of federal, state and foreign income taxes which are computed using statutory rates. The effective tax rate represents the statutory income tax rate reduced by the use of net operating loss carryforwards, R&D tax credits and other items. During fiscal year 1996, the Company reduced its valuation allowance for deferred tax assets as required by SFAS No. 109 and recorded $1,700,000 of income tax benefits primarily related to the assumed future utilization of net operating loss carryforwards. During fiscal year 1997, the deferred tax asset increased by $273,000 to $1,973,000 at April 30, 1997. During fiscal year 1998, the deferred tax asset decreased by $373,000 to $1,600,000 at April 30, 1998. For federal income tax purposes, the Company has utilized all net operating loss carryforwards as of the end of the 1998 fiscal year. Management has determined, based on the Company's history of prior operating earnings and its expectations for the future, that operating income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets and that the estimated effective annual rate in the future years will approximate the statutory rate. This is a forward-looking statement. See "Certain Factors" below. Liquidity and Capital Resources - -------------------------------- The Company uses cash generated from its operations and external financing to fund capital expenditures, pay dividends on the preferred stock and invest in and operate its existing operations and new businesses. Management believes that such sources of funds will be sufficient to meet the needs of its business for the foreseeable future. This is a forward-looking statement. See "Certain Factors" below. The Company's financial condition remains strong. The ratio of current assets to current liabilities was 3.28 at April 30, 1998, as compared to 2.57 at the end of fiscal year 1997. The total amount of working capital increased by $7,827,000 to $26,075,000 at the end of fiscal year 1998. This 19 compares to $18,248,000 at the end of the prior year. Net cash provided by operating activities was $1,508,000 during fiscal year 1998, compared to net cash provided by operating activities of $3,708,000 and $2,578,000 in fiscal years 1997 and 1996, respectively. The decrease in cash provided by operating activities during the last fiscal year resulted from a $3.7 million increase in inventory and a $3.4 million increase in accounts receivable. The increase in inventory was primarily due to the Algas acquisition and a temporary buildup of inventory in anticipation of future upfitter and core product sales. The increase in accounts receivable was primarily due to April 1998 billings on the GM program. The decrease in cash provided by operating activities was partially offset by a $1.6 million increase in net income during fiscal year 1998 compared to the prior fiscal year. Net cash used in investing activities in fiscal year 1998 was approximately $5,763,000, a decrease of approximately $623,000 from 1997. Included in this amount is equipment purchased from EDO Canada Ltd., dies, tooling and equipment purchased from the Algas Carburetion Division of PGI International, the Company's normal capital expenditures for dies, molds and patterns and machinery and equipment, and the investment in IMPCO Mexicano. Investing activities for the prior year principally included the purchase of the Company's Australian subsidiary, which resulted in a net use of cash of approximately $4,655,000. Capital expenditures for dies, molds and patterns and machinery and equipment totaled $3,220,000 in fiscal year 1998, compared to $1,702,000 in fiscal year 1997 and $1,996,000 in fiscal year 1996. Management projects capital expenditures during fiscal year 1999, primarily relating to equipment enhancements and facilities for the development and production of new products, to be comparable to expenditures during the fiscal year 1998. The Company expects to fund a major portion of these expenditures from cash generated from operations and by use of its bank credit facility. These are forward-looking statements. See "Certain Factors" below. Net cash provided by financing activities in fiscal year 1998 was approximately $5,051,000. The Company received approximately $8,454,000 from the issuance of common stock as a result of the exercise of common stock purchase warrants. It also received approximately $3,993,000 from the Bank of America credit facility to fund the Algas and IMPCO BV acquisitions. The Company decreased its borrowing under the operating line of credit by approximately $2,407,000 and made $4,403,000 in principal repayments on term loans and notes. Approximately $2,335,000 of the loan and note payments represented pre-payments. Net cash provided by financing activities in fiscal year 1997 was approximately $4,174,000, of which $3,968,000 was from a term loan with Bank of America to finance the acquisition of the Company's Australian subsidiary. During fiscal year 1997, the Company increased its borrowing under the operating line of credit by approximately $2,050,000 primarily for current operations and material purchases. The Company has a $12,000,000 revolving line of credit and a $5,525,000 capital lease facility with Bank of America. At April 30, 1998, approximately $3,048,000 and $2,625,000 was outstanding under the revolving line of credit and the capital lease facility, respectively. The revolving line of credit expires on August 31, 1999, and the capital lease facility expires on December 31, 2003. In addition, the Company's subsidiary in the Netherlands has a 3,000,000 NLG (U.S. $1,500,000) credit facility with Mees Pierson, a financial institution in the Netherlands. 20 Derivative Financial Instruments - -------------------------------- The Company uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest and foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. The Company is not a party to leveraged derivatives and does not hold or issue financial instruments for speculative purposes. (a) Foreign Currency Management The results and financial condition of the Company's international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. Dollar. The Company's exposure to fluctuations in currency exchange rates has increased as a result of the growth of its international subsidiaries. The functional currency for all of the Company's international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. dollar increases costs incurred by the subsidiaries because most of its international subsidiaries' inventory purchases are U.S. dollar denominated. The Company monitors this risk and attempts to minimize the exposure through forward currency forward contracts and the management of cash disbursements in local currencies. At April 30, 1998 the Company had currency forward contracts protecting U.S.$600,000 in inventory purchases. At April 30, 1998 the fair value of foreign currency forward contracts approximated contract values. On May 29, 1998 the Company entered into six currency forward contracts to protect an additional U.S.$1,200,000 in inventory purchases. The Company seeks to hedge its foreign currency economic risk by minimizing its U.S. dollar investment in foreign operations using foreign currency term-loans to finance the operations of its foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. dollars at period end exchange rates. (b) Interest Rate Management The Company uses interest rate swap agreements with Bank of America to manage its exposure to interest rate changes and stabilize the cost of borrowed funds. When an agreement is executed, the swap is linked to a specific debt instrument. At April 30, 1998, the Company had $4,160,000 secured under fixed interest rate agreements at a weighted average fixed interest rate of 7.78%. Absent these fixed rate agreements, the weighted average variable rate for this debt at April 30, 1998 would have been 7.38%. At April 30, 1998 the fair value of interest rate swap agreements approximated carrying value. On May 29, 1998 the Company secured an additional $3,271,000 under a fixed interest rate agreement. Year 2000 - --------- The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems both internally and externally. The Company has completed its assessment of the Year 2000 issue through 1) communication with key customers, suppliers, financial institutions and others with which it conducts business and 2) review of its current internal computer systems to identify potential Year 2000 issues. Based on this assessment, the Company 21 is not aware of any key customer, supplier, or financial institution with inadequate solutions. The Company has developed plans to address system modifications required by December 31, 1999 and these plans basically require the upgrade to new versions of packaged software. The Company plans to have all systems upgraded by December 1998. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. Certain Factors - ---------------- The preceding discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company faces a number of risks and uncertainties which could cause actual results or events to differ materially from those contained in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, the following: DELAY IN IMPLEMENTATION OF GOVERNMENT REGULATIONS The market for alternative fueled vehicles and the demand for the Company's products are, to a significant degree, driven by local, state and federal regulations in the United States related to air quality and requiring conversion of motor vehicles to alternative fuels. The Company's international business is also affected by similar foreign governmental regulations. Timing in the implementation of these regulations could have an unfavorable impact on the Company's financial performance. DEPENDENCE ON ALTERNATIVE FUEL MARKET Although the Company believes that there will be substantial growth in the market for alternative fueled engines, especially among fleet vehicle owners, there can be no assurance that such growth will materialize or, if such growth does occur, that it will result in increased sales of the Company's products. The Company's products are designed for gaseous alternative fueled vehicles, but not for alternative fuels such as electricity, methanol, ethanol and hydrogen. If the major growth in the alternative fuel market is solely for such fuels, the Company will be adversely affected. At present, the lack of a well-developed infrastructure for the supply of alternative fuels is limiting growth in the alternative fuel engine market. Such an infrastructure is necessary for widespread use of all alternate fuels. 22 DEPENDENCE ON NEW PRODUCTS The Company believes that its future success is dependent upon its ability to design and market new fuel management products as well as enhance its existing products. It believes that the markets for its products will be characterized by rapidly changing technology, new product introductions and the entry of new competitors. The Company's ability to enhance existing products in a timely manner and to develop and introduce new products that incorporate new technologies, conform to increasingly stringent emission standards and achieve market acceptance in a timely manner will significantly affect its future performance. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results are subject to annual and quarterly fluctuations as a result of a variety of factors, including without limitation, budget cycles and funding arrangements of governmental agencies, purchasing cycles of fleet operators, the uncertainty of timing of deliveries of vehicles to be upfitted, the timing of implementation of government regulations promoting alternative fuel vehicles, as well as general economic factors. RISK OF INTERNATIONAL OPERATIONS The Company operates in Europe, Australia and Mexico and markets its products and technologies in other international markets, including both industrialized and developing countries. The Company's international operations are subject to various risks common to international activities, such as exposure to currency fluctuations, the inherent difficulty of administering business abroad and the need to comply with a wide variety of foreign import and United States export laws. The Company's competitiveness in overseas markets may be negatively impacted when there is a significant increase in the value of the dollar against foreign currencies where the Company does business. COMPETITION The Company believes that competition in the alternative fuel engine marketplace is increasing, particularly in the growing market for propane and natural gas fueled vehicle products. Some of the current competitors and potential future competitors are large, well-financed companies, with financial and marketing resources and research and development capabilities that are substantially larger than those of the Company. ENTRY OF ORIGINAL EQUIPMENT MANUFACTURERS INTO MARKET As the market for alternative fueled vehicles increases, original equipment manufacturers may find it advantageous to develop and produce their own fuel management equipment rather than purchasing such equipment from suppliers such as the Company. If this occurs, the total potential demand for the Company's products could be adversely impacted. ABILITY TO MEET OEM SPECIFICATIONS In 1995 the Company began to offer complete alternative fuel systems, which include tanks, brackets, electronics and all other under-hood components required to convert a motor vehicle to alternative fuels. Customers for such systems require that they meet OEM standards. These requirements have resulted in increased development, manufacturing, warranty and administrative costs. If these costs increase significantly, the Company's profitability could be adversely affected. DEPENDENCE ON QUALIFIED PERSONNEL The Company is dependent upon a limited number of key management and technical personnel. In addition, as products become complex, the Company's future success will depend in part upon its ability to attract and retain highly qualified personnel. 23 INCREASED WARRANTY CLAIMS Vehicle manufacturers are, in response to consumer demand, providing increasingly longer warranty periods for their products. Suppliers, such as the Company, are required to provide correspondingly longer product warranties. Consequently, the Company could incur substantially greater warranty claims in the future. NEED TO COMPLY WITH GOVERNMENTAL REGULATIONS The Company must obtain product certification from governmental agencies such as the Environmental Protection Agency and the California Air Resources Board to sell certain of its products in the United States automotive markets. A substantial portion of the Company's future sales will depend upon sales of fuel management products that are certified to meet existing and future air quality and energy standards. Although the Company believes its technologies will permit its existing and new products to meet these standards, there can be no assurance that this will occur. ABILITY TO SECURE FUTURE DEVELOPMENT CONTRACTS The Company has obtained funding under development contracts with original equipment manufacturers and governmental agencies to develop specified products. There can be no assurance that such funding will be obtainable in the future, the lack of which may significantly impact the Company's ability to develop and market new products and technologies. PRODUCT LIABILITY & RECALL Although the Company carries and plans to continue to carry product liability and recall insurance, there can be no assurance that such coverage is adequate or that adequate coverage will continue to be available or, if available, that it will be available at an acceptable cost. LABOR DISPUTES AT OEM FACILITIES As the Company enhances its automotive upfit programs with OEMs, the Company is becoming increasingly dependent on OEM production and the associated labor forces at OEM sites. Most of the labor force at OEM facilities are represented by labor unions. There can be no assurance that labor disputes will not occur. In the event of a dispute, upfit sales may be adversely impacted. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is indexed in Part IV in Item 14. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- The information required in Part III (Items 10, 11, 12 and 13) is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A or by an amendment hereto, in either case, no later than 120 days after the end of the fiscal year covered by this Form 10-K. PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed As Part of This Report: --------------------------------------- (1) Consolidated Financial Statements: ---------------------------------- Report of independent auditors Consolidated balance sheets as of April 30, 1998 and 1997 Consolidated income statements for the years ended April 30, 1998, 1997 and 1996 Consolidated statements of stockholders' equity for the years ended April 30, 1998, 1997 and 1996 Consolidated statements of cash flows for the years ended April 30, 1998, 1997 and 1996 Notes to consolidated financial statements (2) Supplemental Financial Statement Schedules: ------------------------------------------- Schedule II - Valuation accounts All other schedules are omitted because the information is not applicable or is not material, or because the information is included in the consolidated financial statements or the notes thereto.
(3) Exhibits: --------- 10.12 Lease betweeen Klein Investments, Family Limited Partnership, as lessor, and IMPCO Technologies, Inc., as lessee, dated August 18, 1997. 10.13 Amendment dated March 18, 1998 to Loan agreement dated October 7, 1997 between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as borrower. 10.14 Amendment dated April 29, 1998 to Loan agreement dated October 7, 1997 between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as borrower. 10.15 Loan Agreement between IMPCO Technologies, B.V. as borrower, and Bank of America National Trust and Savings Association, acting through its Amsterdam branch, as lender, dated as of April 27, 1998. 22.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP.
Executive Compensation Plans and Arrangements. - -------------------------------------------------------------------------------- Employment Agreement dated April 1, 1997, between IMPCO Technologies, Inc., as the Company, and Robert M. Stemmler, as the Employee - Exhibit 10.7. 1991 Executive Stock Option Plan dated November 5, 1991 among IMPCO Technologies, Inc., as the Company, and Bertram R. Martin, James J. Mantras and Dale L. Rasmussen, as Optionees - Exhibit 10.3 1989 Incentive Stock Option Plan and Amendment to 1989 Incentive Stock Option Plan - Exhibits 10.2 and 10.6, respectively. 1996 Incentive Stock Option Plan - Exhibit 10.8. 1997 Incentive Stock Option Plan - Exhibit 10.9. Reports on Form 8-K. - ------------------------------------------------------------------------------- No reports were filed on Form 8-K during the last quarter of the Company's fiscal year covered by this report.
Exhibits - -------------------------------------------------------------------------------- 2.1 Agreement of Purchase and Sale of Stock by and among IMPCO Technologies, Inc., as buyer, and Centradas B.V., as Shareholder, dated as of October 31, 1995. (8) 2.2 Shareholders Agreement for Technisch Bureau Media B.V. by and among IMPCO Technologies, Inc., and Centradas B.V., dated as of October 31, 1995. (8) 2.3 Deed of Sale of Business by and among IMPCO Technologies Pty. Limited, as buyer, and Ateco Automotive Pty Limited, as seller, dated as of July 1, 1996. (9) 2.4 Deed of Release by and among IMPCO Technologies, Inc. and Ateco Automotive Pty Limited dated as of July 1, 1996. (9) 2.5 Shareholders Agreement for Gas Parts (NSW) Pty Limited by and among IMPCO Technologies Pty. Limited, Gas Parts Pty Limited and Gas Parts (NSW) Pty. Limited, dated as of July 4, 1996. (9) 3.1 Articles of Incorporation and Bylaws. (1) 3.2 Amended Certificate of Designation of AirSensors, Inc. establishing 1993 Series 1 Preferred Stock. (5) 3.3 Certificate of Amendment of Certificate of Incorporation providing for limitation of directors' liability. (3) 3.4 Certificate of Amendment of Certificate of Incorporation providing for the decrease in authorized shares of common stock from 50,000,000 to 25,000,000. (6) 10.1 Lease between L-W Income Properties and IMPCO Technologies, Inc. dated May 10, 1989. (2) 10.2 1989 Incentive Stock Option Plan. (3) 10.3 1991 Executive Stock Option Plan dated November 5, 1991, among AirSensors, Inc., as the Company, and Bertram R. Martin, James J. Mantras and Dale L. Rasmussen, as Optionees. (4) 10.4 First Amendment to Lease dated April 19, 1993, between L-W Income Properties and IMPCO Technologies, Inc. (6) 10.5 1993 Stock Option Plan for Nonemployee Directors (7) 10.6 Amendment to 1989 Incentive Stock Option Plan (7) 10.7 Employment Agreement dated April 1, 1997, between IMPCO Technologies, Inc., as the Company, and Robert M. Stemmler, as the employee. (10) 10.8 1996 Incentive Stock Option Plan (10) 10.9 1997 Incentive Stock Option Plan (11) 10.10 Loan agreement dated October 7, 1997, between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (12) 10.11 Amendment dated February 4, 1998 to Loan agreement dated October 7, 1997, between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (13) 10.12 Lease betweeen Klein Investments, Family Limited Partnership, as lessor, and IMPCO Technologies, Inc., as lessee, dated August 18, 1997. (14) 10.13 Amendment dated March 18, 1998 to Loan agreement dated October 7, 1998 between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (14) 10.14 Amendment dated April 29, 1998 to Loan agreement dated October 7, 1998 between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (14) 10.15 Loan Agreement for IMPCO Technologies, B.V. as borrower, and Bank of America National Trust and Savings Association, acting through its Amsterdam branch, as lender, dated as of April 27, 1998. (14) 22.1 Subsidiaries of the Company. (14) 23.1 Consent of Ernst & Young LLP. (14) -------------------------------------- (1) Incorporated by reference from Form S-18 filed under Registration No. 33-4013-S. (2) Incorporated by reference from Form 10-K for fiscal year 1989. (3) Incorporated by reference from Form 10-K for fiscal year 1990. (4) Incorporated by reference from Form 10-K for fiscal year 1992. (5) Incorporated by reference from Form S-2, File no. 33-56610 declared effective March 9, 1993 (6) Incorporated by reference from Form 10-K for fiscal year 1993. (7) Incorporated by reference from Form 10-K for fiscal year 1994. (8) Incorporated by reference from Form 8-K dated October 31, 1995, and filed as Exhibit Numbers (2.1) through (2.4) thereunder. (9) Incorporated by reference from 8-K/A dated July 1, 1996, and filed as Exhibit Numbers (2.5) through (2.9) thereunder. (10) Incorporated by reference from Form 10-K for fiscal year 1997. (11) Incorporated by reference from Proxy Statement for fiscal year 1997. (12) Incorporated by reference from Form 10-Q for period ended October 31, 1997. (13) Incorporated by reference from Form 10-Q for period ended January 31, 1998. (14) Filed herewith.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. IMPCO Technologies, Inc. By /s/ Robert M. Stemmler ------------------------------------- Robert M. Stemmler, President & Chief Executive Officer Dated July 27, 1998 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert M. Stemmler President, July 27, 1998 ------------------------- Chief Executive Officer and Interim Chairman of the Board (Principal Executive Officer) /s/ Thomas M. Costales Chief Financial Officer July 27, 1998 ------------------------- and Treasurer (Principal Financial Officer) /s/ Brian Olson Corporate Controller July 27, 1998 ------------------------- /s/ Norman L. Bryan Director July 27, 1998 ------------------------- /s/ V. Robert Colton Director July 27, 1998 ------------------------- /s/ Paul Mlotok Director July 27, 1998 ------------------------- /s/ Christopher G. Mumford Director July 27, 1998 ------------------------- /s/ Edward L. Scarff Director July 27, 1998 ------------------------- /s/ Don Simplot Director July 27, 1998 ------------------------- /s/ Rawley F. Taplett Director July 27, 1998 ------------------------- /s/ Douglas W. Toms Director July 27, 1998 -------------------------
31 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders IMPCO Technologies, Inc. We have audited the accompanying consolidated balance sheets of IMPCO Technologies, Inc. [formerly AirSensors, Inc.] as of April 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended April 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IMPCO Technologies, Inc. [formerly AirSensors, Inc.] at April 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Long Beach, California June 30, 1998 except for Note 16, as to which the date is July 27, 1998 32 IMPCO TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS April 30, 1998 and 1997 ----------- ASSETS ------
1998 1997 ------------ ------------ Current assets: Cash $ 2,617,869 $ 1,975,903 Accounts receivable 14,528,000 11,456,539 Less allowance for doubtful accounts 314,794 288,111 ------------ ------------ Net accounts receivable 14,213,206 11,168,428 Inventories: Raw materials and parts 9,565,310 7,717,710 Work-in-process 1,055,411 754,576 Finished goods 7,308,190 5,711,966 ------------ ------------ Total inventories 17,928,911 14,184,252 Other current assets 2,731,963 2,575,055 ------------ ------------ Total current assets 37,491,949 29,903,638 Equipment and leasehold improvements: Dies, molds and patterns 5,039,892 4,272,220 Machinery and equipment 7,074,004 4,846,940 Office furnishings and equipment 4,968,605 4,130,351 Leasehold improvements 2,288,022 1,730,174 Land and Buildings 267,000 267,000 ------------ ------------ 19,637,523 15,246,685 Less accumulated depreciation and amortization 10,613,052 8,026,594 ------------ ------------ Net equipment and leasehold improvements 9,024,471 7,220,091 Intangibles arising from acquisitions 13,024,441 11,351,802 Less accumulated amortization 3,265,341 2,950,805 ------------ ------------ Net intangibles arising from acquisitions 9,759,100 8,400,997 Other assets 1,109,888 1,588,364 ------------ ------------ $57,385,408 $47,113,090 ------------ ------------ ------------ ------------
See accompanying notes. 33 IMPCO TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS April 30, 1998 and 1997 (Continued) ----------- LIABILITIES AND STOCKHOLDERS' EQUITY -----------------------------------
1998 1997 ------------ ------------ Current liabilities: Notes payable $ - $ 328,839 Accounts payable 5,606,922 4,538,243 Accrued payroll obligations 1,848,425 1,564,028 Income taxes payable 746,587 563,947 Other accrued expenses 1,807,032 3,144,978 Current portion of term loans 1,408,225 1,515,585 ------------ ------------ Total current liabilities 11,417,191 11,655,620 Line of credit 2,650,000 5,450,000 Term loan - Bank of America NT&SA 3,799,395 3,592,013 Term loan - DEPA Holding B.V. 1,820,000 2,154,399 Other long term liabilities 2,324,971 1,524,906 Minority interest 1,068,500 673,044 Commitments and contingencies - - Stockholders' equity: 1993 Series 1 Preferred Stock, $0.01 par value, 5,950 shares authorized, issued and outstanding $5,950,000 liquidation value 5,650,000 5,650,000 Common stock, $.001 par value, authorized 25,000,000 shares; 7,091,601 issued and outstanding at April 30, 1998 (5,814,587 at April 30, 1997) 7,092 5,815 Additional paid-in capital relating to common stock 38,386,357 29,342,121 Shares held in trust (36,759) (8,814) Accumulated deficit (8,197,885) (12,467,953) Foreign currency translation adjustment (1,503,454) (458,061) ------------ ------------ Total stockholders' equity 34,305,351 22,063,108 ------------ ------------ $57,385,408 $47,113,090 ------------ ------------ ------------ ------------
See accompanying notes. 34 IMPCO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME Years ended April 30, 1998, 1997 and 1996 ---------
1998 1997 1996 ------------ ------------ ------------ Revenue: Product sales $62,209,310 $58,436,508 $48,487,480 Contract revenue 8,873,554 3,391,528 3,087,229 ------------ ------------ ------------ Net revenue 71,082,864 61,828,036 51,574,709 Costs and expenses: Cost of sales 38,173,943 37,341,704 32,011,253 Research and development expense 13,336,708 8,479,919 7,170,965 Selling, general and administrative expense 12,454,253 11,156,547 8,260,778 ------------ ------------ ------------ Total costs and expenses 63,964,904 56,978,170 47,442,996 Operating income 7,117,960 4,849,866 4,131,713 Financing charges 934,825 1,100,449 503,886 ------------ ------------ ------------ Income before income taxes and minority interest in income of consolidated subsidiary and dividends 6,183,135 3,749,417 3,627,827 Provision (benefit) for income taxes 907,516 262,459 (1,348,616) Minority interest in income of consolidated subsidiary 410,554 261,667 305,568 ------------ ------------ ------------ Net Income before dividends 4,865,065 3,225,291 4,670,875 Dividends on preferred stock 594,997 581,365 609,875 ------------ ------------ ------------ Net income applicable to common stock $ 4,270,068 $ 2,643,926 $ 4,061,000 ------------ ------------ ------------ ------------ ------------ ------------ Net income per share: Basic $ .67 $ .46 $ .72 ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted $ .60 $ .43 $ .64 ------------ ------------ ------------ ------------ ------------ ------------ Number of shares used in per share calculation: Basic 6,333,769 5,722,382 5,648,290 ------------ ------------ ------------ ------------ ------------ ------------ Fully Diluted 8,155,476 6,130,542 7,300,199 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. 35 IMPCO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended April 30, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ 1993 Series 1 Preferred Stock: Beginning balance $ 5,650,000 $ 5,650,000 $ 5,650,000 ------------ ------------ ------------ Ending balance 5,650,000 5,650,000 5,650,000 Common Stock: Beginning balance 5,815 5,655 5,641 Issuance of common stock (57,796, 139,244, and 13,198 shares, respectively) resulting from the exercise of options pursuant to the stock option plans 58 139 14 Issuance of common stock (1,219,218 and 20,775 shares, respectively)resulting from the exercise of warrants 1,219 21 - ------------ ------------ ------------ Ending balance 7,092 5,815 5,655 Additional paid-in capital: Beginning balance 29,342,121 28,746,994 28,660,181 Issuance of common stock resulting from the exercise of options pursuant to the stock option plans 194,271 439,335 86,813 Issuance of common stock resulting from the exercise of warrants 8,453,063 155,792 - Issuance of common stock purchase warrant 93,000 - - Reduction in current tax liability related to stock options 303,902 - - ------------ ------------ ------------ Ending balance 38,386,357 29,342,121 28,746,994 Treasury stock for deferred compensation program, at cost (2,572 and 1,032 shares, respectively) (36,759) (8,814) - Accumulated Deficit: Beginning balance (12,467,953) (15,111,879) (19,172,879) Net income applicable to common stock 4,270,068 2,643,926 4,061,000 ------------ ------------ ------------ Ending balance (8,197,885) (12,467,953) (15,111,879) Foreign currency translation adjustment (1,503,454) (458,061) (34,748) ------------ ------------ ------------ Total stockholders' equity $ 34,305,351 $ 22,063,108 $ 19,256,022 ------------ ------------ ------------ ------------ ------------ ------------
36 See accompanying notes. 37 IMPCO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended April 30, 1998, 1997 and 1996 -----------------------------
1998 1997 1996 ------------ ------------ ----------- Cash flows from operating activities: Net income $ 4,865,065 $ 3,225,291 $ 4,670,875 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles arising from acquisition 455,645 263,998 239,639 Depreciation and other amortization 2,488,605 2,452,594 1,774,695 Increase in accounts receivable (3,396,372) (2,750,026) (2,578,110) Increase in inventories (3,665,033) (385,003) (1,158,391) Increase/(decrease) in deferred tax asset 372,856 (272,856) (1,700,000) Increase in accounts payable 1,178,829 58,508 978,963 Increase/(decrease) in accrued expenses (806,387) 799,321 266,570 Minority interest in income of consolidated subsidiaries 395,456 289,847 383,198 Other, net (381,131) 26,201 (299,517) ------------ ------------ ------------ Net cash provided by operating activities 1,507,533 3,707,875 2,577,922 Cash flows from investing activities: Purchase of equipment and leasehold improvements (3,219,766) (1,702,477) (1,995,981) Investment in IMPCO BV - - (1,965,678) Investment in IMPCO Pty - (4,654,794) - Investment in IMPCO Mexicano (961,000) - - Purchase of intangible assets (1,852,197) (74,600) (327,148) Proceeds from sale of equipment 270,001 74,319 118,172 Deferred software production costs - - (430,597) Other, net - (28,637) (702,241) ------------ ------------ ------------ Net Cash Used in investing activities (5,762,962) (6,386,189) (5,303,473) Cash flow from financing activities: Net borrowings in lines of credit (2,407,382) 2,050,000 2,400,000 Payments on notes payable (328,839) (1,083,615) (508,833) Proceeds from issuance of notes payable - 558,685 643,818 Proceeds from issuance of common stock 8,924,568 595,288 86,828 Payments on term loan (4,074,197) (1,035,454) (334,656) Proceeds from issuance of bank term note 3,992,521 3,968,750 2,050,000 Payments on capital lease obligations (461,023) (297,961) (256,072) Dividends on preferred stock (594,997) (581,365) (609,875) ------------ ------------ ------------ Net cash provided by financing activities 5,050,651 4,174,328 3,471,210 ------------ ------------ ------------ Translation Adjustment (153,256) (331,259) - Net increase in cash 641,966 1,164,755 745,659 Cash beginning of year 1,975,903 811,148 65,489 ------------ ------------ ------------ Cash at end of year $ 2,617,869 $ 1,975,903 $ 811,148 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS - The consolidated financial statements of IMPCO Technologies, Inc. (IMPCO or the Company) [effective September 15, 1997, AirSensors, Inc. changed its name to IMPCO Technologies, Inc.] include the accounts of the Company and it's majority owned subsidiary IMPCO Technologies B.V. (IMPCO BV) [Effective January 1, 1998, IMPCO Media Europe B.V. changed its name to IMPCO Technologies B.V.], its majority-owned subsidiary Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V. (I.M.P.C.O. Mexicano) [Effective January 20, 1998 Industrias Mexicanas de Productos de Combustibles, S. de R.L. de C.V. changed its name to Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V.] and its wholly owned subsidiary IMPCO Technologies, Pty. Limited (Impco Pty). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is engaged in the design, manufacturing and marketing of gaseous fuel delivery systems and related devices that allow internal combustion engines to operate on alternative fuels, primarily propane and natural gas. Worldwide the Company's products are sold to distributors and original equipment manufacturers (OEMs). (b) INVENTORIES - Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method while market is determined by replacement cost for raw materials and parts and net realizable value for work-in-process and finished goods. (c) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated on the basis of historical cost. Depreciation of equipment is provided using the straight-line method over the assets' estimated useful lives, ranging from three to seven years. Amortization of leasehold improvements, and equipment financed by the Company's capital lease facility, is provided using the straight-line method over the shorter of the assets' estimated useful lives or the lease terms. (d) INTANGIBLES ARISING FROM ACQUISITION - Intangibles arising from acquisition are recorded based on the excess of the cost of the acquisition over amounts assigned to tangible assets and liabilities. These intangible assets include goodwill, product rights and trademarks. The intangible assets are being amortized using the straight-line method over their estimated lives of twenty years. (e) DEFERRED COSTS - Deferred costs, included in other assets, represent amounts paid for software and other costs incurred after the establishment of technological feasibility. These costs are capitalized and subsequently amortized using the straight-line method over the estimated economic life of the related product. (f) WARRANTY COSTS - Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. Estimates are based, in part, on historical experience. (g) RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged to expense as incurred. Equipment used in research and development with alternative future uses is capitalized. (h) CONTRACT REVENUE RECOGNITION - Contract revenue is principally recognized by the percentage of completion method. Profits expected to be realized on contracts are based on the Company's estimates of total contract sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts. (i) MINORITY INTEREST IN SUBSIDIARY - In October 1995, IMPCO purchased 51 percent of IMPCO BV. In July 1996, IMPCO acquired IMPCO Pty which included a 50 percent share in a subsidiary (Gas Parts, NSW.) In January 1998, IMPCO Pty acquired the remaining 50 percent of Gas Parts, NSW. In December 1997, IMPCO acquired a 90 percent interest in IMPCO Mexicano. Minority interest represents the minority shareholder's proportionate share of equity in the IMPCO BV, Gas Parts, NSW and IMPCO Mexicano subsidiaries. The balance sheet amounts in minority interest at April 30, 1998 represent 49 percent of the equity held by the single minority shareholder in IMPCO BV and ten percent of the equity held by the single minority shareholder in I.M.P.C.O. Mexicano. (j) NET INCOME PER SHARE - In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic income per share is computed by dividing net income applicable to common stock by the weighted average shares outstanding during the period. Unlike primary earnings per share, common stock equivalents, including outstanding stock options and warrants, are excluded from the Basic calculation. Diluted earnings per share, similar to the fully diluted computation, is computed based on the weighted average number of common shares, all common stock equivalents, and if dilutive, shares issued upon conversion of preferred stock. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. (k) STOCK BASED COMPENSATION - In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting of Stock Based Compensation", which established accounting and reporting standards for stock based employee compensation plans effective after fiscal year 1996. SFAS 123 encourages entities to adopt the new method ("fair value based method") of accounting; however it also allows an entity to continue to measure compensation cost prescribed under existing rules ("intrinsic value based method") prescribed by Accounting Principle Board No. 25. Such entities who elect to remain on the "intrinsic value based" method must make certain pro forma disclosures as if the new fair value method had been applied. At this time, the Company has not adopted the recognition provision of SFAS 123, but has provided pro forma disclosures (see note 9). (l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF - During the first quarter of 1997, the company adopted SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. The Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment (significant decrease in market value of an asset, significant change in extent or manner in which the asset is used or significant physical change to the asset) are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Since adoption, the Company did not experience any significant changes in the business climate or in the use of assets that would require the Company to write down the value of the assets recorded in the balance sheet. The adoption of SFAS No.121 did not have a material effect on the consolidated financial position or results of operations of the Company. (m) USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (n) RECLASSIFICATIONS - Certain reclassifications have been made to the fiscal year 1996 and 1997 consolidated financial statements to conform to the fiscal year 1998 presentation. (o) FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's foreign subsidiaries are generally translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a foreign currency component in shareholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment, or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. (p) FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments recorded on the balance sheet include cash, short-term bank debt, and long-term bank debt. Because of the short maturity, the carrying amount of cash and short-term bank debt approximates fair value. Since the interest rates on the long-term debt are reset at intervals not to exceed twelve months, the carrying value of the Company's long-term debt approximates fair value. At April 30, 1998, off balance sheet derivative financial instruments include foreign currency forward contracts and interest rate swap agreements (see note 4). The Company enters into foreign currency forward contracts to hedge the net receivable/payable position arising from intercompany transactions by its foreign subsidiaries. Foreign currency contracts reduce the Company's exposure to unfavorable fluctuations in foreign currencies versus the U.S. dollar. Foreign currency gains and losses on intercompany transactions are not deferred. Interest rate swap agreements are used by the Company to manage interest rate risk on its floating rate debt portfolio. Each interest rate swap is matched as a hedge against a specific debt instrument and has the same notional amount and tenor as the related debt instrument principle. Fair value of these instruments is based on estimated currency settlement cost. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued certain Statements of Financial Accounting Standards (SFAS) which are applicable to the Company. SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997; SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997; and, SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities" which is effective for fiscal years beginning after June 15, 1999. SFAS No. 130 requires all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The changes in cumulative translation adjustments, reported through stockholders' equity, is currently the Company's only component of comprehensive income. The Company currently plans to adopt this standard in fiscal 1999. SFAS No. 131 requires a public enterprise to report financial and descriptive information about its reportable operating segments based upon the way management organizes segments within the enterprise for making operating decisions and assessing performances. Adoption of this standard will not require any material changes in current disclosures. The Company plans to adopt the standard in fiscal 1999. SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes special accounting for the following three types of hedges: hedges of changes in the fair value of assets, liabilities, or firm commitments (referred to as fair value hedges); hedges of the variable cash flows of forecasted transactions (cash flow hedges); and hedges of foreign currency exposures of net investments in foreign operations. Though the accounting treatment and criteria for each of the three types of hedges is unique, they all result in offsetting changes in value or cash flows of both the hedge and the hedged item being recognized in earnings in the same period. Changes in fair value of derivatives that do not meet the criteria of one of these three categories of hedges would be included in income. As this standard was recently issued, the Company will begin analyzing the various requirements in order to determine what impact, if any, it will have on its disclosures, financial position, results of operations, and cash flows. Currently, the Company does not anticipate adopting this standard before fiscal 2001. 2. ACQUISITIONS (a) ALGAS CARBURETION On December 5, 1997, the Company purchased certain manufacturing equipment and inventory of the Algas Carburetion Division of PGI International. The purchase price of $2,400,000 was paid in cash. On the same day, the Company acquired a 90% interest in Industrias Mexicanas de Productos de Combustibles, S. de R.L. de C.V. Effective January 20, 1998 Industrias Mexicanas de Productos de Combustibles, S. de R.L. de C.V. changed its name to Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V.("Grupo I.M.P.C.O. Mexicano"). The purchase price of $961,000 was paid in cash. Immediately prior to the Company's acquisition of a 90% ownership interest in Grupo I.M.P.C.O. Mexicano, Grupo I.M.P.C.O. Mexicano acquired certain assets of the carburetion division of Algas Mexicana, S.A. de C.V. These acquisitions were financed by term loans of approximately $3.3 million provided by Bank of America [See note 3(a)(iv)]. (b) EDO CANADA, LTD. On December 12, 1997, the Company purchased from the bankruptcy trustee of EDO Canada, Ltd. certain development, testing, quality control and manufacturing equipment used for the manufacture of storage tanks for compressed natural gas. The purchase price of $790,000 was paid in cash and was primarily financed through Bank of America's BA Capital Leasing. 42 (c) ATECO AUTOMOTIVE PTY. LTD. On July 1, 1996, the Company acquired certain assets of Ateco Automotive Pty. Ltd. ("Ateco") for approximately $6,500,000. Ateco, an Australian private company, has distributed IMPCO's gaseous fuel carburetion systems and related devices for use with internal combustion engines since 1969 through its Gas Division near Melbourne, Australia. In order to effectuate the transaction, IMPCO established a wholly owned subsidiary in Australia, IMPCO Technologies Pty. Limited (IMPCO Pty). The acquisition of Ateco has been accounted for under the purchase method of accounting and the acquired operations have been included in the consolidated financial statements since the date of acquisition. The assets acquired by IMPCO Pty. primarily consist of receivables, inventory, equipment, a note, business goodwill, distribution rights in Australia, and a 50% interest in Ateco's sub-distributor Gas Parts (NSW) Pty. The amount of the consideration was determined through negotiations between Ateco and IMPCO Pty. The purchase price was financed through approximately $4,000,000 of term loans provided by Bank of America NT&SA and its Sydney Australia Branch [See note 3(a)(iii) and note 3(b)]. The term loans are three-year loans with a five-year amortization schedule and interest at market rates. In addition, accounts receivables due to IMPCO by Ateco, totaling approximately $1,852,000, were offset against the purchase price. The balance of the purchase price was paid with proceeds from IMPCO's existing line of credit with Bank of America NT&SA. The Company recognized approximately $3,601,000 of intangible assets arising from acquisition which will be amortized over 20 years. The purchase price allocation is based on management's best estimates at the acquisition date. The tangible assets and liabilities have been recorded at their estimated fair values as of the date of acquisition as follows:
Value ----------- Accounts receivable $ 398,399 Inventory 2,265,589 Equipment 44,879 Notes Receivable 158,200 Other assets 49,930 ---------- 2,916,997 Accrued payroll and related expenses (17,959) ---------- Net tangible assets $2,899,038 ---------- ----------
On January 31, 1998, the Company's wholly-owned subsidiary IMPCO Technologies Pty. Limited acquired the remaining 50% ownership interest in Gas Parts (NSW) Pty. for A$225,000 (US$148,500) in cash. The acquisition was accounted for using the purchase method of accounting for step-acquisitions. Excess purchase price over fair market value of the underlying assets of A$141,000 (US$93,000) was allocated to goodwill. 43 (d) IMPCO TECHNOLOGIES B.V. On October 31, 1995, the Company, through its wholly owned subsidiary IMPCO, acquired 51 percent of the outstanding stock of Technisch Bureau Media B.V., a private company in the Netherlands, from Centradas B.V., a private company in the Netherlands, for cash in the amount of 3,187,500 Dutch Guilders (U.S. $2,023,000). Effective January 1, 1998, IMPCO Media Europe BV changed its name to IMPCO Technologies B.V. (IMPCO BV). IMPCO B.V. has distributed IMPCO's gaseous fuel carburetion systems and related devices for use in internal combustion engines since 1972. IMPCO BV services the European marketplace from its headquarters in the Netherlands and through its subsidiaries in Germany, France and the United Kingdom. The acquisition was financed through a term loan provided by Bank of America which will be repaid over a five-year period with interest at market rates [See Note 3(a)(ii)]. The acquisition of IMPCO BV has been accounted for under the purchase method of accounting and has been included in the consolidated financial statements since October 31, 1995, the date of acquisition. The Company recognized $2,100,000 of intangible assets arising from acquisition which will be amortized on the straight-line method over 20 years. The tangible assets and liabilities of IMPCO B.V. have been recorded at their estimated fair market values at the date of the acquisition as follows:
Value ------------ Cash $ 57,747 Accounts receivable 1,808,609 Inventory 3,062,545 Equipment 591,109 Other assets 171,691 ----------- 5,691,701 Accounts payable and accrued expenses (2,021,422) Term loan - DEPA Holding B.V. (2,693,283) Other liability - DEPA Holding B.V. (810,561) ----------- Net tangible assets $ 166,435 ----------- -----------
On May 1, 1998 the Company purchased the remaining 49% of IMPCO BV from Depa Holding BV for 1,400,000 Dutch Guilders (U.S. $693,000). As a condition precedent to purchase of the outstanding shares, IMPCO BV retired the debt outstanding to Depa Holding BV with the proceeds from the term loan granted by Bank of America NT&SA [See Note 3(a)(v)]. The acquisition was accounted for using the purchase method of accounting for step-acquisitions. The Company recognized approximately $238,000 of goodwill arising from the acquisition of the 49% interest which will be amortized on the straight-line method over 20 years. 3. DEBT PAYABLE (a) BANK OF AMERICA NT&SA On October 7, 1997 IMPCO amended its credit facility with Bank of America NT&SA by extending the term of the revolving line of credit for a twelve month period ending August 31, 1999. The amended credit facility also increased the revolving line of credit by $4,000,000 to $12,000,000, and added a $4,000,000 term loan facility for possible future acquisitions. On February 4, 1998 the Company amended the credit facility by extending the payment terms of the acquisition facility from three years to five years. The amended credit facility also includes, as part of the $12,000,000 revolving line of credit, a $1,000,000 revolving line of credit to the Company's Mexican subsidiary. 44 On March 18, 1998 the Company further amended the credit facility by lowering the interest rate on the revolving line of credit and the acquisition facility by one-quarter of one percentage point. On April 29, 1998 the Company amended the credit facility with the bank by adjusting the acquisition facility disbursement terms. The acquisition facility was adjusted to allow for a second disbursement of $692,520.78 for the purchase of the minority portion of IMPCO Technologies B.V. On April 27, 1998 IMPCO Technologies B.V. entered into a credit facility with Bank of America NT&SA through its Amsterdam branch for a term loan for $2,100,000 or an equivalent amount in freely convertible foreign currencies. On September 23, 1997, the Company expanded the capital lease facility from $3,525,000 to $5,525,000 and extended the expiration date to August 31, 2003. Including the revolving line of credit, the capital lease facility and the acquisition facilities, the total Bank of America credit facility was $22,378,000 at April 30, 1998. (i) REVOLVING LINE OF CREDIT The revolving line of credit bears interest, payable monthly, at a fluctuating per annum rate equal to the Bank of America reference rate minus one-quarter of one percentage point (which was 8.25% on April 30, 1998). The Company may elect to have all or portions of the line bear interest at an alternative interest rate agreed upon by the Bank for periods of not less than 30 days nor more than one year. At April 30, 1998, the total outstanding line of credit balance of $2,650,000 was subject to the reference rate. The credit facility provides a Mexican peso line of credit equivalent to $1,000,000 for Grupo I.M.P.C.O. Mexicano and is included as part of the existing $12,000,000 revolving line of credit between the Company and Bank of America NT&SA. For U.S. borrowings, the revolving line of credit carries interest, payable monthly, at a fluctuating per annum rate equal to the Bank of America reference rate or the London Interbank Offering Rate (LIBOR) plus 1.75% (7.41% at 4/30/98). For Mexican borrowings, the revolving line of credit carries interest, payable monthly, at a fluctuating per annum rate equal to the Bank of America Mexico (BAMSA) cost of funds plus 1.50% or the TIIE plus 1.50% (21.02% at 4/30/98). The TIIE is the Interbank Interest Equilibrium Rate calculated by the Bank of Mexico for the most recent period of twenty-eight (28) days prior to commencement of the interest period. The Company may prepay the facility, in full or in part, upon two-business days notice, subject to break funding costs, if any. The minimum prepayment is US$250,000. At April 30, 1998, the total outstanding line of credit balance of Ps. 3,375,775 (U.S. $397,805) was subject to the BAMSA cost of funds rate (22.8% at 4/30/98). It is management's intent to renew the amount of its present borrowings under the revolving line of credit for an uninterrupted period extending beyond one year from the balance sheet date. The line may be used for financing commercial letters of credit with a maximum maturity of 180 days and standby letters of credit with a maximum maturity of five years not to extend beyond April 30, 2002. The amount of letters of credit outstanding at any one time may not exceed $2,000,000 for commercial letters of credit and $750,000 for standby letters of credit. At April 30, 1998, a standby letter of credit totaling $375,000 was outstanding. 45 The maximum amount available at any one time on the revolving line of credit and the commercial letters of credit is $12,000,000. (ii) TERM LOAN FOR ACQUISITION OF IMPCO TECHNOLOGIES B.V. This term loan bears interest, payable monthly, at the Bank's reference rate. The Company may elect to have all or portions of the term loan bear interest at an alternative interest rate agreed upon by the Bank for periods of not less than 30 days nor more than one year. The alternative interest rate is based on the Offshore rate plus 1.50%. Each alternative rate portion must be for an amount not less than $500,000 and may not include any portion of principal that is scheduled to be repaid before the last day of the applicable interest period. On October 20, 1997, the Company entered into a 34 month interest rate swap agreement with Bank of America NT&SA ending August 31, 2000, that fixes the interest rate on the facility at 7.90%. At April 30, 1998, the total outstanding balance was $1,025,000. (iii) TERM LOAN FOR THE ACQUISITION FOR ATECO On October 31, 1997, the Company retired this facility early by making a balloon payment of $1,600,000. (iv) TERM LOAN FOR FUTURE ACQUISITION(S) This term loan bears interest, payable monthly, at the Bank's reference rate. The Company may elect to have all or portions of the term loan bear interest at an alternative interest rate agreed upon by the Bank for periods of not less than 30 days nor more than one year. The alternative interest rate is based on the Offshore rate plus 1.75%. Each alternative rate portion must be for an amount not less than $500,000 and may not include any portion of principal that is scheduled to be repaid before the last day of the applicable interest period. Principal is payable in 20 successive quarterly installments, starting on the last day of the third month after funding. The first 19 installments will be equal to 1/19 of the original principal amount with the last installment equal to the remaining balance. The term loan may be prepaid, with payments applied in inverse order of maturity, in whole or in part, at any time. On December 5, 1997, the Company utilized $3.3 million of the $4 million term loan for the acquisition of Algas (See Note 2). On February 3, 1998, the Company entered into a 58-month interest rate swap agreement with Bank of America ending December 5, 2002 that fixes the interest rate on the facility at 7.74%. At April 30, 1998, the total outstanding balance was $3,135,000. On April 30, 1998, the Company utilized $693,000 of the remaining term loan facility for the acquisition of the minority shares of IMPCO Technologies B.V. (See Note 2). The outstanding balance of $693,000 was subject to the offshore rate (7.46%). On May 29, 1998, the Company entered into a 59-month interest rate swap agreement with Bank of America ending April 15, 2003 that fixes the interest rate on the facility at 7.80%. (v) IMPCO TECHNOLOGIES B.V. TERM LOAN On May 1, 1998 IMPCO Technologies B.V. borrowed 4,200,000 Dutch Guilders (U.S. $2,098,000) to refinance the existing term loan with Depa Holdings as a condition precedent to the sale of the minority shares in IMPCO Technologies B.V. This term loan bears interest, payable monthly, at the 46 Amsterdam Interbank Offered Rate for the corresponding period of the advance, plus 1.50%. Principal is payable in 19 successive quarterly installments of 210,000 Dutch Guilders and the remaining balance is payable as the 20th installment. The term loan may be prepaid, with payments applied in inverse order of maturity, in whole or in part, at any time. At May 1, 1998, the outstanding balance of 4,200,000 Dutch guilders bore an interest rate of 4.94%. (vi) CAPITAL LEASE FACILITY The capital lease facility is available in incremental draws of $50,000 or more to finance acquisitions of equipment such as machinery, dies, molds, office furniture, and motor vehicles. At April 30, 1998, approximately $2,625,000 was outstanding and approximately $1,746,000 remained available. Each draw is to be repaid in twenty consecutive equal quarterly installments and bears interest at either a variable rate or fixed rate of interest. The fixed rate of interest is the U.S. Treasury note bond-equivalent yield per annum corresponding to the number of months remaining on the draw, plus 2.55 percentage points. The variable rate of interest is equal to Bank of America's London Branch 3-month LIBOR rate plus 2.15 percentage points. At April 30, 1998, all draws were subject to the variable rate of interest. The long-term and short-term portions of the capital lease facility are included in other long-term liabilities and other accrued expenses, respectively, on the Company's balance sheet. On May 29, 1998, the Company entered into a 59-month interest rate swap agreement with Bank of America ending April 15, 2003 that fixes the interest rate on $2,578,000 of the facility at 8.50% for fundings 1 through 18 and 8.20% for fundings 19 through 22. If the Company exercises an early termination option before the scheduled expiration date of a capital lease, a termination charge will be assessed. The termination charge is a sliding percentage (not to exceed 3%) of the balance on the lease at time of termination. (vii) LOAN COVENANTS AND COLLATERAL The Bank of America credit facility contains certain restrictions and financial covenants, including liquidity, tangible net worth and cash flow coverage thresholds, as well as limitations on other indebtedness, and is secured by substantially all of the Company's assets. At April 30, 1998, the Company was in compliance with all covenants. (b) TERM LOAN - BANK OF AMERICA, AUSTRALIA On January 31, 1998, the Company retired this facility by making a payment of A$1,000,000 (U.S. $650,000). (c) TERM LOAN - DEPA HOLDING B.V. As of April 30, 1998, the outstanding principal balance on the term loan was 4,200,000 Dutch Guilders (U.S. $2,100,000) and was subject to the annual interest rate of 4.11%. On May 1, 1998, as a condition precedent to the sale of the minority shares held by Depa Holding B.V., IMPCO Technologies B.V. retired this facility from the proceeds of the term loan facility granted by Bank of America NT&SA. (d) CREDIT FACILITY - MEES PIERSON In February of 1996, IMPCO Technologies B.V. secured a 3,000,000 Dutch Guilder (U.S. $1,500,000) revocable credit facility with Mees Pierson, a financial institution in the Netherlands. The interest rate is determined weekly based on a weighted average of several money market indices. IMPCO Technologies B.V.'s borrowings under this facility may not exceed the combined total of a specified amount of its accounts receivable (70% of book value) and inventory (50% of book value). At April 30, 1998, the interest rate was 5.125% and there was no outstanding balance on the credit facility. Annual maturities of long-term debt for the five years subsequent to May 1, 1998 (in millions) are as follows: 1999 - $1.4; 2000 - $1.5; 2001 - $1.3; 2002 - $1.1; 2003 - $1.0; and thereafter - $.7. 4. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest and foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. The Company is not a party to leveraged derivatives and does not hold or issue financial instruments for speculative purposes. (a) Foreign Currency Management The results and financial condition of the Company's international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. Dollar. The Company's exposure to fluctuations in currency exchange rates has increased as a result of the growth of its international subsidiaries. The functional currency for all of the Company's international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. dollar increases costs incurred by the subsidiaries because most of its international subsidiaries' inventory purchases are U.S. dollar denominated. The Company monitors this risk and attempts to minimize the exposure through forward currency forward contracts and the management of cash disbursements in local currencies. At April 30, 1998 the Company had currency forward contracts protecting U.S.$600,000 in inventory purchases. At April 30, 1998 the fair value of foreign currency forward contracts approximated contract values. On May 29, 1998 the Company entered into six currency forward contracts to protect an additional U.S.$1,200,000 in inventory purchases. The Company seeks to hedge its foreign currency economic risk by minimizing its U.S. dollar investment in foreign operations using foreign currency term-loans to finance the operations of its foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. dollars at period end exchange rates. (b) Interest Rate Management The Company uses interest rate swap agreements with Bank of America to manage its exposure to interest rate changes and stabilize the cost of borrowed funds. When an agreement is executed, the swap is linked to a specific debt instrument. At April 30, 1998, the Company had $4,160,000 secured under fixed interest rate agreements at a weighted average fixed interest rate of 7.78%. Absent these fixed rate agreements, the weighted average variable rate for this debt at April 30, 1998 would have been 7.38%. At April 30, 1998 the fair value of interest rate swap agreements approximated carrying value. On May 29, 1998 the Company secured an additional $3,271,000 under a fixed interest rate agreement. (c) Fair Value of Long-Term Debt The fair value of the Company's long-term debt is estimated using discounted cash flows based on the Company's incremental borrowing rates for similar types of borrowings. At April 30, 1998 the fair value of the Company's long-term debt approximated carrying value. 5. INCOME TAXES The provision (benefit) for income taxes consists of the following:
Fiscal years ended April 30, ---------------------------------------- Current: 1998 1997 1996 --------- ---------- ----------- Federal $ 90,759 $ 79,065 $ 32,352 State 36,314 23,828 (29,966) Foreign 208,556 432,422 348,998 -------- -------- -------- 335,629 535,315 351,384 --------- ---------- ---------- --------- ---------- ---------- Deferred: Federal 571,887 (272,856) (1,600,000) State - - (100,000) Foreign - - - --------- ---------- ---------- 571,887 (272,856) (1,700,000) --------- ---------- ---------- --------- ---------- ---------- Total provision (benefit) for income taxes: $ 907,516 $ 262,459 $(1,348,616) --------- ---------- ----------- --------- ---------- -----------
Income before income taxes and minority interest in income of consolidated subsidiaries and dividends for U.S. and foreign based operations is shown below:
Fiscal Years ended April 30, ---------------------------------------- 1998 1997 1996 ----------- ----------- ------------ U.S. $ 4,574,310 $ 2,737,074 $ 2,655,220 Foreign 1,608,825 1,012,343 972,607 ----------- ----------- ------------ 6,183,135 3,749,417 3,627,827 ----------- ----------- ------------ ----------- ----------- ------------
The current provision (benefit) for income taxes for fiscal years 1998, 1997 and 1996 has been reduced by the utilization of approximately $5,045,500, $3,953,000 and $1,650,000 of federal net operating loss carryforwards, respectively. During fiscal years 1998, 1997 and 1996, the current provision for state taxes was reduced by the utilization of approximately $375,000, $246,000 and 140,000, respectively, of investment and/or research tax credits. In addition, in fiscal year 1996 a state income tax refund of approximately $82,000 was applied to the 1996 provision. During the fourth quarter of fiscal year 1996, the Company reevaluated the valuation allowance for its deferred tax assets. Based on this reevaluation, which considered among other items projections as to future taxable income, the Company determined that the valuation allowance should be reduced by $1,700,000 principally due to the presumed future use of federal net operating loss carryforwards. This reduction in the valuation allowance is reflected in the deferred tax benefit for fiscal year 1996. During the fourth quarter of fiscal year 1997, the Company reevaluated the valuation allowance for its deferred tax assets. Based on this reevaluation, which considered among other items, projections as to future taxable income, the Company determined that the valuation allowance should be reduced by $1,559,000 principally due to the presumed future use of federal net operating loss carryforwards. This reduction in the valuation allowance is reflected in the deferred tax benefit for fiscal year 1997. During fiscal year 1998, the Company determined that there is no need to carry a valuation allowance and therefore reduced the valuation allowance by $510,000. This reevaluation was based on projections of future taxable income. A reconciliation of income taxes computed at the federal statutory income tax rate to income taxes reported in the consolidated statements of income is as follows:
Fiscal years ended April 30, -------------------------------- 1998 1997 1996 ----- ----- ----- Federal statutory income tax rate 34.0% 34.0% 34.0% Permanent differences 3.0% 4.0 3.0 Benefit of net operating loss carryforward (13.8) (38.0) (15.4) Federal alternative minimum tax - 2.1 .9 State tax, net .4 .6 (3.7) Foreign tax, net .1 4.3 .5 R and D Credit (9.0) - - Recognition of Deferred Tax Asset - - (56.5) ----- ----- ----- Effective tax rate 14.7% 7.0% (37.2)% ----- ----- ----- ----- ----- -----
The components of the Company's deferred tax liabilities and assets and the related valuation allowance is as follows:
Years ended April 30, -------------------------- 1998 1997 ----------- ------------ Deferred tax liabilities: Tax over book depreciation $ (955,000) $ (866,000) Other (81,000) (53,000) ----------- ---------- (1,036,000) (919,000) ----------- ---------- Deferred tax assets: Net operating loss carryforwards - 1,234,000 Tax credit carryforwards 2,024,000 1,564,000 Inventory reserves 173,000 224,000 Other provisions for estimated expenses 439,000 380,000 ----------- ---------- 2,636,000 3,402,000 ----------- ---------- Gross deferred tax asset 1,600,000 2,483,000 Valuation allowance - (510,000) ----------- ---------- Net deferred tax asset recognized $ 1,600,000 $ 1,973,000 ----------- ---------- ----------- ----------
The net deferred tax assets are included in other current assets and other assets in the accompanying balance sheets. At April 30, 1998, the Company had a general business tax credit carryforward available for federal income tax purposes of approximately $1,776,000 which, if not utilized, will expire by fiscal year 2012. Additionally, the Company had an alternative minimum tax credit carryforward available for federal income tax purposes of approximately $248,000 which does not expire for tax reporting purposes. 6. COMMITMENTS AND CONTINGENCIES (a) LEASES The Company has certain non-cancelable operating leases for facilities and equipment, and non-cancelable capital leases for machinery, equipment and motor vehicles. Future minimum lease commitments under non-cancelable leases are as follows:
Lease Obligations -------------------------------- Fiscal years ending April 30, Capital Operating ----------------------------- -------------- --------------- 1999 $ 1,022,641 $ 1,035,726 2000 897,219 650,908 2001 646,055 503,772 2002 407,970 489,543 2003 258,551 503,394 Later years - 650,217 ------------ ------------ Total minimum lease payments 3,232,436 $ 3,833,560 ------------ ------------ Less imputed interest 457,061 ------------ Present value of future minimum lease payments 2,775,375 Less current portion 741,685 ------------ Long-term capital lease obligation $ 2,033,690 ------------ ------------
Total rental expense under the operating leases for the fiscal years ended April 30, 1998, 1997 and 1996 was approximately $1,126,700, $903,000, and $632,000, respectively. The Company currently leases facilities in Cerritos, California; Irvine, California; Seattle, Washington; Rijswijk, Holland; Cheltenham, Australia; and De Mexico, Mexico. These leases are non-cancelable and certain leases have renewal options. During fiscal year 1998, IMPCO increased its $3,525,000 capital lease facility to $5,525,000 to finance acquisitions of equipment such as machinery, dies, molds and patterns, office furniture and fixtures and motor vehicles. At April 30, 1998 and 1997 respectively, approximately $2,625,000 and $1,819,000 was outstanding under the capital lease facility. At April 30, 1998 the gross and net assets acquired under the capital lease facility was approximately $3,854,000 and $2,131,000, respectively. At April 30, 1997 the gross and net assets acquired under the capital lease facility was approximately $2,482,000 and $1,056,000, respectively. 51 (b) CONTINGENCIES The Company is currently subject to certain legal proceedings and claims arising in the ordinary course of business. Based on discussions with legal counsel, management does not believe that the outcome of any of these matters will have a materially adverse effect on the Company's consolidated financial statements. INVESTMENT AND TAX SAVINGS PLAN The Company's Investment and Tax Savings Plan (the Plan) is a defined contribution plan which is qualified under Internal Revenue Service Code Section 401(k). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). All employees who are at least age twenty-one or older are eligible to participate in the Plan on the first day of any calendar month following one year of service with the Company. Employees of the Company who elect to participate in the Plan may contribute into the Plan not less than 1% nor more than 15% of compensation. The Company's matching contributions are discretionary and match elective salary deferrals up to 1.8% of compensation. Approximately 42% of eligible employees were enrolled in the 401(k) plan at April 30, 1998. Employer contributions totaled approximately $98,000, $95,000, and $85,000 for fiscal years ended 1998, 1997 and 1996. 7. STOCKHOLDERS' EQUITY (a) 1993 SERIES 1 PREFERRED STOCK The holders of the Company's' 1993 Series 1 Preferred Stock (1993 Preferred) are entitled to receive annual cumulative dividends of up to $105 per share and not less than $80 per share ($100 per share at April 30, 1998). The dividend rate, which is adjusted on the first day of each calendar quarter, is based on the Seafirst Bank prime rate of interest plus 1.5% (assuming a deemed principal value of $1,000 per share). Holders of 1993 Preferred are entitled to vote on all matters brought before the common stockholders and have the number of votes equal to the number of full shares of common stock into which the 1993 Preferred could then be converted. The 1993 Preferred is convertible into common stock at the option of the holders by dividing the then conversion price into its liquidation value of $1,000 for each share being converted. At April 30, 1998, the conversion price was $5.29 per share. The conversion price decreases if additional shares of common stock are issued for a consideration per share less than the then conversion price. Each share of 1993 Preferred automatically converts into shares of common stock upon the Company reporting audited consolidated net earnings of $5,000,000 for a fiscal year, or upon the closing of an underwritten public offering of the Company's common stock in which the Company realizes gross proceeds of $10,000,000 or more and the public offering price is at least $12.00 per share, provided that all dividends in arrears are paid and the obligation of the underwriters is that all offered shares must be purchased. Commencing March 31, 1999, the Company has the right to convert the 1993 Preferred to common stock if the average market price for the common stock for the immediately preceding 30 trading days equals or exceeds the conversion price then in effect and the Company pays all accrued dividends. 52 (b) WARRANTS TO PURCHASE COMMON STOCK In the fourth quarter of the current fiscal year, the Company issued a contingent warrant certificate that entitles a contractor to purchase 38,750 shares of Common Stock at a price of $12.00 per share. The warrant vests and becomes exercisable if the closing price equals or exceeds $14.40 per share occuring prior to April 9, 1999. In the first quarter of fiscal year 1999, this condition was met but pursuant to an additional requirement the warrants are not exercisable until April 9, 1999. The following table sets forth the expiration date, number of warrants and the respective exercise prices of these warrants.
EXPIRATION NUMBER DATE OF WARRANTS EXERCISE PRICE ----------------- ------------------- -------------------- April 9, 2001 38,750 $12.00
At date of grant, the fair value of the warrants was determined at $93,000 and is being amortized to expense over the service period. (c) STOCK OPTIONS The Company has five stock option plans which provide for the issuance of options to key employees and directors of the Company. As of April 30, 1998, 1997 and 1996, the Company had outstanding stock options of 1,308,086, 922,810, and 841,303, respectively, to purchase shares of common stock. The following table summarizes the transactions of the Company's stock option plans for the three year period ended April 30, 1998:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE _____________________________________________________________________ Unexercised options outstanding - April 30, 1995 798,335 $7.59 Options granted 95,000 $8.56 Options exercised (13,198) $6.58 Options forfeited (38,834) $10.28 _____________________________________________________________________ Unexercised options outstanding - April 30, 1996 841,303 $7.59 Options granted 238,118 $6.84 Options exercised (139,244) $3.16 Options forfeited (17,367) $8.60 _____________________________________________________________________ Unexercised options outstanding - April 30, 1997 922,810 $7.82 Options granted 475,556 $7.86 Options exercised (57,795) $3.36 Options forfeited (32,485) $6.80 _____________________________________________________________________ Unexercised options outstanding - April 30, 1998 1,308,086 $8.06 Price range $0.00 to $1.50 21,806 $.06 (weighted-average contractual life of 3.5 years) Price range $3.00 to $4.50 51,668 $3.89 (weighted-average contractual life of 3.5 years) Price range $4.50 to $6.00 80,832 $5.63 (weighted-average contractual life 53 of 3.5 years) Price range $6.00 to $7.50 193,876 $6.43 (weighted-average contractual life of 8.2 years) Price range $7.50 to $9.00 664,348 $7.92 (weighted-average contractual life of 8.7 years) Price range $9.00 to $10.50 12,000 $9.13 (weighted-average contractual life of 9.2 years) Price range $10.50 to $12.00 283,556 $11.53 (weighted-average contractual life of 6.0 years) _____________________________________________________________________ Exercisable options - April 30, 1996 576,889 $6.81 April 30, 1997 501,727 $8.00 April 30, 1998 544,232 $8.63 Price range $0.00 to $1.50 21,806 $.06 Price range $3.00 to $4.50 51,668 $3.89 Price range $4.50 to $6.00 80,832 $5.63 Price range $6.00 to $7.50 29,876 $7.04 Price range $7.50 to $9.00 117,550 $8.71 Price range $10.50 to $12.00 242,500 $11.57 _____________________________________________________________________
1997 INCENTIVE STOCK OPTION PLAN During fiscal year 1998, the Company adopted the 1997 Incentive Stock Option Plan. Options for up to 750,000 shares of common stock may be issued to eligible employees. Options vest at a rate of 40% after the first two years following the date of grant and 20% each year thereafter so that the employee is 100% vested in the option after 5 years. The Board of Directors may grant options which have different vesting and exercise provisions. Further information relating to this plan is as follows:
OPTION PRICE PER SHARE APRIL 30, 1998 --------------- ---------------- Granted and effective $7.63 to $11.63 427,000 Exercisable at April 30 - Shares available for future grant 3,000
In addition to the 427,000 options granted, 320,000 options have been issued with contingent vesting schedules. These 320,000 options shall vest pursuant to the plan's normal vesting schedule and be exercisable if the closing price of the Company's Common Stock equals or exceeds (i) $17.00 per share on or prior to April 30, 1999 or (ii) $15.30 per share on at least twenty of thirty consecutive trading days occurring on or before April 30, 1999. The contingency provision was satisfied on June 26, 1998. 1996 INCENTIVE STOCK OPTION PLAN During fiscal year 1997, the Company adopted the 1996 Incentive Stock Option Plan. Options for up to 250,000 shares of common stock may be issued to eligible employees. Options vest at a rate of 40% after the first two years following the date of grant and 20% each year thereafter so that the 54 employee is 100% vested in the option after 5 years. Further information relating to this plan is as follows: FISCAL YEAR ENDED APRIL 30, --------------------------- OPTION PRICE PER SHARE 1998 1997 --------------- ------- ------- Beginning balance $6.25 to $11.00 212,583 - Granted $6.25 to $11.00 38,556 218,118 Relinquished $6.25 to $8.75 (11,735) (5,535) Exercised $8.38 (2,000) - Ending balance $6.25 to $11.00 237,404 212,583 Exercisable at April 30 2,800 - ------- ------- ------- ------- Shares available for future grant 10,596 37,417 ------- ------- 55 1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS During fiscal year 1994, the Company adopted the 1993 Stock Option Plan for Nonemployee Directors. Options for up to 350,000 shares of the Company's common stock may be issued to members of the Company's Board of Directors who are not and have not been employees of the Company within three years prior to the date of the grant of an option. Options are not assignable and generally vest cumulatively at the rate of 25% per year, commencing twelve months following the date of grant. The option exercise price per share is the higher of (i) the average of the fair market values for the fifteen trading days immediately following the date of grant or (ii) the market value on the fifteenth trading day immediately following the date of grant. Further information relating to this plan is as follows:
FISCAL YEAR ENDED APRIL 30, ------------------------------------ OPTION PRICE PER SHARE 1998 1997 1996 --------------- ------- ------- ------- Beginning balance $8.64 to $11.78 290,000 270,000 220,000 Granted $8.64 to $11.78 - 20,000 70,000 Relinquished 11.78 - - (20,000) ------- ------- ------- Ending balance $8.64 to $11.78 290,000 290,000 270,000 ------- ------- ------- ------- ------- ------- Exercisable at April 30 255,000 222,500 200,000 ------- ------- ------- ------- ------- ------- Shares available for future grant 60,000 60,000 80,000 ------- ------- ------- ------- ------- -------
1991 EXECUTIVE STOCK OPTION PLAN During fiscal year 1992, the Company adopted the 1991 Executive Stock Option Plan, under which three executive officers were granted Series A and Series B options. These options may be exercised at any time through November 6, 2001, are not assignable, and may be exercised whether or not the optionee is an employee at the time of exercise. The Series B options were granted in exchange for the termination of certain executive officers rights in the 1989 phantom stock pool. Further information relating to this Plan is as follows:
FISCAL YEAR ENDED APRIL 30, SERIES A OPTIONS OPTION PRICE ------------------------------------- ---------------- PER SHARE 1998 1997 1996 ---------------- ---------- ----------- ----------- Beginning balance $3.89 51,668 126,668 126,668 Exercised $3.89 - (75,000) - ------- -------- -------- Ending balance $3.89 51,668 51,668 126,668 ------- -------- -------- ------- -------- -------- Exercisable at April 30 51,668 51,668 126,668 ------- -------- -------- ------- -------- -------- SERIES B OPTIONS Beginning balance $0.06 53,520 96,900 96,900 Exercised $0.06 31,714 43,380 - ------- -------- -------- Ending balance $0.06 21,806 53,520 96,900 ------- -------- -------- ------- -------- -------- Exercisable at April 30 21,806 53,520 96,900 ------- -------- -------- ------- -------- --------
56 1989 INCENTIVE STOCK OPTION PLAN Under the Company's 1989 Incentive Stock Option Plan, up to 500,000 options may be issued. Options generally vest at the rate of 25% per year, cumulatively, beginning on the first anniversary of the date of grant. Further information relating to the 1989 Incentive Stock Option Plan is as follows:
FISCAL YEAR ENDED APRIL 30, ------------------------------------- OPTION PRICE PER SHARE 1998 1997 1996 --------------- ------- ------- ------- Beginning balance $5.25 to $15.00 315,039 347,735 354,767 Granted $8.00 10,000 - 25,000 Exercised $6.00 to $ 9.00 (24,081) (20,864) (13,198) Relinquished $6.00 to $10.38 (20,750) (11,832) (18,834) ------- ------- ------- Ending balance $5.25 to $15.00 280,208 315,039 347,735 ------- ------- ------- Exerciseable at April 30 212,958 174,039 153,321 ------- ------- ------- ------- ------- ------- Shares available for future grant 23,586 12,836 1,004 ------- ------- ------- ------- ------- -------
57 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Numerator: Net income $5,275,619 $3,486,958 $4,976,443 Preferred stock dividends (594,997) (581,365) (609,875) Minority interest (410,554) (261,667) (305,568) ----------- ----------- ----------- Numerator for basic earnings per share - income available to common stockholders to common stock 4,270,068 2,643,926 4,061,000 Effect of dilutive securities: Preferred stock dividends 594,997 - 609,875 ----------- ----------- ----------- ----------- ----------- ----------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $4,865,065 $2,643,926 $4,670,875 Denominator: Denominator for basic earnings per Share -- weighted-average shares 6,333,769 5,722,382 5,648,290 Effect of dilutive securities: Employee stock options 450,315 117,738 166,503 Warrants 246,628 290,422 361,917 Convertible preferred stock 1,124,764 - 1,123,489 ----------- ----------- ----------- Dilutive potential common shares 1,821,707 408,160 1,651,909 Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 8,155,476 6,130,542 7,300,199 ----------- ----------- ----------- Basic earnings per share $0.67 $0.46 $0.72 ----------- ----------- ----------- ----------- ----------- ----------- Diluted earnings per share $0.60 $0.43 $0.64 ----------- ----------- -----------
For additional disclosures regarding the outstanding preferred stock, the employee stock options, and the warrants, see Note 7. Options to purchase 260,000 shares of common stock at prices ranging from $10.88 to $11.78 were outstanding during fiscal year 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. 9. FASB 123: COMPENSATORY STOCK OPTION PLAN The Company has elected to account for its employee stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. No compensation expense is recorded under APB 25 because the exercise price of the Company's employee common stock options equals the market price of the underlying common stock on the grant date. 58 Statement 123 requires "as adjusted" information regarding net income and net income per share to be disclosed for new options granted after fiscal year 1996. The Company determined this information using the fair value method of that Statement. The fair value of these options was determined at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED APRIL 30, 1998 1997 1996 ------- --------- --------- Expected dividend yield 0% 0% 0% Calculated volatility .534 .486 .497 Risk-free interest rate 3% 3% 3% Expected Life of the option in years 9.09 8.70 8.35
The estimated fair value of the options is amortized to expense over the options' vesting period for "as adjusted" disclosures. The net income per share "as adjusted" for the effects of statement No. 123 is not indicative of the effects on reported net income/loss for future years. The Company's reported "as adjusted" information at April 30 is as follows: (in thousands, except per share amounts): 59
YEAR ENDED APRIL 30, 1998 1997 1996 ---- ---- ---- Net Income $4,270 $2,654 $4,061 As Adjusted $3,628 $2,467 $3,756 Net Income Per Share As Reported - Basic $.67 $.46 $.72 Net Income Per Share "As Adjusted" - Basic $.57 $.43 $.66 Net Income Per Share As Reported - Dilutive $.60 $.43 $.64 Net Income Per Share "As Adjusted" - Dilutive $.52 $.40 $.60
In management's opinion existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. For fiscal years 1997 and 1996, the "As Adjusted" net income per share has been restated based on refined estimates and assumptions. 10. REVENUES During fiscal year 1998, the IMPCO, BV, IMPCO Pty and I.M.P.C.O. Mexicano subsidiaries accounted for approximately sixteen percent, ten percent and one percent of total consolidated revenues, respectively, and contract revenue accounted for approximately twelve percent of consolidated revenues. During fiscal year 1998, General Motors Corporation accounted for approximately FIFTEEN percent of consolidated revenues. During fiscal years 1997 and 1996, no single unaffiliated customer exceeded ten percent of consolidated revenues. The Company routinely sells products to a broad base of customers, which includes distributors and original equipment manufacturers. Based on the nature of these customers, credit is generally granted without collateral being required. Management does not anticipate that a significant credit risk exists as a result of these customer relationships. 11. SEGMENT DATA The Company has U.S. based operating facilities and three foreign based operating subsidiaries in Holland (IMPCO BV), Australia (IMPCO Pty) and Mexico (I.M.P.C.O. Mexicano). Transfers between geographic areas include inter-company sales, which are eliminated in consolidation. Operating income is total revenue less operating expenses, excluding finance charges and taxes. Information concerning the Company's geographic areas of operation in fiscal year 1998 is as follows (dollars in thousands):
Fiscal year ended April 30, 1998 --------------------------------------------------- United States Europe Australia Mexico Elims Consolidated ------------- ------ --------- ------ ----- ------------ Sales to unaffiliated Customers $51,780 $ 11,588 $ 6,893 $ 822 $ - $ 71,083 Transfers between geographic areas 8,826 - - - (8,826) - ------- -------- ------- ------ ------- --------- Total revenue 60,606 11,588 6,893 822 (8,826) 71,083 ------- -------- ------- ------ ------- --------- ------- -------- ------- ------ ------- --------- Operating income 5,778 1,364 455 (47) (432) 7,118 ------- -------- ------- ------ ------- --------- ------- -------- ------- ------ ------- --------- Total assets, at April 30, 1998 51,375 7,399 7,169 1,647 (10,298) 57,292 ------- -------- ------- ------ ------- --------- ------- -------- ------- ------ ------- ---------
60 Export sales from the corporation's United States operations to unaffiliated customers were as follows (dollars in thousands):
1998 1997 1996 ------- ------ -------- Canada $ 1,214 $1,499 $ 1,659 Pacific Rim 8,146 4,139 4,966 Europe 11,588 5,500 2,529 Latin America 6,719 6,537 3,779
12. CONTRACT REVENUE In August 1995, the Company extended its original 1993 two year fixed-price contract with General Motors Corporation (GM) to develop, manufacture and install compressed natural gas engine management systems (CNG systems). Under the terms of the contract, the Company is engineering, testing and validating CNG systems for certain 1997, 1998, and 1999 model year car and truck platforms in compliance with GM's specifications. Revenues for development efforts are principally recognized by the percentage of completion method and principally related to contracts with GM. During fiscal year 1998, 1997, and 1996 GM and other contract revenues comprised 12%, 5%, and 6% of the Company's total revenues, respectively. Operating income earned on the GM and other development contracts during fiscal year 1998, 1997 and 1996 was approximately $1,511,000, $400,000 and $155,000 after deducting an allocation for selling, general and administrative costs. 13. PURCHASES During fiscal years 1998, 1997 and 1996, purchases from one vendor constituted approximately 18%, 17% and 20% of consolidated net inventory purchases, respectively. In fiscal year 1998, 10 suppliers accounted for approximately 55% of consolidated net inventory purchases. 14. SUPPLEMENTARY CASH FLOW INFORMATION During fiscal years 1998, 1997 and 1996 the following non-cash transactions were effected and are not reflected in the Consolidated Statements of Cash Flows: a) The Company incurred capital lease obligations of approximately $1,296,000, $835,000 and $700,000, respectively. b) Pursuant to the IMPCO BV acquisition an outstanding debt obligation of 1,279,000 Dutch Guilders (US $766,000), was converted into a term loan during fiscal year 1996. c) Interest and taxes paid during fiscal year 1998, 1997, and 1996 are as follows:
Fiscal year ended April 30 -------------------------------------- 1998 1997 1996 -------- ---------- -------- Interest paid $940,000 $1,062,000 $436,000 Taxes paid 191,000 755,000 110,000
61 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the unaudited quarterly results of operations follows (in thousands, except per share amounts):
Fiscal year 1998 July 31 Oct. 31 Jan. 31 Apr. 30 -------- -------- -------- -------- Product sales $ 14,151 $ 15,730 $ 14,835 $ 17,493 Contract revenue 2,138 2,432 2,158 2,146 Total revenue 16,289 18,162 16,993 19,639 Cost of sales 8,819 9,756 8,657 10,942 Gross Profit 7,470 8,406 8,336 8,697 Research and development expense 3,066 3,278 3,628 3,365 Net income 692 991 1,197 1,391 Net income per share: Basic .12 .17 .18 .20 Diluted .11 .15 .16 .18 Fiscal year 1997 July 31 Oct. 31 Jan. 31 Apr. 30 -------- -------- -------- -------- Product sales $ 14,179 $ 14,014 $ 14,765 $ 15,479 Contract revenue 970 633 294 1,495 Total revenue 15,149 14,647 15,059 16,974 Cost of sales 9,109 8,636 9,183 10,414 Gross Profit 6,040 6,011 5,876 6,560 Research and development expense 2,284 2,087 1,784 2,325 Net income 567 495 623 959 Net income per share: Basic .10 .09 .11 .17 Diluted .09 .08 .10 .15
16. OTHER MATTERS In July 1998, the Company became aware of a fourth quarter 1997 transaction that could be in violation of certain U.S. Government export regulations. In July 1997, the Company became aware of a similar transaction which also occurred in the fourth quarter of 1997. In both cases, the Company immediately engaged legal counsel to investigate the occurrences, assess whether a violation occurred and advise whether disclosure should be made to the appropriate governmental authorities. Following discovery of the first fourth quarter 1997 transaction, the Company adopted a compliance policy which includes compliance with export licensing and trade sanctions, and has taken steps to make employees aware of export regulations. Also, the first transaction was disclosed to the appropriate governmental authorities in August of 1997. Currently, there are no charges of wrong doing, any pending government investigation of the Company's export activities or any other response from the governmental authorities to the Company's prior disclosure. It is the opinion of the Company that as a result of its disclosure of the facts to the appropriate authorities in both cases, and in light of the facts that the products sold were non-sensitive in nature and that the Company has installed policies and procedures to prevent future violations of export regulations, an ultimate settlement with the government should not have a material adverse effect on the Company's financial position, results of operations, or cash flows. However, until the matter is settled with the government, the amount of fines, if any, or other sanctions that may be imposed cannot be reasonably estimated. 62 IMPCO TECHNOLOGIES, INC. SCHEDULE II - VALUATION ACCOUNTS
Additions charged Balance at (credited) Write-offs Balance beginning to costs and and other at end of of period expenses adjustments period --------- ------------ ----------- --------- Allowance for doubtful accounts for the years ended: April 30, 1998 $288,111 $119,390 ($92,707) $314,794 April 30, 1997 165,322 157,288 (34,499) 288,111 April 30, 1996 153,802 13,000 (1,480) 165,322 Inventory valuation reserve for the years ended: April 30, 1998 837,718 235,865 (298,851) 774,732 April 30, 1997 610,515 384,829 (157,626) 837,718 April 30, 1996 1,280,000 237,151 (906,636) 610,515 Warranty reserve for the years ended: April 30, 1998 275,761 219,812 (194,383) 301,190 April 30, 1997 469,639 222,121 (416,000) 275,760 April 30, 1996 217,123 627,978 (375,462) 469,639 Product liability reserve for the years ended: April 30, 1998 91,935 - (42,944) 48,991 April 30, 1997 156,848 10,793 (75,705) 91,935 April 30, 1996 234,489 - (77,641) 156,848
EX-10.12 2 EXHIBIT 10-12 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (DO NOT USE THIS FORM FOR MULLET-TENANT BUILDINGS) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only August 18, 1997, is made by and between KLIEG INVESTMENTS, FAMILY LIMITED PARTNERSHIP ("Lessor") and IMPCO TECHNOLOGIES, INC., A DELAWARE CORPORATION ("Lessee"). (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 17872 CARTWRIGHT ROAD, IRVINE, located in the County of ORANGE, State of CALIFORNIA, and generally described as (describe briefly the nature of the property, and, if applicable, the "Project", if the property is located within a project) AN APPROXIMATE 79,150 SQUARE FOOT INDUSTRIAL BUILDING AND THE LEGAL PARCEL OF LAND ON WHICH IT IS SITUATED. ("Premises"). (See also Paragraph 2) 1.3 Term: SEVEN (7) years and 0 months ("Original Term") commencing August 18, 1997 ("Commitment Date") and ending August 17, 2004 ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: N/A ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $34,826.00 per month ("Base Rent"), payable on the FIRST (1st) day of each month commencing UPON LEASE EXECUTION SEE ADDENDUM (See also Paragraph 4) _ if this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $15,727.87 a Base Rent for the period August 15, 1997 THROUGH AUGUST 31, 1997. 1.7 Security Deposit: $34,826.00 ("Security Deposit"). (See also Paragraph 5) 1.8 Agreed Use: MANUFACTURING, DISTRIBUTION, AND OFFICE ADMINISTRATION Lessor. (See also Paragraph 6) 1.9 Insuring Party. Is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8) 1.10 Real Estate Brokers: (See also Paragraph 15) SEE ADDENDUM (a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): THE SEELEY COMPANY - MICHAEL HARTEL represents Lessor exclusively ("Lessor's Broker"); CB COMMERCIAL - BRENT CARROLL represents Lessee exclusively ("Lessee's Broker"); or N/A represents both Lessor and Lessee ("Dual Agency"). 1 "VOIDED PARAGRAPH" 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See also Paragraph 37) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of paragraphs 51 through 68 and Exhibits A and B, all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. "VOIDED PARAGRAPH" 2.2 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. Note: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with Specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the redemption of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.2(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months Base Rent. If 2 Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease and provided that such Capital Expenditure does not exceed the amount of three (3) months Base Rent then payable, or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the opinion to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. SEE ADDENDUM (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed changed in use, changed in intensity of use, or modification to the Premises made by Lessee then, and in the event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate the Lease. 2.4 Acknowledgments. Lease acknowledgments that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 3 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is no delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations thereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1 Rent Defined. All monitory obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be ("Rent"). 4 4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver or Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amend to accommodate a material change in the business of Lessee or to accommodate a sublease or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's Reasonable judgment, significantly reduced, Lessee shall deposit such additional moneys with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any moneys to be paid under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same 5 will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include as explanation of Lessor's objections to the change in use. 6.2 Hazardous Substances. SEE ADDENDUM (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a bases for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises of neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurance as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Redemption. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the premises (including through 6 the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigator and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys and consultants fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, redemption and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including cost of redemption, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, redemption, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or redemption measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such redemption measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and redemption thereof required by the Applicable 7 Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $10,000, whichever is greater, given written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the redemption of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $10,000, whichever is greater. Lessee shall provide Lessor with said funds of satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall precede to make such redemption as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in the this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the reasonable requirements of any applicable fire insurance underwriter or rating bureau, and the reasonable commendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. Maintenance; Repairs, Utilities Installations; Trade Fixtures and Alterations. 8 7.1 Lessee's Obligations. (a) In General. Subject to the provisions of Paragraph 2.2 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Distraction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, of the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, presser vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good odor, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the building. (b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced the maintenance of the following equipment and improvements. If any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing system, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, and (v) roof covering and drains. (c) Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date of which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to federal income tax regulations or guidelines for depreciation thereof (including interest on the unamorized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 9 7.2 Lessor's Obligations. Subject to the previous of Paragraph 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Distraction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term: "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Alterations and Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which cost an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alterations or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notice of non-responsibility. If Lessee shall contest the 10 validity of any such lien, claim, or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys fees and cost. 7.4 Ownership; Removal; Surrender; and Restoration. See Addendum (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Prior to the installation of same, Lessee may inquire of Lessor whether Lessor will require removal of such items by Lessee by the expiration or termination of this Lease, and Lessor shall notify Lessee within five (5) business days of Lessee's inquiry. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted, "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishing, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or redemption of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2 (b) in excess of $2,000.00 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lessee term shall be prorated to correspond to the Lease term. 8.2 Liability insurance. 11 (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant therein. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any inter-insured exclusions as between insured parsons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor, Lessor shall maintain liability insurance as described in Paragraph 8.2(a) in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be names as an additional insured therein. 8.3 Property insurance - Building improvements and Rental Value. (a) Building and improvements. The insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundless, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the insuring Party, however, Lessee Owned Alterations and Utility and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or Policies shall insure against all risks of direct physical loss of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any position of the Premises as the result and inflation guard protection casing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted US Department of Labor Consumer Price index for all Urban Consumers Price Index for all Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible classes, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an insured loss. (b) Rental Value. The Insuring Lessor shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the even the Lease is terminated by reason of an insured loss, the period of indemnity of such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Tent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee's acts, omissions use or occupancy of the Premises. 12 (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of a group buildings owned by Lessor, which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 Lessee's Property/Business interruption insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures, Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omission, use or occupancy of the Premises. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in most current issue of "Best's Insurance guide".or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidated the required insurance polices. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies o such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such change the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of the Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it. the other Party may, but shall not be required to procure and maintain the same. 8.6 Waiver of Subrogation.. With out affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damage against the other, for loss of or damage to its property arising out of a incident to the parts required to be insured against herein. The effect of such releases and waivers is not limited by amount of insurance carried or required, or by any deductibles applicable herein. The Parties agree to have their respective property damage 13 insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except to Lessor's negligence or willful misconduct, Lessee shall indemnity, protect, defend and hold harmless the Premises, Lessor, and its agents. Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or occupancy of the Premises by Lessee. If any action of proceeding is brought against Lessor by reason of any of the foregoing maters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to defended or indemnified. 8.8 Exemption of Lessor from Liability, Except for Lessor's negligence or willful misconduct, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessor's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wire, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of Building of which the Premises are a part, or from other sources of places. Lessor shall not be liable for any damages arising from any neglect of any other tenant of Lessor. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of he damage or destruction, Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage of destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage in Partial or Total. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demotion, debris, removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall at Lessor's expense, repair such damage (but no Lessee's 14 Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this lease shall continue in full force and effect; provided, however, that Lessee shall at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for the purpose. Notwithstanding the foregoing the foregoing, if the required insurance was not in force as to the fact that, by reason of the unique nature of improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds to fully restore the unique aspect of the Premises unless Lessee provides Lessor with funds to cover same, or adequate assurance thereof within said ten (10) days period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by/written notice to Lessee within ten (10) days thereafter to: (I) make such restoration and repair as it commercially reasonable with Lessor paying shortage in proceeds, in which case this Lease any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject in Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be make available for repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expensive, in which event this Lease shall continue in full force and effect, or (1)repair such damage as soon as reasonably possible at Lessor's within thirty (30) days, after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective ten (10) days after receipt of the termination notice to give written notice to lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days, after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction.. If the damage or destruction was caused by the gross negligence or will full misconduct or Lessee, Lessor shall have the right to recover Lessor's damages from Lessee's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month Base Rent, whether or not an insured loss either party may terminate this lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to the other within thirty (30 days after the date of occurrence of such damage. 15 Notwithstanding the foregoing, If Lessee at that time has an execrable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate notice purporting to terminate the Lessee, or (I) the day prior to the date which is ten days after Lessee's receipt of Lessor's written at Lessor's commercially reasonable expense, repair such damage as seasonably possible and this lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent: Lessee's; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, redemption or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but, not to exceed the proceeds liability for any such damage, destruction, redemption, repair of restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within forty-five (45) days after such obligation shall come ]accrued, Lessee may, at any time prior to the commencement of such repair of restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and repair or restoration is not commenced with thirty (30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced with in said thirty (30 days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination-Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2 (g) Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee by Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been or is not then required to be used by Lessor. 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination 16 of his Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10 Real Property Texas. 10.1 Definition of "Real Property Texas"(SEE ADDENDUM) as used herein, "Real Property Taxes" shall include any form of assessment; improvement estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes) ; improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by authority having the direct or indirect poser to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or change, or any increase therein, imposed by reason of events occurring during the term of the Lease including but not limited to, a change in the ownership of the Premise. 10.2 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of the Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of the time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is infect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In the event Lessee incurs a late change on the third missed Rent payment and all missed Rent thereafter, Lessor may at Lessor's option, estimate the current Real Property Taxes, and require that such taxes to paid in advance to Lessor by Lessee, with: (i)in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii)monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxed when due. Lessee may be intermingled with other moneys of Lessor and shall not bear interest. If the event of Breach by Lessor, be treated as an additional Security Deposit. 10.3 Joint Assessment. If the Premises are not separately assesses, Lessee's liability shall be an equitable proportion of the Teal Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively 17 determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all Taxes assessed against and levied upon Lessee Owned Alteration, Utility installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of written statement. 11. furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of written statement. 11. Utilities. Lessee shall pay for all water, gas, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all changes jointly metered. 12. Assignment and Subletting. 12.1 Lessor's consent Required (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's Interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of fifty percent (50%) or more of the voting control of Lessee shall constitute a change in control for this purposes. (c) The involvement of Lessee of its assets in any transaction, or series of transactions (by way of merger, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net worth of Lessee by an amount greater than fifty percent(50%) of such New Worth as it was represented at the time of execution of this Lease or at the time of the most recent assignment to which Lessor has connected, or as it exists immediately prior to aid transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of the Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment of subletting without consent shall, at Lessor option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If lessor elects to treat such unproved assignment of subletting of noncurable Breach, Lessor may either:(i) terminate this Lease or (ii) upon thirty (30)days written notice. Increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such 18 Breach and rental adjustment, (i) the purchase price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the reminder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment of subletting, shall not: (i) be effective without the express written assumption by such assignment or subleases of the obligations of Lessee under the lease (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligation from any persons other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise in remedies for Lessee's Default or Branch (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or subleases, including but not limited to the intended use and/or required modification of the Premises. If any Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or subleases under, this Lease shall by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provision of an assignment or sublease to which Lessor has specially consented to in writing. 19 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all of any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing and comply with any of Lessee's obligations of such sublease. Lessee hereby irrevocably authorizes and directs any such subleases, upon receipt of a written notice from Lessor starting that a Branch exists in the performance of Lessee's obligations under the Lease, to pay to Lessor all Rent due and to become due under the Sublease. Sublease shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Branch exists, notwithstanding any claim form Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublease to attorney to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of exercise of said option to the expiration of such sublease provided, however, Lessor shall not liable for any prepaid rents or security deposit paid by such sublessor or any prior Defaults or Breaches or such sub lessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No Sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the Sublessee, who shall have the right to cure the Default of Lessee, within the grace period, if any, specified in such notice. The Sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default: Breach: Remedies. 13.1 Default Breach. a "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under the Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default with any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) business days following written notice to Lessee. (c) The failure by Lessee to provide (J) reasonable written evidence of compliance with Applicable Require (ii) the service contracts, (iii) the recession, of an unauthorized assignment or subletting, (iv)a Tenancy Statement, (v) a requested subordination, 20 (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42(easements), or (viii) any other documentation or information which Lessor may reasonable require of Lessee under the terms of this Lease, where any such failure continues for a period of twenty (20) days following notice to Lessee. (d) A Default by Lessee as to terms, convent, conditions or provisions of the this lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraph 13.1 (a), (b), or (c), above, where such Default continues for a period of thirty (30)days after written notice; however, that if the nature of Lessee's Default is such that more than thirty (30)days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commerce such cure within thirty (30)day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (1) the making of any general arrangement or assignment for the benefit of creditors:(ii) becoming a "debtor" as defined in 11 U.S..C.~101 or any successor statute thereto (unless, in the case of a petition filled against Lessee, the same in dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharge within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (1)the death of a Guarantor. (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) guarantor's becoming insolvent or the subject of a bankruptcy filling, (iv) a Guarantor's refusal to honor the guaranty or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice). Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental license, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor at its option may require all future payments to made by Lessee to be by cashier's check. In the event of a Broach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which, case this Lessee shall terminate and Lessee's shall immediately surrender 21 possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (I) the unpaid Rent which had been earned at the time of termination; (i) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of resetting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexplored term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages causes by Lessee's Branch of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detained, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve may reserve the right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease to remedies provided for in this Lease and/or said statute. (b) Continue the Lease and Lessee's right to possession and recover in Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relate, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws of judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture. Any agreement for free or abated rent or other changes, or for the giving or paying by Lessor to or for Lessee o any cash or other bonus, inducement or consideration for Lessee's entering into this Lease all of which concessions are hereinafter referred to as "inducement Provisions", shall be deemed 22 conditioned upon Lessee's full and faithful performance of all the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any rent, other change, bonus, inducement, or consideration therefore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessor, notwithstanding any subsequent cure of said Breach by Lessees. The acceptance by Lessor of rent or cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor on a pro-rate basis based upon the ratio of the time remaining in the initial term of the Lease to the then expired portion of the Lease. (of the provision of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor in incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a fair and reasonable estimate of the cots Lessor will occur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount nor prevent the exercise of the other rights and remedies granted hereunder. In the event that a late charge a payable hereunder, whether or not collect, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment shall bear interest for the date when due, as to scheduled payments, or the thirty-first (31) day after it was due as to non-scheduled payment. The interest ("interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate more than once in any twelve (12) month period, or twice of the entire Term of the Lease, (including any extensions) allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For Purpose of this Paragraph, a reasonable time shall in no event less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall 23 have been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonable required for its performance, then Lessor shall not be in breach if performance is commenced with such thirty (30) day period and thereafter diligently pursued to completion. (b) Performance by Lessor shall not be deemed in breach of this Lease nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and off set from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay a excess such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation. If the Premises or any portion thereof under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Combination, Lessee may, at Lessee authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease, shall remain in full force and effect as to the portion of the Premises remain, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the leasehold, the value of the part taken, or for severance damages; provided however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 16. Estoppel Certificates, (a) Each Party (as "Responding Party"-See Addendum) shall within five (5) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 24 (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate stating that (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party. (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any thereof, Lessee and all Guarantors shall deliver to any Potential lender or purchaser designated by Lessor such current financial statements as may be reasonable required by such lender of purchaser, including but not limited to Lessee's financial statements for past three (3) years. Which statements shall be audited if it is Lessee's custom to do so, or otherwise, such financial statements shall be certified as accurate by Tenant's President or CFO. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for purpose herein set forth. 17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or if this a sublease, of the Lessee's interest in the prior lease. In the event of transfer of Lessor's title or interest in the Premises of the Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be Performed by Lessor. Subject to the foregoing the obligations and/or covenants in this Lease to be performed by Lessor shall be binding only upon the Lessor or herin active defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days Unless otherwise specially indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or is its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lessee, and shall not seek 25 recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholder, or any of their personal assets for such satisfaction. 21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or Other Agreement Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior to contemporaneous agreement or understanding shall be effective Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality character and financial responsibility of the other Party to this Lease and as to the nature, quality, and character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The Liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) be sent by certified or registered mail or US Postal Service Express Main, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice on the business day. A copy of notices of Lessor shall be concurrently transmitted to such party of parties of such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered of certified main receipt requested shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown on the postmark thereon. Express mail or overnight courier that guarantee next delivery shall be deemed after delivery of the same to the Postal Service or courier. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of Default or Breach of any term, convenient or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, 26 any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable therein. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any thereof beyond the expiration of termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increase to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election herunder shall be, wherever possible, be cumulative with all other remedies at law or in equity 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of he State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any option granted hereby shall be subject and a subordinate to any ground lease, mortgage, deed of trust or other hypothecation or security device (Collectively, "Security Device"), now or hereafter place upon the Premises, to any and all advance made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Lessor under this Lease accruing prior to taking title to the Premises. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security 27 Device by give written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to althorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security, and that in the event of such foreclosure, such new owner shall not; (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets of defenses which Lessee might have against any prior Lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance, With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement ") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attires to the record owner of the Premises. Further, with sixty (60) days after the executive of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provided the Non-Disturbance Agreement within said sixty (60) days, Lessee may, at Lessee's option, directly contract Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the executive of any further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. Attorney's Fees. If any Party brings an action of proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall included, without imitation, a Party who substantially obtains or defeats to decision or judgment. The term, "Prevailing Party" shall include, without imitation, a Party who substantially obtains or defeats the relied sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim of defense. The attorney's' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fee reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 28 32. Lessor's Access; Showing Premises; Repairs. After reasonable prior notice, Lessor's agents shall have the right to enter the Premises an any time, the case of an emergency, and otherwise all reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees during the last six (6) months of the Term, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the premises any ordinary "For Sale" signs provided it is clear that only the Premises, is for sale and not Lessee's business, Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place or about the Premises any ordinary "For Sublease" sign. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's Prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however that Lessor may elect to continue any one or all existing subtenants. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such interest. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architect's, attorney's and other consultants' fees) incurred in the consideration of or response to, a request by Lessee for any Lessor consent, including but not limited to consents to as assignment, a subletting or presence of use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to a any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may otherwise specifically state in writing by Lessor at the time of such consent. The failure to specify herein and particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such future or other conditions as are then reasonable with reference to the particular matter for which consent is being give. In the event that either Party disagrees with any determination made by other hereunder and reasonably requests the reasons or such determination, the determining party shall furnish 29 its reasons in writing and in reasonable detain within ten (10) days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industry Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 Default. It shall constitute a Default of the Lessee if any, Guaranty fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the convenants, conditions and provision on Lessee's part to observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during he term hereof. 39. Options SEE ADDENDUM 39.1 Definition. ":Option" shall mean: (a) the right to extend the term of renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first other to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot as assigned or exercised by anyone's other than said original Lessee and only while the original Lessee is in full possession of the Premises, and if requested by Lessor, with Lessor's certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised 39.4 Effect of Default on Options. (a) Lessee hall have no right to exercise an option: (I) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any rent is unpaid (provided that notice thereof is given Lessee).(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not 30 the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within an Option may be exercised shall not be extended or enlarge by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or affect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (I) Lessees fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges hat the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invites and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, right and declarations that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereto, the Parry whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof said Party shall be entitled to recover such sum or no much or so much thereof as it was not legally required to pay. 31 44. Authority. If either Party hereto is a corporation, trust, limited company, partnership, or similar antity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duty authorized to execute and deliver this Lease on a its behalf. Each party shall, with, thirty (30) days after request, deliver, deliver to the other party satisfactory evidence of such authority. 45. Conflict. Any conflict between the printed previsions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Other. Preparation of this Lease by either Party or their agent and submission of same to the other Party and shall not be deemed an offer to lease to the other Party. The Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary medications to this Lease as may be reasonably requires's by a Lender connection with the obtaining of normal financing or refinancing of the Premises. 48. Multiple Parties. If more than one person or entity is names herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease. (X is not attached to this Lease) 32 EX-10.13 3 EXHIBIT 10-13 [LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. TWO TO BUSINESS LOAN AGREEMENT This Amendment No. Two (the "Amendment") dated as of March 18th, 1998, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and IMPCO TECHNOLOGIES, INC. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of October 7, 1997, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 Subparagraph (a) of Paragraph 1.3 of the Agreement is amended in its entirety to read as follows: "(a) Unless the Borrower elects an optional interest rate as described below, the interest rate is the Bank's Reference rate MINUS one-quarter (0.25) of one percentage point." 2.2 Paragraph 1.5 of the Agreement is amended in its entirety to read as follows: "1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect the optional interest rates listed below for this Facility No. 1 during interest periods agreed to by the Bank and the Borrower. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a `Portion.' The following optional interest rates are available: (a) the Cayman Rate plus 1.50 percentage points. (b) the LIBOR Rate plus 1.50 percentage points." 2.3 Subparagraph (b) of Paragraph 4.4 is amended in its entirety to read as follows: "(b) The Borrower will repay principal in installments on the dates and in the amounts set forth on Exhibit A attached here to." 2.4 Paragraph 4.5 of the Agreement is amended in its entirety to read as follows: "4.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect the optional interest rates listed below for this Facility No. 4 during interest periods agreed to by the Bank and the Borrower. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a `Portion.' The following optional interest rates are available: (a) the Cayman Rate plus 1.75 percentage points. (b) the LIBOR Rate plus 1.75 percentage points." 2.5 An Exhibit A is added to the Agreement as set forth on Exhibit A attached here to. 3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION IMPCO TECHNOLOGIES, INC. x /s/ Karim Teymourtache x /s/ Thomas M. Costales - --------------------------------- -------------------------- By: KARIM TEYMOURTACHE, VICE PRESIDENT By: THOMAS M. COSTALES Title: CFO EXHIBIT A
DUE DATE PAYMENT AMOUNT -------- -------------- March 5, 1998 $165,000 June 5, 1998 $165,000 September 8, 1998 $165,000 December 7, 1998 $165,000 March 5, 1999 $165,000 June 7, 1999 $165,000 September 7, 1999 $165,000 December 6, 1999 $165,000 March 6, 2000 $165,000 June 5, 2000 $165,000 September 5, 2000 $165,000 December 5, 2000 $165,000 March 5, 2001 $165,000 June 5, 2001 $165,000 September 5, 2001 $165,000 December 5, 2001 $165,000 March 5, 2002 $165,000 June 5, 2002 $165,000 September 5, 2002 $165,000 December 5, 2002 $165,000
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION IMPCO TECHNOLOGIES, INC. x /s/ Karim Teymourtache x /s/ Thomas M. Costales - --------------------------------- -------------------------- By: KARIM TEYMOURTACHE, VICE PRESIDENT By: THOMAS M. COSTALES Title: CFO EX-10.14 4 EXHIBIT 10-14 BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. THREE TO BUSINESS LOAN AGREEMENT This Amendment No. Three (the "Amendment") dated as of April 9, 1998, is between Bank of America National Trust and Savings Association (the "Bank") and IMPCO Technologies, Inc. (the "Borrower"). RECITALS -------- A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of October 7, 1997, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT --------- 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 Paragraph 4.2 of the Agreement is amended to read in its entirety as follows "4.2 AVAILABILITY PERIOD. The loan is available in two disbursements from the Bank between the date of this Agreement and August 31, 1998, unless the Borrower is in default. The first disbursement must be for at lease Three Million Three Hundred Thousand Dollars ($3,300,000) (the 'First Disbursement'). The second disbursement must be for at least Six Hundred Ninety-Two Five Hundred Twenty and 78/100 Dollars ($892,620.78) (the `Second Disbursement')." 2.2 Paragraph 4.4(b) of the Agreement is amended to read in its entirety as follows: "(b) The Borrower will repay principal as follows: (i) The Borrower will repay principal of the First Disbursement in 20 successive quarterly installments of One Hundred Sixty-Five Thousand Dollars ($165,000) starting March 5, 1998. On December 5, 2002, the Borrower will repay the remaining principal balance plus any interest then due under the First Disbursement. (ii) The Borrower will repay principal of the Second Disbursement in 20 successive quarterly installments of Thirty-Four Thousand Six Hundred Twenty-Six Dollars ($34,626) starting July 31, 1998. On April 30, 2003, the Borrower will repay the remaining principal balance plus any interest then due under the Second Disbursement." 3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that (a) there is no event which is, or with notice or lapse of time or both would be a default under the Agreement, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. - 1 - This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA National Trust and Savings Association IMPCO Technologies, Inc. X /s/ Karim Teymouftache X /s/ Thomas M. Costales ---------------------------------- -------------------------------- By: Karim Teymouftache, Vice President By: Thomas M. Costales, Chief Financial Officer - 2 - EX-10.15 5 EXHIBIT 10-15 Amsterdam, April 27, 1998 SUBJECT: CREDIT FACILITY We are pleased to inform you that Bank of America National Trust and Savings Association, acting through its Amsterdam branch (the "Bank"), is prepared to make available a term loan, subject to the following terms and conditions: BORROWER: IMPCO Technologies B.V., established at Rijswijk, The Netherlands. TYPE AND PURPOSE OF CREDIT: A. 5 year Term Loan. B. Instruments: Advances of 1,3,6 or 12 months tenors C. Purpose: to finance the purchase/buyout of the 49% minority partner in IMPCO Technologies B.V. AMOUNT OF CREDIT: USD 2,100,000 (United States Dollars Two Million One Hundred Thousand), or an equivalent amount in freely convertible foreign currencies. AVAILABILITY: Immediately upon receipt of your written confirmation of acceptance of this letter. DRAWDOWN: Latest May 31 1998 REPAYMENT: 20 equal quarterly installments of USD 105,000 (United States Dollars One Hundred and Five Thousand), commencing August 31 1998. Payments or reimbursements under this credit facility shall be made to the Bank when due, without set-off or counterclaim, in the currency advanced, free and clear of any deduction for any present or future reserves, fees or taxes and agrees to pay any present or future reserves, fees or taxes or charges with respect to such payments or reimbursements which may be imposed by any government authority, except net income taxes imposed to the Bank by any jurisdiction, and to pay to the Bank, at the time interest is paid, all additional amounts which the Bank specifies as necessary to preserve the after-tax yield that the Bank would have received if such reserves, fees or taxes had not been imposed. EXPIRY DATE: May 31 2003 INTEREST: FOR ADVANCES IN DUTCH GUILDERS: As advised by the Bank at time of request of drawing, a present Amsterdam Interbank Offered Rate for the corresponding period of the advance, plus 1.50%. Interest is calculated on 365/360 days basis and is payable at maturity of the advance or quarterly, whichever comes first. FOR ADVANCES IN CONVERTIBLE CURRENCIES OTHER THAN DUTCH GUILDERS: The rate of interest at which deposits in the amount and currency of the advance and for the relevant interest period would be offered to Bank in the interbank market plus 1.5%. Interest will be calculated on the basis applicable for the currency in question (365/360 or 365/365) and will be payable at maturity of the advance or quarterly, whichever comes first. The obligation to pay the aforementioned reserves, fees, taxes and additional amounts shall survive the payment in full of principal and interest under this credit facility. DEFAULT INTEREST: If any sum due and payable by the Borrower is not paid when due, such sum shall bear interest at a rate of 2% p.a. above the cost at which Bank can fund itself in the applicable interbank market. PREPAYMENTS: The Borrower shall only be entitled to prepay any amount under this credit facility with the prior written consent of the Bank and under the conditions to be determined by the Bank. Prepayments will be applied to the remaining installments in inverse order of maturity. Any costs incurred by the Bank in the re-deployment of the sums prepaid to the maturity date of the advance will be for borrower's account. EXPENSES: The Borrower will pay to the Bank, immediately upon demand, all costs and expenses, including legal fees, and the allocated costs of in-house counsel, expended or incurred by the Bank in connection with the preparation, negotiation, due diligence, closing, administration, including waivers and amendments, and enforcement of this credit facility, including such waivers and amendments, and any instruments or agreements required or executed in connection with this credit facility. COLLATERAL/SUPPORT: An unconditional guarantee of IMPCO Technologies, Inc in a format acceptable to the Bank. [LOGO] CONDITIONS AND ADDITIONAL TERMS: This credit commitment is further subject to the following terms and conditions: Financial and other reporting requirements: Borrower shall submit to the Bank: - - Within 210 days after the end of each financial year of the Borrower, audited fiscal year-end financial statements; - - Any additional information which the Bank may reasonably request from time to time. CROSS DEFAULT: The unpaid balance of the loan shall be immediately due and payable in case of any breach or default of IMPCO Technologies B.V. or IMPCO Technologies, Inc with Bank or under any other agreement involving the borrowing of money or the extension of credit under which Borrower or Guarantor may be obligated as borrower or guarantor, if such default consists of the failure to pay any indebtedness when due or if such default permits or causes the acceleration of any indebtedness or the termination of any commitment to lend. REGULATORY: The availability of this credit facility is at all times subject to the Bank's compliance with any and all restrictions, rules and regulations of De Nederlandsche Bank N.V. (Central Bank) or any other applicable regulatory authority. PARI PASSU: The Borrower represents and warrants that all rights of the Bank under this credit facility shall at all times rank at least equally and ratably with rights of other providers of similar credit facilities. NEGATIVE PLEDGE: The Borrower shall not without the prior written consent of the Bank create or permit, or undertake to create or permit any encumbrance to subsist on all or any of its present or future assets. ASSET SALES: Bank has the right to create participations by other lenders for the whole or part of its rights in respect to loans made to you under this credit facility. Such participations may be created by assignment or other contractual relations and may involve the transfer or assignment of such loans from our books to the books of the participant(s). You agree to the creation of participations in this way. To enable Bank to create such participations, it may be necessary for Bank, to disclose the terms of this credit facility letter, any notices delivered pursuant to this credit facility letter and any other information which you authorize us to disclose or which is publicly available. The creation of such participations would have certain accounting implications to Bank, which make it necessary for any amount which has been or is to be advanced, to be repaid on the last day of its interest period. However, Bank will treat it as having been repaid of the proceeds of that re-advance and re-advanced for the next interest period. Consequently, unless the credit facility for whatever reason is or fails to be repaid before or at the end of a current interest period, no actual transfer of funds by you will be called for. [LOGO] GENERAL BANKING CONDITIONS: Except as otherwise agreed, our relationship will be governed by the General Banking Conditions as filed by the Dutch Bankers' Association at the Registrar's Office of the District Court in Amsterdam, as such General Banking Conditions may be amended from time to time. By signing the attached copy of this letter, the Borrower declares to have received the enclosed copy of the General Banking Conditions and to be familiar with its contents. APPLICABLE LAW AND FORUM: Unless otherwise agreed upon for specific transactions, this credit facility shall be governed by and construed in accordance with the laws of the Netherlands. Any disputes arising in connection herewith shall be submitted to the competent court in Amsterdam, provided that the Bank may seek enforcement of the obligations of the Borrower hereunder through any other competent court in any other jurisdiction. ACCEPTANCE: To evidence your acceptance of this term loan, kindly return the attached copy of this letter, duly signed and dated. If the Bank has not received these documents by May 15, 1998, this offer will expire on that date. This credit facility shall be available upon receipt by the Bank of the attached copy of this letter, duly signed. Sincerely, BANK OF AMERICA NT&SA ACCEPTED AND AGREED TO: This 29th day of April, 1998 By: /s/ F.J.M. Meens By: /s/ R. Frings ------------------------- ---------------------- Name: F.J.M. Meens Name: R. Frings Title: Vice President Title: MD. By: /s/ Job R.H.M. van Luyken By: ------------------------- ---------------------- Name: Job R.H.M. van Luyken Name: Title: Assistant Vice President Title: Enclosure: General Banking Conditions EX-22.1 6 EXHIBIT 22-1 63 EXHIBIT 22.1, IMPCO TECHNOLOGIES, INC. SUB OF THE CO Exhibit 22.1 IMPCO TECHNOLOGIES, INC. SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Fuel Injection Centers of America, Inc. Washington Canadian AirSensors, Inc. British Columbia, Canada IMPCO Technologies, B.V. Holland IMPCO Europe, B.V. Holland IMPCO Technologies, Pty. Australia Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V. Mexico IMPCO de Venezuela S. de R.L. Venezuela
EX-23.1 7 EXHIBIT 23-1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in (a) Amendment No. 3 to the Registration Statement (Form S-3, No. 33-56610) pertaining to shares of common stock IMPCO Technologies, Inc. and in the related Prospectus, (b) Amendment No. 1 to the Registration Statement (Form S-8, No. 33-38649) pertaining to the 1989 Incentive Stock Option Plan of IMPCO Technologies, Inc. and in the related Prospectus, (c) the Registration Statement (Form S-8, No. 33-72008) pertaining to the 1991 Executive Stock Option Plan of IMPCO Technologies, Inc. and in the related Prospectus, (d) the Registration Statement (Form S-3, No. 33-37035) pertaining to the 1996 Incentive Stock Option Plan of IMPCO Technologies, Inc. and (e) the Registration Statement (Form S-8, No. 33-62889) pertaining to the IMPCO Investment and Tax Savings Plan, of our report dated June 30, 1998 except for Note 16, as to which the date is July 27, 1998, with respect to the consolidated financial statements and financial statement schedule of IMPCO Technologies, Inc. included in this Annual Report (Form 10-K) for the year ended April 30, 1998. /s/ Ernst & Young LLP Long Beach, California July 28, 1998 EX-27.1 8 EXHIBIT 27-1
5 YEAR APR-30-1998 APR-30-1998 2,617,869 0 14,528,000 314,794 17,928,911 37,398,949 19,637,523 10,613,052 57,292,408 11,417,191 0 0 5,650,000 7,092 28,555,259 57,292,408 62,209,310 71,082,864 38,173,943 63,964,904 0 0 934,825 6,183,135 907,516 4,865,065 0 0 0 4,270,068 0.67 0.60
EX-27.2 9 EXHIBIT 27-2
5 YEAR YEAR APR-30-1997 APR-30-1996 APR-30-1997 APR-30-1996 1,975,903 811,148 0 0 11,456,539 9,792,356 288,111 278,361 14,184,252 11,438,002 29,903,638 24,578,326 15,246,685 13,413,611 8,026,594 6,935,878 47,113,090 37,727,887 11,655,620 9,265,581 0 0 0 0 5,650,000 5,650,000 5,815 5,655 16,407,293 13,600,367 47,113,090 37,727,887 58,436,508 48,487,480 61,828,036 51,574,709 37,341,704 32,011,253 56,978,170 47,442,996 0 0 0 0 1,100,449 503,886 3,749,417 3,627,827 262,459 1,348,616 3,225,291 4,670,875 0 0 0 0 0 0 2,643,926 4,061,000 0.46 0.72 0.43 0.64
EX-27.3 10 EXHIBIT 27-3
5 9-MOS 6-MOS 3-MOS APR-30-1998 APR-30-1998 APR-30-1997 JAN-31-1998 OCT-31-1997 JUL-31-1997 964,120 1,571,101 2,851,311 0 0 0 10,846,053 9,118,014 10,025,086 265,602 346,930 245,764 17,664,204 15,120,749 15,059,097 31,350,195 27,719,093 30,139,372 19,042,064 16,711,806 16,413,004 10,122,070 9,206,373 8,763,824 51,268,862 44,239,036 47,355,963 11,166,842 9,438,788 11,094,406 0 0 0 0 0 0 5,650,000 5,650,000 5,650,000 7,036 5,984 5,815 27,198,871 18,566,832 16,855,318 51,268,862 44,239,036 47,355,963 44,716,184 29,880,881 14,151,086 51,444,821 34,451,586 16,289,323 27,232,314 18,574,808 8,819,156 46,400,444 31,403,058 14,974,619 0 0 0 0 0 0 686,056 501,925 279,648 4,358,321 2,546,603 1,035,056 740,915 392,667 139,430 3,325,739 1,979,973 840,371 0 0 0 0 0 0 0 0 0 2,879,491 1,682,474 691,621 0.47 0.29 0.12 0.42 0.26 0.11
EX-27.4 11 EXHIBIT 27-4
5 9-MOS 6-MOS 3-MOS APR-30-1997 APR-30-1997 APR-30-1997 JAN-31-1997 OCT-31-1996 JUL-31-1996 1,776,674 2,381,066 1,565,094 0 0 0 11,502,069 10,178,335 9,499,511 284,423 290,986 168,639 14,839,773 14,852,967 13,676,542 30,468,622 28,663,044 27,294,851 14,638,138 14,281,834 14,350,488 7,600,527 7,800,069 7,314,782 47,029,747 46,064,410 44,176,491 10,271,445 9,551,215 9,787,289 0 0 0 0 0 0 5,650,000 5,650,000 5,650,000 5,771 5,687 5,687 15,450,777 14,782,023 14,120,565 47,029,747 46,064,410 44,176,591 42,957,912 28,193,494 14,179,291 44,854,155 29,795,401 15,148,632 26,927,385 17,744,681 9,109,120 41,483,861 27,631,468 14,055,786 0 0 0 0 0 0 820,059 526,985 224,179 2,550,235 1,636,948 868,667 255,024 181,000 117,833 2,120,470 1,352,588 712,414 0 0 0 0 0 0 0 0 0 1,685,376 1,062,527 567,382 0.30 0.19 0.10 0.28 0.17 0.09
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