FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No. 000-21153
ALYN CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 33-0709359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
16761 Hale Avenue
Irvine, CA 92606
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(Address of principal executive offices)
(714) 475-1525
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(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. 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. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 14, 1997 was $40,533,500, based on
the closing price of $9.25 on that date.
As of March 14, 1997, the aggregate number of outstanding shares of
common stock of the registrant was 10,750,000.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on June 2, 1997, is incorporated by reference into Part III
(Items 10, 11, 12 and 13) of this Form 10-K.
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TABLE OF CONTENTS
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
<S> <C>
THE SECURITIES LITIGATION REFORM ACT OF 1995.................................................................... 3
PART I................................................................................................. 3
1. BUSINESS............................................................................. 3
2. PROPERTIES........................................................................... 18
3. LEGAL PROCEEDINGS.................................................................... 18
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 18
PART II................................................................................................ 18
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................. 18
6. SELECTED FINANCIAL DATA.............................................................. 20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................ 21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 23
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................. 23
PART III............................................................................................... 24
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 24
11. EXECUTIVE COMPENSATION............................................................... 25
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................................... 26
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 26
PART IV................................................................................................ 27
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.................................................................................. 27
SIGNATURES.............................................................................................S-1
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements involve known
and unknown risks and uncertainties that may cause the Company's actual results
or outcomes to be materially different from those anticipated and discussed
herein. Further, the Company operates in an industry sector where securities
values may be volatile and may be influenced by regulatory and other factors
beyond the Company's control. Important factors that the Company believes might
cause such differences are discussed in the cautionary statements accompanying
the forward-looking statements in this Annual Report on Form 10-K and in the
risk factors detailed in this Annual Report on Form 10-K and in the Company's
Prospectus, dated October 22, 1996. In assessing forward-looking statements
contained herein, readers are urged to read carefully all cautionary statements
contained in this Annual Report on Form 10-K and in the Company's Prospectus
dated October 22, 1996.
PART I
1. BUSINESS.
Unless otherwise indicated, all information in this Annual Report on
Form 10-K gives effect to the merger, effective May 2, 1996, of Alyn
Corporation, a California corporation ("Old Alyn"), with and into Alyn
Corporation, a Delaware corporation formerly named AC Acquisition Corp. ("Alyn"
or the "Company"). Unless the context otherwise requires, the term Company as
used in this Annual Report on Form 10-K includes the Company and its
predecessor, Old Alyn.
Alyn designs, develops, manufactures and markets consumer and
industrial products utilizing its proprietary advanced metal matrix composite
materials, which it believes have a superior combination of physical properties,
including strength, light weight, stiffness, hardness and fracture resistance,
for a variety of selected markets. The Company has developed technology, for
which it obtained a patent in January 1996, for the application of boron carbide
in combination with aluminum in lightweight metal matrix composites under the
name Boralyn(R). Boron carbide, a principal component of Boralyn(R), is an
advanced ceramic that is the third hardest material in the world, and the
hardest material available at a commercially reasonable cost. The Company
believes that no other material offers a range of properties comparable to those
Boralyn(R) provides. Boralyn(R) is lighter and can be more easily fabricated
than titanium; has a higher specific stiffness than titanium, aluminum or
specialty steel; is one-third the density of many steels; has a resistance to
wear greater than aluminum, specialty steel and titanium; is more resistant to
corrosion than aluminum; is highly fracture resistant; and exhibits minimal
resonance over a wide range of rotational speeds. Boralyn(R) is available in a
range of grades with varying properties to satisfy specific customer
requirements and is easily welded, cast, bent, coated and extruded with
conventional equipment and tools. The Company believes that Boralyn(R) is a
highly effective replacement for many existing premium-priced metal and
composite products, such as those used in high-end sporting goods, high-capacity
disks for computer hard disk drives, neutron shielding and other applications.
The Company is focusing its initial marketing efforts on the use of
Boralyn(R) in applications where its unique combination of properties will
justify an appropriate price premium. These applications include: (i) high-end
sporting goods such as premium-priced golf club heads and shafts, high-end
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lightweight bicycle frames and components and sports racquets; (ii) disks for
computer hard disk drives; and (iii) neutron shielding for both disposal
containers and reactor installations.
Development of the Company's Business
The growth of interest in metal matrix composites is a result of the
engineering properties of these composites. Metal matrix composites compare
favorably to other materials with respect to weight, stiffness and strength,
high temperature capabilities, and low thermal expansion, and can be relatively
easily fabricated. Based on independent studies, the Company believes these
materials can provide up to 60% savings in weight compared to traditional
metallic alloys while still retaining key structural and design properties. They
also compare favorably with certain other composite materials, namely
polymer-matrix materials that have temperature and strength limitations, are
sensitive to moisture and in some cases also release gases or moisture.
The Company was founded in January 1990 by Robin A. Carden, who had
previously been a senior engineer at Ceradyne Inc., a company engaged in
advanced ceramics, where he developed civilian applications for advanced
ceramics originally developed for military use. At that time, boron carbide
technology had recently been declassified by the U.S. Department of Defense. In
order to capitalize on the commercial possibilities of a boron carbide/metallic
alloy composite structure, under Mr. Carden's direction the Company began to
experiment with new techniques for bonding boron carbide to different metals,
creating new composite structures. From 1990 through 1993 the Company continued
development of metal matrix composites, while purchasing and reselling boron
carbide powders in order to generate cash for its Boralyn(R) development
efforts. These efforts led to the filing of a patent application in January
1994, first sales of Boralyn(R) bicycle frames, and the grant of a U.S. patent
for the "Metal Matrix Compositions and Method of Manufacture Thereof" in January
1996, which covers the initial matrix composites and methods for making them.
Many of the Company's claims with respect to the physical
characteristics of Boralyn(R) have been subjected to, and were verified and
supported by, studies and testing, performed by independent third parties,
including testing by: (i) the Department of Chemical Engineering and Materials
Science of the University of California, Irvine, of its specific strength,
homogeneity, hardness, density and specific stiffness; (ii) Corning Incorporated
CELS - Laboratory Services, of its chemical composition; (iii) the University of
Michigan's Nuclear Reactor Laboratory of its neutron radiation absorption
characteristics; (iv) THoT Technologies, Inc. of its minimal resonance through a
wide range of computer hard disk drive rotational speeds; and (v) Golf
Laboratories, Inc. of its effect on the driving distance achieved by a golf club
head.
In May 1996, the Company received significant debt financing from new
stockholders, including Kingdon Capital Management Corp. affiliates and Edelson
Technology Partners III, enabling the Company to pursue further its Boralyn(R)
business. In that same month and in the month thereafter, the Company assembled
a senior management team with experience in areas such as operations,
manufacturing, research and development and finance and administration. This
senior management team prepared a comprehensive business, marketing and
manufacturing plan.
In September 1996, the Company and Taylor Made Golf Company, Inc.
("Taylor Made"), a leading golf club manufacturer, entered into an agreement
which provides for the production and purchase of Boralyn(R)-based metalwood
golf club heads through June 30, 1999, and an exclusive license through that
date should specified minimum volume requirements be met. Under the agreement,
Taylor Made is working with the Company to develop club head designs, molds,
manufacturing, tooling and production and promotional programs in order to
permit deliveries of Boralyn(R)-based metalwood golf club heads for sale during
the second half of 1997. Following completion of product designs, molds and
manufacturing tooling, Taylor Made will purchase a minimum of $42.75 million of
Boralyn(R)
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golf club metalwood heads between July 1, 1997 and June 30, 1999. If Taylor Made
does not purchase Boralyn(R) metalwood golf club heads in that minimum amount,
the Company's sole remedy is to terminate the exclusivity of Taylor Made's
license rights. Taylor Made has placed its first purchase order under the
agreement, covering $2.25 million of metalwood golf club heads.
On October 22, 1996, the Company completed its initial public offering
(the "Initial Public Offering") of 2,750,000 shares of its common stock at a
price of $13.50 per share. The Company received net proceeds of approximately
$33.3 million after deducting underwriting discounts and offering expenses.
Subsequently, in October 1996, $4.7 million of net proceeds from the Initial
Public Offering were used for repayment of principal, accrued and unpaid
interest thereon and all other amounts owing in respect of a credit facility
from stockholders, and the credit facility was terminated. Following completion
of the Initial Public Offering, the Company added personnel to its marketing,
sales and engineering support staff.
The Company moved its operations to a newly leased 48,000 square foot
facility in Irvine, California, in October 1996, which it anticipates will
become fully operational in the second quarter of 1997. The new facility
includes sintering, casting (including soluble core), forging and extrusion
capabilities. Prior to commencement of production at the new facility,
production and shipment of Boralyn(R) was undertaken by unaffiliated
subcontractors.
Company Strategy
Alyn's objective is to become a leader in advanced metal matrix
composite products and establish significant market share and brand awareness
for Boralyn(R) in niche markets, such as higher-priced consumer products and
specialized uses, where value-added premiums can be obtained. The Company
intends to do so by capitalizing on its existing proprietary technology and
patented process for producing Boralyn(R) through the direct manufacture and
sale of Boralyn(R)-based products to industrial and consumer product
manufacturers and distributors, and, to a lesser extent, to producers of
military products. The Company believes that its focus on marketing Boralyn(R)
for use in higher-priced consumer and commercial products and applications where
its properties provide performance advantages will provide it with the best
opportunity for meaningful market penetration. The Company has also developed
what it believes to be a superior manufacturing process which benefits from the
characteristics of Boralyn(R). The Company has filed a patent application for
its soluble core method of manufacturing metal matrix composite die-cast metal
structures, which allow for forming complex hollow chambers and passages, often
within a one-piece structure, without the need for welding together separate
components or other secondary manufacturing processes.
Characteristics of Boralyn(R)
Boralyn(R) is a new metal matrix composite material with the principal
constituents being aluminum and boron carbide. Boralyn(R) compares favorably to
other materials with which it will compete in markets selected by the Company,
with respect to density, specific strength, specific stiffness, hardness and
resistance to wear, fatigue and corrosion resistance, resonance and neutron
absorption.
Density. Boralyn(R) exhibits relatively low density compared to certain
alternative materials, such as aluminum. This characteristic contributes to its
greater specific strength and greater specific stiffness.
Specific Strength. The specific strength range (dependent somewhat on
the grade) of Boralyn(R) is higher by a considerable margin than that of
aluminum, somewhat higher than that of many specialty
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steel and, depending on the grade of Boralyn(R), of titanium as well. Specific
strength is particularly significant in applications such as bicycle components.
Specific Stiffness. Boralyn(R) has greater specific stiffness when
compared to titanium alloy, aluminum alloy and specialty steel. Specific
stiffness is particularly significant in applications such as computer hard
drive disks and golf club heads.
Specific Strength/Specific Stiffness. The combination of specific
strength and specific stiffness is important for many products, such as
premium-priced golf clubs and high-end bicycle frames and components, where the
combination of strength, stiffness and light weight is important. Certain grades
of Boralyn(R) exhibit a significantly superior combination of specific strength
and specific stiffness compared to the other competing materials. For many
applications, far less Boralyn(R) is required to provide necessary strength and
stiffness; conversely, for the same weight, Boralyn(R) provides significantly
more strength and stiffness than the other competing materials. Other
applications such as arrows, baseball bats, sailing masts, and spinnaker poles
for boats also benefit from these strength and stiffness advantages.
Resistance to Wear. Boralyn(R) can easily be welded, extruded or casted
and exhibits greater wear resistance than aluminum or steel, and therefore can
be used to advantage in applications where high wear resistance is significant,
such as in engine blocks, brake discs and pistons.
Fatigue and Corrosion Resistance. Boralyn(R), in a 5% salt moist
environment, will endure a larger number of stress cycles than aluminum alloy.
This property makes Boralyn(R) superior to aluminum alloy for applications in
which many stress cycles are encountered, particularly in corrosive
environments. Any structural support where stress is applied repeatedly needs
high fatigue characteristics. Bicycle frames and components, airplane
structures, motorcycle frames, piston rods and satellite supports are some of
the applications where high fatigue resistance is necessary, and many of those
applications take place in areas characterized by salt and moist atmospheric
conditions.
Resonance. Boralyn(R) has lower resonance characteristics than glass
and aluminum substrates (materials commonly used in computer hard disk drives)
over rotational speeds ranging from 1,000 to 10,000 revolutions per minute.
Boralyn(R) disks exhibit minimal resonance over the entire range of rotational
speeds. The lower resonance of Boralyn(R) is of particular advantage in computer
hard disk drives, where lower resonance allows for closer head-to-disk distance
at higher rotational speeds, characteristics that will allow for greater storage
capabilities and faster data transfer rates.
Neutron Absorption. Neutron absorption (attenuation) in boron
carbide-based materials such as Boralyn(R) is primarily a function of the
density (referred to as areal density) and degree of uniformity of distribution
(i.e., homogeneity) of boron carbide particles within the material. The
predictable homogeneity of Boralyn(R) allows for the design of structures to
customer requirements without incorporating additional material, compared with
competing materials that the Company believes can require as much as 40%
additional material to compensate for irregular distribution of
neutron-absorbing particles (i.e., relative lack of homogeneity) and therefore
achieve adequate levels of uniform absorption. Accordingly, Boralyn(R) can
produce the same neutron absorbing results as competing materials, but with less
Boralyn(R), thereby reducing the weight and cost of the structure.
Broad Range of Available Grades. Boralyn(R) is available in various
grades depending principally on the aluminum alloy of choice and the percent of
boron carbide that is included. A specific grade can be matched to a specific
application where a specific property or properties are to be highlighted. For
example, in aerospace applications, where thermal expansion is a problem due to
the extremes of the environment, the percentage of boron carbide can be
increased to lower the thermal expansion; for
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transducers, the electrical resistivity can be lowered by decreasing the boron
carbide to a few percent; for better wearability, 20% to 25% boron carbide can
be used for harder surfaces.
Ease of Fabrication. In addition to the properties described above,
Boralyn(R) also has excellent brazing and welding capabilities, can be easily
extruded and wrought and can be used in a variety of casting processes. The
Company has also developed what it believes to be a superior manufacturing
process that benefits from the characteristics of Boralyn(R). The Company
recently filed a patent application for its soluble core method of manufacturing
metal matrix composite die-cast metal structures, which allows for forming
complex hollow chambers and passages, often within a one-piece structure,
without the need for welding together separate components or other secondary
manufacturing processes.
Products and Applications
The Company is focusing its initial marketing efforts on the use of
Boralyn(R) in applications where its unique combination of properties will
justify an appropriate price premium. These applications include the following:
High-end Sporting Goods. The Company has targeted premium-priced golf
club heads and shafts and high-end lightweight bicycle frames and components as
a primary market for Boralyn(R)-based products.
Golf Club Heads and Shafts. The U.S. wholesale market for
premium-priced golf clubs was estimated by industry sources to be approximately
$890 million in 1994, reflecting a 23% increase over the prior year. The Company
believes that the higher specific stiffness, higher specific strength and ease
of fabrication of Boralyn(R), compared with titanium, allow the design and
manufacture of golf club heads with a larger "sweet spot" and better mass
distribution compared with titanium heads, thus yielding what golfers term a
"more forgiving" golf club. In an independent third-party's comparison test
against two premium-priced titanium golf club heads, a Boralyn(R) golf club head
drove the ball longer distances. The higher specific stiffness of Boralyn(R)
compared with graphite composite, a commonly used golf club shaft material, also
should permit stiffer shafts of the same weight to be made with Boralyn(R).
On September 10, 1996, the Company and Taylor Made, a leading golf club
manufacturer, entered into a Sale of Goods Agreement and Exclusive License (as
amended in October 1996, the "Agreement and License") which provides for the
production and purchase of Boralyn(R)-based metalwood golf club heads through
June 30, 1999, and an exclusive license through that date should specified
minimum volume requirements be met. Under the Agreement and License, Taylor Made
is working with the Company to develop club head designs, molds, manufacturing,
tooling and production and promotional programs in order to permit deliveries of
Boralyn(R)-based metalwood golf club heads for sale during the second half of
1997. Following a completion of product designs, molds and manufacturing
tooling, Taylor Made will purchase a minimum of $42.75 million of Boralyn(R)
golf club metalwood heads between July 1, 1997 and June 30, 1999. If Taylor Made
does not purchase Boralyn(R) metalwood golf club heads in that minimum amount,
the Company's sole remedy is to terminate the exclusivity of Taylor Made's
license rights. Taylor Made has placed its first purchase order under the
Agreement and License, covering $2.25 million of metalwood golf club heads. The
Company and Taylor Made are continuing to work on Boralyn(R) metalwood golf club
heads and other golf club equipment.
Taylor Made has been provided an exclusive world-wide license regarding
Boralyn(R) metalwood golf club heads through June 30, 1999, subject to its
meeting minimum annual and quarterly order volume requirements specified in the
Agreement and License as follows: minimum orders of $9.0
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million for the twelve months ending June 30, 1998, with orders in any quarter
in that period to be not less than $1.5 million; and minimum orders of $33.75
million for the twelve months ending June 30, 1999, with orders in any quarter
in that period to be not less than $6.375 million. The order minimums are
subject to adjustment under certain circumstances, including late deliveries.
Taylor Made is required to give the Company notice at least 90 days prior to any
calendar quarter in which Taylor Made will not or does not expect to meet the
minimum order volume requirement for that quarter, and the Company may then
terminate the exclusivity of Taylor Made's license rights as its sole remedy.
Manufacturing of products for delivery under the Agreement and License are to be
made at the Company's plant. If that facility has insufficient capacity to
process order volume at any time, however, Boralyn(R)-based products to be
delivered to Taylor Made will be manufactured at one or more second sources
approved by the Company at facilities under the direct control and supervision
of the Company. Products delivered to Taylor Made under the Agreement and
License will independently display the "Boralyn(R)" name. The Company
anticipates that the Boralyn(R)-based metalwood golf club heads manufactured for
Taylor Made will be a premium-priced product.
The Agreement and License also provides the framework for ongoing
discussions between the Company and Taylor Made and between the Company and
Taylor Made's parent, France-based Salomon Group, regarding an extension of
their relationship and the possible inclusion of Boralyn(R) in additional golf
club equipment and in other sporting goods by members of Salomon Group.
Prior to entering into the Agreement and License, the Company had
produced prototype golf club heads for Taylor Made. The Company has also
produced prototype golf club heads for certain other major golf club or sporting
goods equipment producers, including pre-tooling versions based on production
molds customized for Boralyn(R) composite heads. The Company believes that
production and customer approval of pre-tooling versions of golf clubs based on
customized molds is usually the final step before receipt of a definitive
production or purchase order. The Company has ceased further activities and
negotiations with those companies in accordance with the Agreement and License.
Should the Company and Taylor Made fail to reach an agreement to extend their
relationship to include additional Boralyn(R) golf club equipment, however, the
Company expects to resume activities concerning such other golf club equipment
with one or more of those other companies, and may initiate similar activities
with other golf club producers.
There can be no assurance that the Company will enter into any
agreement or receive any additional production or purchase orders from Taylor
Made, or will enter into any agreement with any other golf club producer or any
other member of Salomon Group.
Bicycle Components and Frames. The U.S. retail market for
bicycles, bicycle components and related products and services was estimated by
industry sources to be approximately $5 billion in 1994. The Company believes
that approximately 220,000 premium-priced (over $600 at retail) bicycles were
sold in 1995. The Company has received orders for prototype components or frames
from leading manufacturers of bicycle components and/or frames, and from several
smaller bicycle component and/or frame manufacturers. The Company has also
entered into an agreement with Mavic S.A., a wholly-owned subsidiary of Taylor
Made, relating to the development of Boralyn(R)-based bicycle wheel rims. The
higher specific strength and specific stiffness of Boralyn(R) compared to
aluminum and specialty steel allows for the production of lighter bicycle
components and frames with no decrease in strength or stiffness, or if weight is
not a dominant consideration, for stiffer components and frames with no increase
in weight. These characteristics improve riding efficiency.
Other potential sporting goods applications where strength and
stiffness are important include baseball bats, tennis and other sports racquets
and arrows. The Company has received orders from Worth Inc., for prototype
baseball bats, and from Spalding Sports Worldwide, Inc., a division of Spalding
& Evenflo Cos., Inc. for prototype racquetball and tennis racquets.
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Computer Hard Disks. The U.S. wholesale market for computer hard disk
substrates was estimated by industry sources to be approximately 247 million
units in 1996. The Company believes that disks for high-speed, high-capacity
drives, which the Company is targeting in its marketing efforts, represent
between 5% and 10% of the total market. The Company has produced preliminary
sample disk substrates of Boralyn(R) for evaluation by several major disk drive
manufacturers, and has received small prototype orders from three of those
manufacturers. Compared with conventional aluminum and glass substrates
currently in use as disks in computer hard drives, Boralyn(R) disks exhibit
minimal resonance over the entire range of rotational speeds, from initial
spin-up to current maximum speeds of existing substrates, as well as at
substantially higher rotational speeds. Lower resonance disks will permit hard
disk drives to be designed for closer head-to-disk distances and higher
rotational speeds, characteristics that will allow for greater storage
capabilities and faster data transfer rates. In order to realize the benefits of
Boralyn(R), hard disk drive manufacturers will have to modify existing hard disk
drive designs, and such modifications may be substantial. The Company believes
that hard disk drive manufacturers will be motivated to modify or introduce new
hard disk drive designs only after a substantial testing period and significant
marketing efforts by the Company. The Company expects to incur substantial
expenses in connection with those testing and marketing efforts, and anticipates
ultimately that disks based on Boralyn(R) will be accepted by hard disk drive
manufacturers, if at all, only if such disks can be demonstrated to have
superior characteristics and can be offered at competitive prices. Further, the
Company expects that use of disks based on Boralyn(R) will commence with, and
could be limited to, high-end computer hard disk drives, which constitute a
small but significant percentage of the current market for computer hard disks.
The Company does not anticipate production orders for hard disk applications
prior to the second half of 1997, as a result of stringent testing requirements,
substantial marketing efforts and the redesign of computer hard disk drives by
disk drive manufacturers that would be necessary to realize the benefits of
disks based on Boralyn(R), and there can be no assurance that any production
orders will be obtained.
Other Industrial Applications. Other potential industrial applications
of Boralyn(R) include its use in components for the aerospace/defense sector;
assembly equipment; automotive and motorcycle components; marine applications;
and armor for government and military vehicles and for personal protection.
Neutron Shielding. Materials traditionally used for neutron absorption
in nuclear reactors and disposal containers for radioactive products and waste
require a separate neutron-absorbing material such as boron carbide, encased in
layers of metallic alloy such as aluminum supported by steel, in order to
provide stiffness and structural integrity. The metal matrix structure of
Boralyn(R), combined with its boron carbide ingredients, provides acceptable
neutron absorption characteristics as well as stiffness in an homogeneous,
single structure, with advantages in ease of use and fabrication. Although the
Company has had preliminary discussions with an international nuclear plant
construction company concerning prototype disposal containers, the Company has
elected to defer delivering prototypes in the neutron shielding field in order
that it may concentrate its efforts currently on high-end sporting goods,
computer hard disks and other industrial applications. The Company does not
anticipate production orders for neutron shielding applications until at least
late 1997, and there can be no assurance that any production orders will be
obtained.
Marketing and Customer Support
The Company intends to achieve market penetration in selected markets
through a multi-step process usually consisting of initial discussions of the
application highlighting the advantages of Boralyn(R), an engineering and
marketing evaluation by the prospective customer of sample material and
demonstration products, appropriate agreements allowing the customer to use and
market Boralyn(R) in the relevant application and market and, finally, a
production program where appropriate expenditures are made on tooling, equipment
and quality control necessary to fulfill market requirements. The
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Company intends to sell primarily to OEM customers, with distribution from the
Company manufacturing site to customer facilities.
The Company anticipates incurring increased expenditures in connection
with its marketing activities in the next two years, and has allocated a
substantial portion of the net proceeds of the Initial Public Offering to fund
those activities. The existing sales staff on June 30, 1996 of two persons
increased to eight persons at December 31, 1996, and is expected to increase to
approximately 10 persons by the end of 1997. The Company's marketing activities
are also expected to include substantial applications engineering support to
assist in the development of products for specific customers and markets,
evaluation of Boralyn(R) by institutions that specialize in technology and/or
markets of this type, development of appropriate sales materials such as
specification sheets and corporate brochures, and promotion through appearances
at selected trade shows and selective advertising in journals and the trade
press. For example, the Company exhibited Boralyn(R) bicycle components and
frames at the annual Interbike Exhibition in Anaheim, California in September
1996. These activities, if successful, may not result in proportional or any
revenue increases in the same period in which those activities occur. The
Company's marketing activities will initially focus on prospective customers in
the United States, but it is anticipated that international efforts will develop
within the next 18 months. However, in view of the anticipated concentration
outside the United States, and particularly in Europe, of prospective customers
for neutron shielding applications of Boralyn(R), the Company believes that it
may be required to focus on international marketing efforts in order to obtain
any significant production orders for such applications.
Patents and Trademarks
The Company believes that protection of its proprietary technology and
know-how is important to the development of its business. It seeks to protect
its interests through a combination of patent protection and confidentiality
agreements with key employees, as well as by limiting the availability of
certain critical information to a small number of key employees.
The Company intends to pursue a vigorous patent application program in
the United States and abroad. The Company has obtained one United States patent
(No. 5,486,223, issued to Robin A. Carden in January 1996, and which expires in
January 2014), that it believes provides protection for its proprietary
Boralyn(R) technology and contains claims that cover the use of Boralyn(R),
particularly in high-end sporting goods, as well as in certain other markets
targeted by the Company. The Company has also filed additional patent
applications, including divisional patent applications and continuation-in- part
applications that stem from the Company's original patent application. The
divisional patent applications relate to methods of fabricating Boralyn(R) and
to bicycle frames that were disclosed in the original patent application. The
continuation-in-part patent applications expand the scope of the claims in the
original patent, and cover the Company's processes of fabricating Boralyn(R).
Divisional patent applications and continuation-in-part patent applications
generally are likely to complete the U.S. Patent Office review process on an
expedited basis and, with respect to claims having a common subject matter with
those in the original patent, are entitled to the date of filing of the original
patent for purposes of considering patentability. The divisional patent
application relating to bicycle frames was allowed in June 1996 and is expected
to issue in March 1997. The divisional patent application relating to methods of
fabricating Boralyn(R) was allowed in September 1996. There can be no assurance
that the Company's pending continuation-in-part applications will receive
expedited review. New patent applications recently filed by the Company cover
(i) application of Boralyn(R) in neutron shielding, (ii) application of
Boralyn(R) in computer hard disk drives and (iii) a new soluble core
manufacturing method for Boralyn(R)-based structures. The Company is not aware
of any reason why its pending applications should not be granted with claims
that will provide coverage and, therefore, adequate protection for its
anticipated business activities, although there can be no assurance in that
regard.
-10-
<PAGE>
There can be no assurance that the Company's existing patent and the
divisional patent applications that were allowed, or any other patents that may
be granted, will be valid and enforceable or provide the Company with meaningful
protection from competitors. There also can be no assurance that any pending
patent application will issue as a patent or that any claim thereof will provide
protection against infringement. If the Company's present or future patent
rights are ineffective in protecting the Company against infringement, the
Company's marketing efforts and future revenues could be materially and
adversely affected. Moreover, if a competitor were to infringe the Company's
patent, the costs of enforcing the Company's patent rights may be substantial or
even prohibitive. The Company currently has only limited patent protection for
its technology outside the United States, and may be unable to obtain even
limited protection for its proprietary technology in certain foreign countries.
The Company believes that its current and anticipated business does not
infringe on any patent owned by others, although there can also be no assurance
that the Company's products will not infringe the patent rights of others or
that it will not be forced to expend substantial funds to defend against
infringement claims of, or to obtain licenses from, third parties.
Research and Development
The Company continuously engages in the development of new products and
improvements to its existing formulations and will maintain laboratory
facilities for these purposes as well as a network of outside independent test
laboratories and specialty subcontractors. As of December 31, 1996, the Company
employed five persons in research and development activities. The Company's past
research and development effort was focused on various applications for cast,
forged and extruded Boralyn(R) products, and the tooling and methods for product
production, and the formulation of other metal matrix composites using magnesium
and titanium. It is expected that formulations and techniques will continue to
be developed and refined through empirical tests and prototype development. The
Company expects that it will devote substantial resources to research and
development efforts. The costs of those efforts will be recorded for accounting
purposes as expenses as they are incurred, notwithstanding that the benefits, if
any, from the Company's research and development efforts (in the form of
increased revenues or decreased product costs) may not be reflected in the
Company's operating results, if at all, until subsequent periods.
Manufacturing and Supply
Raw materials used by Alyn are principally aluminum and boron carbide.
The Company presently purchases boron carbide from a limited number of
suppliers, including one supplier that provides approximately 50% of the
Company's present requirements. Although the Company believes that boron carbide
is readily available from other suppliers, there can be no assurance that the
Company will be able to continue to obtain desired quantities of boron carbide
on a timely basis at prices and terms deemed reasonable by the Company. Alyn's
other principal raw material, aluminum, is available from several domestic
suppliers and the Company is not dependent on the availability of supplies from
any other single source.
Unlike a number of other metal-matrix composites, Boralyn(R) is not
made through a molten process. Instead of adding boron carbide powder into the
molten base metal alloy, the various powdered elements are blended dry and mixed
uniformly to avoid stratification and settling. After the particulates have
sufficiently mixed, they are directed into a die and then into a cylindrical
container, where the particulates are subjected to up to 85,000 pounds per
square inch (psi) of pressure, transforming the elements into a solid ingot.
These Boralyn(R) ingots are used for casting and to extrude forms such as plates
and tubes for use in various consumer products and other end uses.
-11-
<PAGE>
The Company monitors the quality of its products that are produced by
subcontractors by frequent tests and material certification, and intends to
maintain a strict internal quality control system to monitor the quality of
production at its renovated facility. The quality control laboratory is expected
to be capable of conducting both physical and chemical testing. The Company also
maintains product liability insurance at levels it believes to be adequate.
The Company intends to maintain a sufficient inventory of raw materials
and finished Boralyn(R) in the on-site warehouse that will occupy part of its
newly-leased facility, which is expected to be ready for inventory storage by
March 1997. Finished inventory generally is expected to be warehoused for
distribution by commercial trucking throughout the United States at the
Company's plant, but products produced for third parties are likely to be
immediately released to third party warehouses and not remain at the Company's
plant.
Government Regulation
The Company's manufacturing and packaging operations are subject to a
wide range of federal, state and local regulations, including the discharge,
handling and disposal of hazardous wastes regulations contained in the
environmental laws and the plant and laboratory safety requirements of various
occupational safety and health laws that are applicable to all the Company's
facilities and operations.
The Company believes it has complied in all material respects with
regard to governmental regulations applicable to it. To date, those regulations
have not materially restricted or impeded the Company's operations.
Competition
The materials industry is highly competitive. The Company competes in
its chosen markets against several larger multi-national companies, all of which
are well-established in those markets and have substantially greater financial
and other resources than those of the Company. Competitive market conditions
could adversely affect the Company's results of operations if it were required
to reduce product prices to remain competitive or were unable to achieve
significant sales of its products.
In the golf club market, the Company competes primarily with titanium,
used widely today in premium-priced golf club heads, with the base material
being supplied by companies such as RMI Titanium Company, Tremont Industries,
Inc., and Titanium Metals Corporation of America (Timet), and with clubs
produced by CoastCast and Sturm Ruger. In the premium-priced bicycle market, the
current market uses titanium, aluminum alloys, and other materials supplied by
companies such as The Aluminum Corporation of America (Alcoa), Reynolds Metals
Co., Easton Aluminum, Inc., Sandvik Steel Co. and Oregon Metallurgical
Corporation (Oremet Titanium). In the computer disk drive market, the disks
currently being used are made from aluminum supplied by Alcoa and other
suppliers. For neutron shielding, current disposal containers typically use
Boral, a material supplied by AAR Brook & Perkins.
Personnel
The Company employed 33 persons as of December 31, 1996, including
three Company executive officers, five research and development personnel, 11
manufacturing personnel and eight persons engaged in sales and marketing
activities. None of the Company's employees is a member of a labor union. The
Company considers its relationship with its employees to be good. The Company
anticipates hiring approximately 40 additional manufacturing, eight additional
research and product development and six additional sales and marketing
personnel during 1997.
-12-
<PAGE>
Risk Factors
An investment in the shares of Common Stock of the Company involves a
high degree of risk and should only be made by persons who can afford a loss of
their entire investment. In evaluating an investment in the Common Stock,
existing stockholders and prospective investors should consider carefully, among
other matters, the following risk factors, as well as the other information
contained in this Report.
Emerging Technology; Substantial Risk of Uncertain Market Acceptance.
Since commencement of operations in 1990, the Company has been engaged in the
formulation, development and fabrication of Boralyn(R) for use in commercial and
consumer products. As with any new technology, there is the substantial risk
that the marketplace may not be receptive to products based on it. The Company
expects to incur substantial expenses as it continues its development and
marketing activities and, if they are successful, to penetrate the markets for
its products. Market acceptance of the Company's products will depend, in large
part, upon the pricing of those products and the Company's ability to
manufacture and deliver them on a timely basis, as well as the ability of the
Company to demonstrate the advantages of its products over competing
methodologies and products. There can be no assurance that the Company will be
able to market Boralyn(R) successfully or that any of the Company's future boron
carbide-based or other products will be accepted in the marketplace. The costs
of the Company's marketing efforts will be substantial and will be recorded as
expenses as they are incurred, notwithstanding that the benefits, if any, from
those marketing efforts (in the form of revenues) may not be reflected, if at
all, until subsequent periods.
Limited Operating History; Prior Losses. The Company has a limited
operating history, having commenced its materials development and manufacturing
activities in 1990, and having had extremely limited revenues through 1996, with
net revenue declining from $540,000 in 1993 to $194,000 in 1996. The Company has
not received a production order for Boralyn(R) since late 1994, when it ceased
supplying a bicycle frame manufacturer in order to pursue what it believed to be
more promising marketing and distribution channels in the high-end bicycle frame
and components market. The Company had a net loss of $2,255,000 for the year
ended December 31, 1996, compared with a net loss of $245,000 for the year ended
December 31, 1995 and a net loss of $470,000 in the year ended December 31,
1994. The Company anticipates incurring operating losses for the current fiscal
year, and may continue to incur losses thereafter. There can be no assurance
that the Company will ever achieve profitability in the future or maintain
profitability, if achieved, on a consistent basis. Moreover, the Company has
entered into a five-year lease of a facility in Irvine, California, and has
committed substantial capital, including approximately $12.6 million of the net
proceeds of the Initial Public Offering, to provide that facility with
significant production capability. Unless and until the Company achieves a
significant level of sales of Boralyn(R) or Boralyn(R)-based products, the
Company will have substantial production overcapacity and underabsorbed costs
that would cause the Company to incur substantial operating losses.
No Manufacturing Experience; Reliance on Manufacturing Facilities. The
Company is only now developing internal manufacturing capacity and no experience
in manufacturing its products in commercial quantities. The Company intends to
manufacture a substantial portion of its products at its newly- leased facility
in Irvine, California. The new facility, when fully equipped, will include
sintering, casting (including soluble core) and extrusion capabilities, although
there can be no assurance that these capabilities will be adequate for all of
the Company's future fabrication requirements, or, on the other hand, that the
Company will be able to fully utilize the plant's capacity. The manufacturing
process for Boralyn(R) utilizes high temperature and high pressure processes and
may be subject to volatile chemical reactions. A mechanical or human failure or
unforeseen condition, including natural disasters such as earthquakes,
characteristic of Southern California, could result in temporary interruption of
the Company's manufacturing capacity. Moreover, the Company's manufacturing
-13-
<PAGE>
operations will use certain equipment which, if damaged or otherwise rendered
inoperable or unavailable, could result in the disruption of the Company's
manufacturing operations. Although the Company has obtained business
interruption insurance with coverage for lost profits and out-of-pocket expenses
of $1.0 million per occurrence, and presently maintains and intends to continue
to maintain other property and casualty coverage that it believes to be
adequate, any extended interruption of operations at the Company's manufacturing
facility would have a material adverse effect on the business of the Company.
Rapid Technological Change and New Product Development. The Company
operates in a rapidly evolving field -- advanced composite materials -- that is
likely to be affected by future technological developments. The Company's
ability to anticipate changes in technologies, markets and industry trends and
to develop and introduce new and enhanced products on a timely basis will be a
critical factor in its ability to grow and remain competitive. There can be no
assurance that new products will be completed or that any new products can be
marketed successfully. In addition, the anticipated development schedules for
new or improved products are inherently difficult to predict and are subject to
change as a result of shifting priorities in response to customers' requirements
and competitors' new product introductions. Moreover, the Company expects that
it will devote substantial resources to research and development efforts. The
costs of those efforts will be expensed as they are incurred, notwithstanding
that the benefits, if any, from the Company's research and development efforts
(in the form of increased revenues or decreased product costs) may not be
reflected, if at all, until subsequent periods.
In order to realize the benefits of Boralyn(R), hard disk drive
manufacturers will have to modify existing hard disk drive designs. The Company
believes that hard disk drive manufacturers will be motivated to modify or
introduce new hard disk drive designs only after a substantial testing period
and significant marketing efforts by the Company. The Company expects to incur
substantial expenses in connection with those testing and marketing efforts, and
anticipates ultimately that disks based on Boralyn(R) will be accepted by hard
disk drive manufacturers, if at all, only if such disks can be demonstrated to
have superior characteristics and can be offered at competitive prices. Further,
the Company expects that use of disks based on Boralyn(R) will commence with,
and could be limited to, high-end computer hard disk drives, which constitute a
small but significant percentage of the current market for computer hard disks.
Dependence on Patents. The Company has obtained one United States
patent that it believes provides protection for its proprietary Boralyn(R)
technology and contains claims that cover the use of Boralyn(R), particularly in
high-end sporting goods, as well as in certain other markets targeted by the
Company. The Company has also filed additional patent applications, including
divisional patent applications and continuation-in-part applications that stem
from the Company's original patent application. The divisional patent
applications relate to methods of fabricating Boralyn(R) and to bicycle frames
that were disclosed in the original patent application. The continuation-in-part
patent applications expand the scope of the claims in the original patent, and
cover the Company's processes of fabricating Boralyn(R). Divisional patent
applications and continuation-in-part patent applications generally are likely
to complete the U.S. Patent Office review process on an expedited basis and,
with respect to claims having a common subject matter with those in the original
patent, are entitled to the date of filing of the original patent for purposes
of considering patentability. The divisional patent application relating to
bicycle frames was allowed in June 1996 and is expected to issue in March 1997.
The divisional patent application relating to methods of fabricating Boralyn(R)
was allowed in September 1996. There can be no assurance that the Company's
pending continuation-in-part patent applications will continue to receive
expedited review. New patent applications recently filed by the Company cover
(i) application of Boralyn(R) in neutron shielding, (ii) application of
Boralyn(R) in computer hard disk drives and (iii) a new soluble core
manufacturing method for Boralyn(R)-based structures. The Company is not aware
of any reason why its pending applications should not be granted with claims
-14-
<PAGE>
that will provide coverage and, therefore, adequate protection for its
anticipated business activities, although there can be no assurance in that
regard. There can also be no assurance that the Company's existing patent and
the divisional patent applications that were allowed, or any other patents that
may be granted, will be valid and enforceable or provide the Company with
meaningful protection from competitors. Further, there can be no assurance that
any pending patent application will issue as a patent or that any claim thereof
will provide protection against infringement. If the Company's present or future
patent rights are ineffective in protecting the Company against infringement,
the Company's marketing efforts and future revenues could be materially and
adversely affected. Moreover, if a competitor were to infringe the Company's
patent, the costs of enforcing the Company's patent rights may be substantial or
even prohibitive. There can also be no assurance that the Company's future
products will not infringe the patent rights of others or that the Company will
not be forced to expend substantial funds to defend against infringement claims
of, or to obtain licenses from, third parties. The Company currently has only
limited patent protection for its technology outside the United States, and may
be unable to obtain even limited protection for its proprietary technology in
certain foreign countries.
Product Liability Risks. The Company faces an inherent business risk of
exposure to product liability claims in the event that any of its products are
alleged to be defective or cause harmful effects. The cost of defending or
settling product liability claims may be substantial. The Company currently
maintains and intends to continue to maintain product liability insurance
coverage that it believes to be adequate. There can be no assurance that the
Company will be able to obtain such insurance on acceptable terms in the future
or that such insurance will adequately cover any claims.
Dependence on Management. The Company's future success and
profitability is substantially dependent upon the performance of its senior
executives, including Robin A. Carden, the Company's founder and principal
stockholder, and Walter R. Menetrey, its chief operating officer. Each of the
Company's senior executives has an employment agreement with the Company and has
a substantial equity interest in the Company through ownership of shares of
Common Stock or the grant of options to purchase shares of Common Stock. The
loss of Mr. Carden or Mr. Menetrey could have a material adverse effect on the
Company. Moreover, the Company does not maintain key-man life insurance on any
of its executives other than a $5.0 million policy on the life of Mr. Carden.
The Company's future growth will also be dependent upon its ability to attract
and retain additional qualified management, technical, scientific,
administrative and other personnel. By reason both of its location and the
nature of its business, the Company believes it will experience significant
competition for qualified management, supervisory, engineering and other
personnel. There can be no assurance that the Company will be successful in
hiring or retaining the personnel it requires for continued growth.
Need for Additional Management Information Systems. The Company's
existing management information and accounting systems are not designed for, and
are likely to be inadequate to handle, information and accounting requirements
arising from large-scale production of Boralyn(R) and future sales growth,
should they materialize. A portion of the net proceeds of the Initial Public
Offering have been allocated to procurement and installation of accounting and
manufacturing production management software and related computer hardware
designed for a large-scale manufacturing enterprise, which is being installed
during the first half of 1997. There can be no assurance that such management
information systems will be adequate for the Company's future needs.
Competition. The materials industry is highly competitive. The Company
competes in its chosen markets against several larger multi-national companies,
all of which are well-established in those markets and have substantially
greater financial and other resources than those of the Company. Competitive
market conditions could adversely affect the Company's results of operations if
it were required to reduce product prices to remain competitive or were unable
to achieve significant sales of its products.
-15-
<PAGE>
Need for Future Capital. Future growth will be dependent, in part, upon
the capital resources available to the Company from time to time. The Company's
ability to obtain future debt financing will be dependent in part on the quality
and amount of the Company's trade receivables and inventory. The Company
believes that internally generated funds and cash on hand should satisfy the
Company's anticipated capital needs for the next 21 to 24 months. However, there
can be no assurance that those funds will be sufficient to support the Company's
business strategy or that, if additional financing is required, it will be
available in amounts and on terms satisfactory to the Company, if at all.
Dependence on Trademarks for Current and Future Markets. The market for
the Company's products is and will remain dependent upon the goodwill engendered
by its trademarks and trade names. Trademark protection is therefore material to
the Company's business. Although Boralyn(R) is registered in the United States,
there can be no assurance that the Company will be successful in asserting
trademark or trade name protection for its significant marks and names in the
United States or other markets, and the costs to the Company of such efforts may
be substantial.
Dependence on Principal Suppliers. The Company presently purchases its
principal raw material, boron carbide, from a limited number of suppliers,
including one supplier that provides approximately 50% of the Company's present
requirements. The Company's business would be materially and adversely affected
if it were unable to continue to receive boron carbide at prices and on terms
presently made available to it by its principal supplier. Although the Company
believes that boron carbide is readily available from other suppliers, there can
be no assurance that the Company will be able to continue to obtain desired
quantities of boron carbide on a timely basis at prices and on terms deemed
reasonable by the Company. The Company's business would be materially and
adversely affected if it were unable to continue to receive boron carbide at
prices and on terms comparable to those presently made available to it by its
principal supplier.
Possible Dependence on Significant Customers. In view of the very early
stage nature of the Company's business, currently it has only a limited number
of customers, each of whom is material to the Company's present results of
operations. Even after the Company matures, however, certain customers may be
material to the business, operations and future prospects of the Company. There
can be no assurance that one or more principal customers will not suffer
business or financial setbacks resulting in reduction or cancellation of product
orders or the Company being unable to obtain payment from such customers at any
time or from time to time. The loss of sales to one or more significant
customers could have a material adverse effect on the business and operations of
the Company. The Company currently has granted an exclusive world wide license
covering metalwood golf club heads to Taylor Made, and is exclusively discussing
other related products. Although the Company generally does not intend to enter
into exclusive production or distribution arrangements with any customer, there
may be circumstances in which the benefits offered by a proposed exclusive
arrangement would justify the Company committing to an exclusive relationship as
regards a product or product line for a period of months or years. However,
there can be no assurance that the prospective benefits of such an exclusive
relationship would, in fact, materialize, and the existence of exclusive
relationships with one or more parties might prevent the Company from pursuing
other market alternatives, with possible adverse results on future revenues and
prospects.
Quarterly Fluctuations in Operating Results. The Company's operating
results may vary significantly from quarter to quarter, in part because of the
costs associated with changes in the Company's products and personnel, the size
and actual delivery dates of orders, and the timing of, and costs related to,
any future acquisitions. The Company's operating results for any particular
quarter are not necessarily indicative of any future results. The uncertainties
associated with new product introduction and market trends may limit
management's ability to forecast accurately short-term results of operations.
Fluctuations caused by variations in quarterly operating results or the
Company's failure
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<PAGE>
to meet analyst's projections or public expectations as to operating results may
adversely affect the market price of the Common Stock.
Control by Certain Stockholders; Anti-takeover Provisions. Certain of
the Company's present stockholders own a substantial majority of the outstanding
shares of Common Stock. Consequently, those stockholders have the ability to
elect all the Company's directors and to control the outcome of all other issues
submitted to the Company's stockholders, and other stockholders do not have the
ability to elect any of the Company's directors or to control the outcome of
other matters submitted to the stockholders. Additionally, the Company's Board
of Directors has the authority to issue up to 5,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of holders of any Preferred Stock that may be issued in the future.
Although the Company has no present intention to issue shares of Preferred
Stock, any issuance of Preferred Stock, while potentially providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. Certain
provisions of Delaware law applicable to the Company may also discourage
third-party attempts to acquire control.
Shares Eligible for Future Sale. Future sales of shares of Common Stock
by existing stockholders pursuant to Rule 144 promulgated under the Securities
Act of 1933, as amended, or otherwise, could have an adverse effect on the price
of the shares of Common Stock. In addition, the Company has contractually
granted certain of its existing stockholders, including, among others, Robin A.
Carden, Walter R. Menetrey, M. Kingdon Offshore NV, Kingdon Associates, L.P.,
Kingdon Partners, L.P., Udi Toledano and Edelson Technology Partners III,
certain registration rights. No prediction can be made as to the effect that
future sales of Common Stock, or the availability of shares of Common Stock for
future sales, will have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock.
Possible Volatility of Stock Price. Trading volume and prices for the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operations, results, announcements with respect to sales and
earnings, as well as technological innovations, and new product developments and
other events or factors, which cannot be foreseen or predicted by the Company,
including the sale or attempted sale of a large amount of securities in the
public market, the registration for resale of any shares of Common Stock, and
the effect on the Company's earnings of existing or future equity-based
compensation awards to management.
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<PAGE>
2. PROPERTIES.
The Company leases its new facility in Irvine, California, under a
five-year lease entered into in June 1996 and expiring in August 2001, with a
five-year renewal option. The 48,000 square foot, primarily single story
facility, is located on a three-acre site at 16761 Hale Avenue in Irvine in an
industrial park with close proximity to truck, rail and air (John Wayne Airport,
a major regional airport in Orange County) connections and a highly trained
labor pool. Of the total 48,000 square foot area of the facility, approximately
10,000 square feet are for office space and approximately 38,000 square feet are
for manufacturing operations dedicated to Boralyn(R) ingot manufacturing,
including powder consolidation and sintering (approximately 10,000 square feet),
extrusion of tubes and other shapes (approximately 8,000 square feet), die
casting (approximately 8,000 square feet), and secondary processes and
warehousing.
The facility is designed for expansion of capacity to match future
needs over the next several years, with additional warehousing to be leased at a
nearby location, if required. There can be no assurance that these facilities
will be adequate for all of the Company's future fabrication requirement, or,
alternatively, that the Company will be able to fully utilize the capacity of
its new facility. The Company believes the new facility will be adequate for its
contemplated needs.
3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending or, to the Company's
best knowledge, presently threatened against the Company. See Note 7 to the
Company's Financial Statements filed as part of this Report.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1996.
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is listed for quotation under the symbol
"ALYN," on the National Market of The Nasdaq Stock Market, Inc. The following
table sets forth the high and low per share bid prices for the Company's common
stock for each quarterly period since the Company's initial public offering on
October 22, 1996.
Common Stock
Calendar Year High Low
1996
Fourth Quarter 16 10
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<PAGE>
As of March 14, 1997, there were approximately 400 holders of record of
the Company's common stock.
The Company does not anticipate paying any dividends on its common
stock in the foreseeable future. The Company presently intends to retain its
earnings, if any, to finance the development of its business. The payment of any
dividends in the future will depend on the evaluation by the Company's Board of
Directors of such factors as it deems relevant at the time. Currently, the Board
of Directors believes that all of the Company's earnings, if any, should be
retained for the development of the Company's business.
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<PAGE>
6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Alyn Old Alyn
-----------------
-----------------------------------------------------------------
Period from Period from
May 2, January 1,
1996 to 1996 to Years ended December 31,
December 31, May 1, -----------------------------------------------
----------------- ---------------
1996 1996 1995 1994 1993 1992
----------------- --------------- ----------- ------------- ----------- --------
(Unaudited)
Statements of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Net revenue $90 $104 $319 $309 $540 $377
----------------- -------------- ------------ ------------- ----------- --------
Costs and expenses:
Cost of goods sold 80 34 203 92 265 273
Establishment of manufacturing
facilities 262
General and administrative expenses 1,257 53 219 352 259 53
Selling and marketing 587 23 52 143 114 32
Research and development 283 7 79 180 24 19
----------------- -------------- ------------ ------------- ----------- --------
Total costs and expenses 2,469 117 553 767 662 377
----------------- -------------- ------------ ------------- ----------- --------
Operating loss (2,379) (13) (234) (458) (122) 0
Other income (expense), net 141 (2) (10) (11) (3) 0
----------------- -------------- ------------ ------------- ----------- --------
Loss before provision for income taxes (2,238) (15) (244) (469) (125) 0
Provision for income taxes 1 1 1 1 1 1
----------------- -------------- ------------ ------------ ------------ --------
Net loss ($2,239) ($16) ($245) ($470) ($126) ($1)
================= ============== ============ ============ ============ ========
Per Share Data:
Net loss per share ($0.25)
=================
Weighted average number of common shares
outstanding 8,800
=================
Proforma net loss(1) (42) ($322)
============== ===========
Pro forma net loss per share(2) ($0.01) ($0.04)
============== ===========
Pro forma weighted average common shares
outstanding(2) 8,000 8,000
============== ===========
Balance Sheet Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Unaudited)
Working capital (deficit) $23,494 ($382) ($133) $18 $145
Total assets 32,203 128 193 219 198
Long-term obligations 0 128 128 128 128
Total stockholders' equity (deficit) 31,066 (490) (245) (99) 26
</TABLE>
(1) The pro forma financial information includes the amortization of
intangible assets. The general and administrative expenses do not
reflect the amortization of intangible assets of $77,000 and $26,000
for the year ended December 31, 1995 and the Period from January 1,
1996 to May 1, 1996, respectively.
(2) The pro forma net loss per share and the weighted average common
shares outstanding reflect the merger of Old Alyn with AC Acquisition
Corp. and the issuance of 0.02611 shares of common stock in exchange
for each issued and outstanding share of common stock of Old Alyn,
and an 80-for-one stock split.
-20-
<PAGE>
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
Since its inception in 1990, the Company has been engaged in research,
development, testing and prototype production of advanced metal matrix composite
materials, utilizing proprietary technology for the application of boron carbide
in combination with aluminum, under the name Boralyn(R). The Company applied for
a patent regarding Boralyn(R) in January 1994, and the patent was granted in
January 1996. In the fourth quarter of 1993 and in 1994, the Company sold
Boralyn(R) tubes, as well as Boralyn(R) prototype cast parts, with a large
portion of the Boralyn(R) sales in each of 1993 and 1994 being production tubes
for one bicycle manufacturer. In 1995, the Company stopped supplying that
manufacturer in order to pursue what it considered to be more promising
marketing alternatives. In 1995 and 1996, Boralyn(R) sales were primarily the
result of prototype orders. In September 1996, the Company and Taylor Made
entered into an agreement which provides for the production and purchase of
Boralyn(R) based metalwood golf club heads through June 30, 1999, and an
exclusive license through that date should specified minimum volume requirements
be met. Under the agreement, Taylor Made is working with the Company to develop
club head designs, molds, manufacturing, tooling, and production and promotional
programs in order to permit deliveries of Boralyn(R)-based metalwood golf club
heads for sale in the second half of 1997. Taylor Made has placed its first
purchase order covering $2.25 million of metalwood golf club heads. No
production revenues for Boralyn(R) have been recognized since late 1994, and
none are anticipated prior to the third quarter of 1997. The Company does not
expect to achieve significant sales of Boralyn(R) prior to the second half of
1997, and there can be no assurance that any significant sales will be achieved.
The Company was unprofitable through 1996, expects to incur a loss for 1997 as a
result of start-up expenses in anticipation of production orders, and may incur
additional losses thereafter.
Results of Operations
For purposes of comparison with the year ended December 31, 1995, the
results of operations for the period from January 1, 1996 through May 1, 1996
and the period from May 2, 1996 through December 31, 1996 have been aggregated.
Total revenue for 1996 decreased 39.2% to $194,000 from $319,000 in
1995. The decrease was primarily the result of the Company's decision, following
the grant in January 1996 of the patent for Boralyn(R), to focus its efforts on
sales of Boralyn(R)-based products and, in anticipation of receiving additional
private and public financing later in 1996, to reduce its efforts to sell boron
carbide powders and ceramic products, which it had pursued in the past in order
to generate cash. In 1995, total revenue increased 3.2% to $319,000, compared
with $309,000 in 1994. The increase reflected a slight increase in Boralyn(R)
sales, as well as an increase in sales of boron carbide powders and ceramic
products.
Cost of goods sold decreased 43.8% to $114,000 in 1996 from $203,000 in
1995, reflecting the reduction in revenues. Cost of goods sold decreased as a
percentage of total revenue to 58.8% in 1996 from 63.6% in the prior year. The
decrease was primarily attributable to the change in product mix to include a
greater proportion of higher margin Boralyn(R) product sales. In 1995, cost of
goods sold increased 120.7% to $203,000 compared with $92,000 in 1994. Cost of
goods sold increased as a percentage of total revenue to 63.6% in 1995 from
29.8% in the prior year. The increase was primarily attributable to the price of
boron carbide, which adversely affected the margins on sales of boron carbide
powder.
-21-
<PAGE>
Expenses for the establishment of manufacturing facilities of $262,000
were incurred in 1996. There were no expenses incurred during the prior year.
The expenses were incurred for the addition of manufacturing management and
related pre-operating costs as the Company built infrastructure and installed
machinery and equipment to produce its Boralyn(R) products. These expenses are
expected to increase in the next few quarters to support the Company reaching
normal production levels.
General and administrative expenses increased 498.2% to $1,310,000 in
1996 from $219,000 in 1995. As a percentage of total revenue, general and
administrative expenses increased to 675.3% in 1996 from 68.7% in the prior
year. The increase was primarily the result of the additional staff, including
recruiting and moving costs, legal services and other administrative costs.
These expenses are expected to increase substantially in the next several
quarters to support anticipated growth in the Company's business activities. In
1995, general and administrative expenses decreased 37.8% to $219,000, compared
with $352,000 in 1994. The decrease in expenses was primarily a result of
expense reduction efforts to conserve cash.
Selling and marketing expenses increased 1,073.1% to $610,000 in 1996
from $52,000 in 1995. As a percentage of total revenue, selling and marketing
expenses increased to 314.4% in 1996 from 16.3% in the prior year. This increase
was the result of increased sales staff, including specialists in sporting
goods, computers, and transportation industries, marketing staff and an increase
in marketing expenses incurred in the start-up marketing efforts for Boralyn(R)
products. Such expenses are expected to increase substantially over the next
several quarters following the year ended December 31, 1996, as
Boralyn(R)-related marketing and sales activities increase. In 1995, selling and
marketing expenses decreased 63.6% to $52,000, compared with $143,000 in 1994.
The decrease in expenses was primarily a result of a reduction in selling
expenses as the Company reduced expenditures to conserve cash.
Research and development expenses increased 267.1% to $290,000 in 1996
from $79,000 in 1995. As a percentage of total revenue, research and development
expenses increased to 149.5% in 1996 from 24.8% in the prior year. This increase
was primarily the result of increased research staff and ongoing development
programs. The Company expects research and development related personnel
expenses and other research and development expenses to increase substantially
in 1997 and thereafter, as the Company expands ongoing development programs. In
1995, research and development expenses decreased 56.1% to $79,000, compared
with $180,000 in 1994. The decrease in expenses was primarily a result of the
lower level of product development contracts, and a reduction in research and
development efforts in order to conserve cash.
As a result of the foregoing factors, loss before provision for income
taxes increased 823.4% to $2,253,000 in 1996 from a loss of $244,000 in 1995,
compared with a decrease in 1995 of 48.0% from a loss of $469,000 in 1994.
Liquidity and Capital Resources
On October 22, 1996, the Company completed an initial public offering
of 2,750,000 shares of its common stock at a price of $13.50 per share, which
generated net proceeds to the Company of approximately $33.3 million after
underwriting discounts and offering expenses. Alyn intends to use the net
proceeds as follows: (i) approximately $12.6 million for capital expenditures
for new production facilities, equipment and tooling, and for management
information systems, and (ii) approximately $3.0 million for marketing
activities, with the remaining net proceeds to be utilized for working capital
and general corporate purposes. The Company used approximately $4.7 million of
net proceeds from the initial public offering for repayment of the credit
facility from certain stockholders and related accrued interest. The Company has
invested approximately $5.1 million in
-22-
<PAGE>
new machinery and equipment and production facilities, and has made deposits for
an additional $1.7 million in machinery and equipment. In accordance with
investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to fund operations have been invested in
interest-bearing high quality short-term investment grade securities and
government securities.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that its existing cash resources will be
sufficient to satisfy its contemplated cash requirements through at least 1998.
The Company's future liquidity and capital funding requirements will depend on
numerous factors, including results of marketing its Boralyn(R) products, their
acceptance in the market, and the costs and timing of growth in sales, marketing
and manufacturing activities.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 for a list of the Alyn Corporation Financial Statements and
Schedules and Supplementary Information filed as part of this report.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
-23-
<PAGE>
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item, insofar as it relates to
directors, is incorporated herein by reference to the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on June 2, 1997.
Directors and Executive Officers of the Company
The Directors and executive officers of the Company and their ages are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robin A. Carden.......................... 39 President, Chief Executive Officer and a Director
Walter R. Menetrey....................... 63 Executive Vice President, Chief Operating Officer and a
Director
Phillip R. Gustavson..................... 52 Vice President, Finance and Administration
Harry Edelson............................ 60 Director
Michael Markbreiter...................... 35 Director
Udi Toledano............................. 46 Chairman of the Board and a Director
</TABLE>
The business experience, principal occupations and employment, as well
as the periods of service, of each of the directors and executive officers of
the Company during at least the last five years are set forth below.
Robin A. Carden is the founder of the Company and has been the
President, Chief Executive Officer and a Director since its formation in 1990.
Prior to 1990, Mr. Carden was employed by Ceradyne Inc., a company engaged in
the development and production of advanced ceramics products, as Senior Sales
Engineer, and was engaged in developing civilian applications for advanced
ceramics products originally developed for military use. Mr. Carden graduated
from Long Beach State University with a Bachelor of Science degree. A number of
United States patents have been issued to Mr. Carden.
Walter R. Menetrey has been the Executive Vice President, Chief
Operating Officer and a Director of the Company since May 1996. From August 1992
to April 1996, he worked as an independent management consultant to numerous
companies engaged in, among other things, the security and software industries.
Prior to July 1992, Mr. Menetrey was Chief Executive Officer of Meret, Inc., a
company engaged in the manufacture and sale of fibre optics communication
equipment. In July 1995, Mr. Menetrey filed for personal bankruptcy under
Chapter 7 of the Bankruptcy Code, and Mr. Menetrey was granted a discharge of
the claims of certain creditors pursuant to Section 727 of the Bankruptcy Code
in November 1995. Mr. Menetrey received a Bachelor of Science degree in Physics
and a Master of Science degree in Electrical Engineering from the California
Institute of Technology.
Phillip R. Gustavson has been the Vice President, Finance and
Administration, of the Company since June 1996. From March 1995 to June 1996,
Mr. Gustavson was the Corporate Controller for PIA Merchandising, Co., Inc., a
public company engaged in the retail merchandising services industry. From March
1993 to December 1994, he was the Chief Financial and
-24-
<PAGE>
Administrative Officer of Aztec Toys, Inc., a toy manufacturing company. Prior
to September 1992, he was the Vice President (Finance and Administration) of
Geneva Capital Markets, Inc., a private investment company. Mr. Gustavson is a
Certified Public Accountant.
Harry Edelson has been a Director of the Company since May 1996. Mr.
Edelson has been the Managing Partner of Edelson Technology Partners, a venture
capital fund that is an affiliate of Edelson Technology Partners III, a
principal stockholder of the Company, for more than ten years. Edelson
Technology Partners and its related funds have invested in more than 70
companies involved in a wide range of technologies, including
telecommunications, computers, semiconductors, specialty chemicals,
environmental and publishing, with a focus on funding technologies that could
assist its corporate partners. Mr. Edelson was a financial analyst for over 12
years, covering technology companies for Merrill Lynch & Co., Drexel Burnham
Lambert and First Boston Corporation. He has consulted for dozens of companies
and is a frequent speaker and contributor to leading business magazines in
Europe, Asia and the United States.
Michael Markbreiter has been a Director of the Company since May 1996.
Since August 1995, Mr. Markbreiter has been a portfolio manager for private
equity investments for Kingdon Capital Management Corp., a manager of investment
funds. In April 1994, he co-founded Ram Investment Corp., a venture capital
company. From March 1993 to January 1994, he served as a portfolio manager for
Kingdon Capital Management Corp. Prior to February 1993, he worked as an analyst
at Alliance Capital Management Corp. Mr. Markbreiter graduated from Cambridge
University with a degree in Engineering.
Udi Toledano has been a Director of the Company since May 1996 and
Chairman of the Board since January 1997. Mr. Toledano has been the President of
Andromeda Enterprises, Inc., a private investment company, since December 1993.
Prior to that he was the President of CR Capital Inc., a private investment
company, for more than five years. He has been an advisor to various public and
private corporations, none of which competes with the Company. Since May 1996,
Mr. Toledano has been a Director of HumaScan Inc., a public medical device
company, and since April 1995, he has been a Director of Global Pharmaceutical
Corporation, a public generic pharmaceutical manufacturing company. Since July
1994, Mr. Toledano has been a Director of Universal Stainless & Alloy Products,
Inc., a public specialty steel producing company, and since January 1993, he has
been a Director of Pudgie's Chicken, Inc., a public national fast food chain.
All Directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Messrs. Edelson,
Markbreiter and Toledano were elected as Directors of the Company pursuant to
the terms of a Stockholders' Agreement, dated as of May 1, 1996 (the
"Stockholders' Agreement"), by and among the Company and certain stockholders of
the Company. The voting arrangements in the Stockholders' Agreement terminated
upon the consummation of the Offering.
11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 2, 1997.
-25-
<PAGE>
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 2, 1997.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 2, 1997.
-26-
<PAGE>
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents Filed with this Report.
The following documents are filed as part of this report.
1. Financial Statements
The financial statements listed in the accompanying List of
Financial Statements covered by Report of Independent
Auditors.
2. Financial Statement Schedules
None.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* By-Laws of the Registrant.
4.1* Specimen Copy of Stock Certificate for shares of common stock.
4.2* Stockholders Agreement, dated as of May 1, 1996, by and among the
Company and certain stockholders of the Registrant.
10.1* 1996 Stock Incentive Plan of the Registrant.
10.2* Employment Agreement between the Company and Robin A. Carden, dated
as of April 1, 1996, as amended by Amendment Number
One, dated as of April 30, 1996.
10.3* Form of Employment Agreement between the Company and certain senior
executives.
10.4* Lease, dated as of June 12, 1996, between the
Registrant and Taylor- Longman, with respect to
premises at 16761 Hale Avenue, Irvine, California.
10.5* Sale of Goods Agreement and Exclusive License, dated as of September 10,
1996, by and between Taylor Made Golf Company, Inc. and the Registrant
(for which confidential treatment has been granted with respect to certain
provisions).
27.1 Financial Data Schedule for the year ended December 31, 1996.
99.1* U.S. Patent Number 5,496,223, dated January 23, 1996.
</TABLE>
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the fourth
quarter of the year ended December 31, 1996.
---------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File no. 333-09143) and any amendments thereto.
-27-
<PAGE>
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.
ALYN CORPORATION
By: /s/ Robin A. Carden
------------------------------------
Robin A. Carden, President and Chief
Executive Officer
Pursuant to the requirements 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robin A. Carden
- ----------------------------------------------- President, Chief Executive March 18, 1997
Robin A. Carden Officer and Director (principal
executive officer)
/s/ Phillip R. Gustavson Vice President, Finance and March 18, 1997
- ----------------------------------------------- Administration (principal
Phillip R. Gustavson financial and accounting
officer)
/s/ Walter R. Menetrey Executive Vice President, Chief March 18, 1997
- ----------------------------------------------- Operating Officer and Director
Walter R. Menetrey
/s/ Harry Edelson Director March 19, 1997
- -----------------------------------------------
Harry Edelson
/s/ Michael Markbreiter Director March 18, 1997
- -----------------------------------------------
Michael Markbreiter
/s/ Udi Toledano Chairman of the Board and a Director March 19, 1997
- -----------------------------------------------
Udi Toledano
</TABLE>
S-1
<PAGE>
Form 10-K Item 14(a)(1)
ALYN CORPORATION
LIST OF FINANCIAL STATEMENTS
The following Finanical Statements of Alyn Corporation
are included in Item 8:
Page
Report of Independent Accountants.......................... F-2
Balance Sheet.............................................. F-3
Statement of Operations.................................... F-4
Statement of Stockholders' Equity (Deficit)................ F-5
Statement of Cash Flows.................................... F-6
Notes to Financial Statements.............................. F-7
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Alyn Corporation
We have audited the accompanying balance sheet of Alyn Corporation (the
"Company") as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit) and of cash flows for the period from May 2,
1996 through December 31, 1996. We have also audited the accompanying balance
sheet of Old Alyn as of December 31, 1995, and the related statements of
operations, stockholders' equity (deficit) and of cash flows of Old Alyn for
the two years ended December 31, 1995 and for the period from January 1, 1996
through May 1, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements audited by us present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and Old Alyn at December 31, 1995, and the results of operations and cash
flows of the Company and of Old Alyn for the periods described in the first
paragraph above, in conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 20, 1997
F-2
<PAGE>
ALYN CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
Alyn Old Alyn
December 31, December 31,
1996 1995
------ -----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $24,411,000 $77,000
Accounts receivable, net of allowance for doubtful
accounts of $4,000 at December 31, 1996 57,000 15,000
Inventories 41,000 16,000
Other current assets 122,000
---------------------------- --------------------
Total current assets 24,631,000 108,000
Equipment, furniture and fixtures, net 5,027,000 3,000
Other assets 1,771,000
Intangible assets, net of accumulated amortization
of $56,000 at December 31, 1996 774,000 17,000
---------------------------- ---------------------
$32,203,000 $128,000
============================ =====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $945,000 $64,000
Accrued and other current liabilities 192,000 426,000
---------------------------- ----------------------
Total current liabilities 1,137,000 490,000
Note payable to stockholder 128,000
Commitments and contingencies (Note 8)
Stockholders' equity (deficit)
Alyn:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, $0.001 par value; 20,000,000 shares
authorized; 10,750,000 shares issued and
outstanding 11,000
Additional paid-in-capital 33,294,000
Old Alyn:
Common stock, Class A, no par value; 10,000,000
shares authorized; 1,700,000 shares issued
and outstanding 1,000
Common stock, Class B, no par value; 10,000,000
shares authorized; 300,000 shares issued and
outstanding 325,000
Accumulated deficit (2,239,000) (816,000)
------------------------------ -------------------
Total stockholders' equity (deficit) 31,066,000 (490,000)
------------------------------ -------------------
$32,203,000 $128,000
============================== ===================
See accompanying notes to financial statements.
F-3
</TABLE>
<PAGE>
ALYN CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Alyn Old Alyn
------------------------ ----------------------------------------------------------
Period from Period from
May 2, January 1,
1996 to 1996 to
December 31, May 1, Year ended December 31,
------------------------ --------------- ---------------------------------------
1996 1996 1995 1994
------------------------ -------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Net sales $25,000 $104,000 $261,000 $309,000
Contract revenue 65,000 58,000
------------------------ ------------ ---------------------- ----------------
Total revenue 90,000 104,000 319,000 309,000
------------------------ ------------ ---------------------- ----------------
Costs and expenses:
Cost of goods sold 80,000 34,000 203,000 92,000
Establishment of manufacturing
facilities 262,000
General and administrative
expenses 1,257,000 53,000 219,000 352,000
Selling and marketing 587,000 23,000 52,000 143,000
Research and development 283,000 7,000 79,000 180,000
-------------------------- ----------- --------------------- ----------------
Total costs and expenses 2,469,000 117,000 553,000 767,000
-------------------------- ----------- --------------------- ----------------
Operating loss (2,379,000) (13,000) (234,000) (458,000)
Interest expense (141,000) (3,000) (12,000) (12,000)
Other income 282,000 1,000 2,000 1,000
-------------------------- --------- ----------------------- ----------------
Loss before provision for
income taxes (2,238,000) (15,000) (244,000) (469,000)
Provision for income taxes 1,000 1,000 1,000 1,000
-------------------------- --------- ---------------------- ----------------
Net loss ($2,239,000) ($16,000) ($245,000) ($470,000)
========================== =========== ==================== ================
Net loss per share ($0.25)
=========================
Weighted average number of common
shares outstanding (Note 1) 8,800,205
=========================
Unaudited pro forma data (Notes 1 and 3):
Pro forma net loss ($42,000) ($322,000)
========= ====================
Pro forma net loss per share ($0.01) ($0.04)
========= ====================
Pro forma weighted average
number of common shares
outstanding (Note 1) 8,000,000 8,000,000
========= ====================
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
ALYN CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Common Stock, Class A
----------------------------------- ----------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Old Alyn (Notes 1 and 5)
Balance at December 31, 1993 1,000 $1,000
Sale of common stock warrant
Exchange of shares of common
stock for shares of common
stock, Class A (1,000) (1,000) 1,700,000 $1,000
Issuance of common stock,
Class B
Net loss
------------------------------- ----------------------------------------
Balance at December 31, 1994 1,700,000 1,000
Net loss
------------------------------- ----------------------------------------
Balance at December 31, 1995 1,700,000 1,000
Repurchase of common stock
Net loss
------------------------------- ----------------------------------------
Balance at May 1, 1996 -- -- 1,700,000 $1,000
=============================== ========================================
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
----------------------------------- ----------------------------------------
Shares Amount Shares Amount
Alyn (Note 1)
Issuance of common stock -- -- 4,240,000 $4,000
Common stock issued in exchange
for Old Alyn common stock 3,760,000 4,000
Common stock issued in initial
public offering, net of offering costs 2,750,000 3,000
Net loss
----------------------------------- ----------------------------------------
Balance at December 31, 1996 -- -- 10,750,000 $11,000
=================================== ========================================
Common Stock, Class B
Accumulated
Deficit
-------------------------------------------
Shares Amount
Old Alyn (Notes 1 and 5)
Balance at December 31, 1993 ($101,000)
Sale of common stock warrant $75,000
Exchange of shares of common
stock for shares of common
stock, Class A
Issuance of common stock,
Class B 300,000 250,000
Net loss (470,000)
- -----------------------------------------------------------------------------
Balance at December 31, 1994 300,000 325,000 (571,000)
Net loss (245,000)
- -----------------------------------------------------------------------------
Balance at December 31, 1995 300,000 325,000 (816,000)
Repurchase of common stock (200,000) (217,000) (43,000)
Net loss (16,000)
- -----------------------------------------------------------------------------
Balance at May 1, 1996 - 100,000 $108,000 ($875,000)
= =============================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in Accumulated
Capital Deficit
Alyn (Note 1)
Issuance of common stock $1,000
Common stock issued in exchange
for Old Alyn common stock (4,000)
Common stock issued in initial
public offering, net of offering costs 33,297,000
Net loss ($2,239,000)
---------------------------------------------------------
Balance at December 31, 1996 $33,294,000 ($2,239,000)
=========================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ALYN CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Alyn Old Alyn
----------------------- ----------------------------------------------------
----------------------- ----------------------------------------------------
Period
Period from from
May 2, 1996 January 1,
to December 1996 to
31, May 1, Year ended December 31,
1996 1996 1995 1994
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss ($2,239,000) ($16,000) ($245,000) ($470,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 111,000 1,000 2,000 3,000
Provision for allowance for doubtful accounts 2,000 8,000
(Increase) decrease in operating assets
and liabilities:
Accounts receivable (22,000) (30,000) (7,000) 50,000
Inventories (32,000) 7,000 138,000 (49,000)
Other current assets (122,000)
Deferred offering costs (128,000)
Other assets (1,624,000)
Intangible assets (60,000) (1,000) (6,000) (6,000)
Accounts payable 884,000 (4,000) 22,000 (7,000)
Accrued and other current liabilities (588,000) 94,000 158,000 126,000
----------------------- ------------ ------------------ ------------
Net cash provided by (used in)
operating activities (3,690,000) (69,000) 62,000 (353,000)
------------------------ ------------- ------------------ ------------
Cash flows from investing activities:
Capital expenditures (5,075,000) (4,000) (4,000)
----------------------- ------------- ------------------ ------------
Net cash used in investing activities (5,075,000) (4,000) (4,000)
----------------------- ------------- ------------------ ------------
Cash flows from financing activities:
Sale of common stock warrant 75,000
Issuance of Old Alyn common stock, Class B 250,000
Proceeds from initial stock offering 33,300,000
Payment of stockholder note payable (128,000)
Proceeds from stockholder credit facility 4,650,000
Repayment of stockholder credit facility (4,650,000)
----------------------- ------------- ------------------ ------------
Net cash provided by financing activities 33,172,000 325,000
----------------------- ------------- ------------------ ------------
Net increase (decrease) in cash 24,407,000 (73,000) 62,000 (32,000)
Cash at beginning of period 4,000 77,000 15,000 47,000
------------------------ ----------- ------------------ ------------
Cash at end of period $24,411,000 $4,000 $77,000 $15,000
======================== =========== ================== ============
Supplemental cash flow information:
Cash paid during the period for income taxes $1,000 $1,000 $1,000 $1,000
======================== ============ ================== ============
Cash paid during the period for interest $144,000 -- -- --
======================== ============ ================== ============
Noncash investing and financing activities:
Liability recorded for repurchase of common
stock from stockholder $260,000
===================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business
Alyn Corporation (Alyn or the Company) was incorporated in Delaware on
April 9, 1996. In May 1996, the Company acquired Alyn Corporation (Old Alyn), a
California corporation, whereby all of the 1,800,000 outstanding shares of
common stock of Old Alyn were exchanged at a ratio of 2.1-to-one for 3,760,000
shares of common stock of the Company (0.02611-to-one for 47,000 shares
pre-split discussed below). Subsequent to the acquisition, Old Alyn stockholders
owned forty-seven percent of Alyn. As a result of the change in control of Old
Alyn, the acquisition was accounted for as a purchase.
Alyn designs, develops, manufactures and markets industrial and
consumer products utilizing its proprietary advanced metal matrix composite
materials. Old Alyn had developed technology, for which it obtained a patent in
January 1996, for the application of Boron Carbide in combination with aluminum
in lightweight metal matrix composites under the name Boralyn(R).
On October 22, 1996, the Company completed its initial public offering
of 2,750,000 shares of common stock at a price of $13.50 per share. The Company
received net proceeds of approximately $33.3 million after underwriting
discounts and offering expenses. Subsequently, in October 1996, approximately
$4.7 million of net proceeds from the initial public offering were used for
repayment of principal, accrued interest thereon and all other amounts owing
with respect to a credit facility provided by stockholders, and the credit
facility was terminated.
In July 1996, the Company's Board of Directors amended its Articles of
Incorporation to increase the number of shares authorized of common stock from
110,000 to 20,000,000 and to authorize 5,000,000 shares of preferred stock and
declared an 80-for-one split of its common stock. All share amounts presented
for Alyn and loss per share data for Old Alyn have been adjusted to give
retroactive effect for this split.
Summary of accounting policies
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out cost basis.
Equipment, furniture and fixtures
Equipment, furniture and fixtures, including tooling, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of individual assets, which range from 18 months to 10 years.
Amortization of leasehold improvements is recorded using the straight-line
method over the shorter of the life of the improvement or the term of the
related lease.
F-7
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
Intangible assets
Intangible assets consisting of patents for the Boralyn(R) technology
and goodwill are amortized on a straight-line basis over the estimated economic
life of 10 years. Intangible assets are periodically reviewed for impairment to
ensure that they are fairly stated. The Company reviews the recoverability of
intangible assets by comparing cash flows on an undiscounted basis to the net
book value of the assets. In the event the projected undiscounted cash flows are
less than the net book value of the assets, the carrying value of the assets
will be written-down to their fair value, less cost to sell.
Revenue
The Company recognizes sales of product at the time of shipment.
Contract revenue of $65,000 in 1996 was recognized as the related research and
development costs of $39,000 were incurred. Contract revenue of $58,000 in 1995
was recognized as the related research and development costs of $58,000 were
incurred. Amounts received prior to performance are classified as customer
advances and recognized as earned. The Company performs on-going credit
evaluations and maintains reserves for potential credit losses. Amounts not
collected subsequent to December 31, 1995 and 1994 were written-off.
In 1996, two customers accounted for 38% of product sales, individually
19% and 19%. In 1995, two customers accounted for 54% of product sales,
individually 40% and 14%. In 1994, two customers accounted for 47% of product
sales, individually 31% and 16%.
Research and development
Expenditures for research and development costs are charged to expense
as incurred.
Net loss per share
Net loss per share is based upon the number of weighted average of
common stock shares outstanding during the period from May 2, 1996 to December
31, 1996 after giving retroactive effect to the 80-for-one stock split.
Pro forma net loss and net loss per share
Pro forma net loss per share is based upon the number of weighted
average of common stock shares outstanding during the year ended December 31,
1995 and the period from January 1, 1996 to May 1, 1996, after giving
retroactive effect for the acquisition of Old Alyn, assuming the change from an
S to C-Corporation tax status as a result of the acquisition, and the 80-for-one
stock split. The effect on net loss per share of the acquisition is to increase
the net loss by $77,000 and $26,000 for goodwill amortization for the year ended
December 31, 1995 and the period from January 1, 1996 to May 1, 1996,
respectively, and to increase the weighted average shares outstanding by
3,760,000 (post-split). The effect of the change in tax status was not material.
Historical net loss per share of Old Alyn has not been presented for all periods
as such is not deemed meaningful.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the
F-8
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Concentrations of credit risk
The Company sells its products and services to various companies across
several industries, and therefore management believes that no material
concentrations of credit risk exist.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and held in banks,
money market funds, commercial paper and other short-term investments with a
remaining or original maturity of three months or less when purchased.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and accrued and other
current liabilities. These financial instruments are stated at current value
which approximates fair value.
Long-lived assets
The Financial Accounting Standards Board ("FASB") issued Statement 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121") which is effective for fiscal years beginning
after December 15, 1995. SFAS No. 121 was adopted January 1, 1996 and did not
have a material impact on the Company's financial position, results of
operations or liquidity.
F-9
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
2. Balance sheet components
Alyn Old Alyn
December 31,
1996 1995
Inventories:
<S> <C> <C>
Raw materials $ 24,000 $ 6,000
Finished goods 17,000 10,000
---------------- ------------
$ 41,000 $ 16,000
================ ============
Equipment, furniture and fixtures:
Machinery, equipment and tooling $ 42,000 $ 2,000
Furniture and office equipment 656,000 11,000
Leasehold improvements 2,000 2,000
Construction in progress -
Machinery and equipment 2,055,000
Leasehold improvements 2,339,000
5,094,000 15,000
Less: accumulated depreciation and
amortization (67,000) (12,000)
---------------- -------------
$ 5,027,000 $ 3,000
================ ============
Other assets
Deposits on machinery and equipment $ 1,702,000
Other 69,000
---------------- ----------
$ 1,771,000 $ --
================ ==========
Accrued and other current liabilities:
Accrued compensation $ 255,000
Accrued professional fees $ 82,000 73,000
Customer advance 40,000
Other 110,000 58,000
---------------- ------------
$ 192,000 $ 426,000
================ ============
</TABLE>
3. Income taxes
The Company accounts for income taxes under the liability method.
Accordingly, deferred tax assets and liabilities are measured each year based on
the difference between the financial statement and tax bases of all assets and
liabilities at the current expected income tax rates. Deferred tax assets and
liabilities are not material to the financial position of the Company at
December 31, 1996 and 1995, with the exception in 1996 of the net operating loss
carryforward of $918,000 against which a full valuation allowance was recorded.
In 1994, Old Alyn elected to become an S-Corporation for federal and California
income tax purposes. As a result of these elections, federal and California tax
attributes of Old Alyn
F-10
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
passed to the Old Alyn stockholders. Alyn is a C-Corporation for income tax
purposes and is taxed accordingly. The provision for income taxes in each of the
three years ended December 31, 1994, 1995 and 1996 is comprised primarily of the
annual minimum California franchise tax.
4. Note payable to stockholder
At December 31, 1995, Old Alyn had an unsecured note payable due to a
stockholder of $128,000. In May 1996, the outstanding principal and accrued
interest were paid to the stockholder.
5. Stock transactions - Old Alyn
In June 1994, Old Alyn's Articles of Incorporation were amended
authorizing 10,000,000 shares of Series A common stock and 10,000,000 shares of
Series B common stock. The stockholders of Old Alyn exchanged their existing
shares of common stock for 1,700,000 shares of Series A common stock. Old Alyn
received $75,000 cash in exchange for an option to acquire Series B common stock
of Old Alyn. Pursuant to this option agreement, Old Alyn issued 300,000 shares
of the new Series B common stock for an additional $250,000 in cash.
In April 1996, Old Alyn executed an agreement to repurchase 200,000
shares of the Series B common stock for $260,000 in cash. The cash was paid to
the stockholder in May 1996.
6. Related party transactions
The Company paid $100,000 in 1996 to a firm managed by the Chairman of
the Board for sales, marketing and consulting services.
7. Stock options
In July 1996, the Company established a stock incentive plan for key
employees, non-employee directors and consultants to the Company who are
expected to contribute to the Company's future growth and success. Under the
plan, the Company may grant options with respect to a maximum of 1,000,000
shares of common stock. The options will be granted at not less than fair market
value and vest ratably over a three-year period with the exception of certain
non-employee director options that will be fully vested at the date of grant. No
award may be granted under the plan after June 30, 2006. In October 1996, the
Company granted options for the purchase of 383,000 shares of common stock at
the initial public offering price, all of which were outstanding at December 31,
1996. Of the options outstanding at December 31, 1996, 25,000 options with an
exercise price of $13.50 were exercisable. At December 31, 1996, there were
617,000 shares of common stock reserved under the plan for the future granting
of stock options.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS NO. 123), effective for 1996,
the Company continues to account for stock compensation costs in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost been determined based on the
fair value at the grant dates for awards under the Company's incentive stock
plan in accordance with SFAS No. 123, net loss would have been increased by
$167,000 ($0.02 per share) in 1996. As required by SFAS No. 123, the
F-11
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1996:
historical dividend yield of 0.0%; an expected life of five years; historical
volatility of 58.09% and a risk-free rate of return of 6.34%. The
weighted-average fair value of the options granted during 1996 was $7.62.
8. Commitments and contingencies
Commitments and leases
Future minimum lease payments required under non-cancelable operating
leases are as follows: $287,000 in 1997, $320,000 in 1998, $333,000 in 1999,
$304,000 in 2000, and $200,000 in 2001.
Rent expense totaled $84,000 in 1996, $17,000 in 1995, and $15,000 in
1994.
Litigation and claims
In June 1996, the Company received correspondence from the counsel of a
prospective customer asserting damages suffered as a result of alleged
misrepresentations as to the properties and capabilities of Boralyn(R) and the
prospective customer's alleged loss of anticipated profits from future sales of
products. Management believes that the prospective customer's assertions are
without merit and intends to vigorously defend any litigation brought by the
prospective customer. However, the cost of defending such litigation, if
brought, may be material and there can be no assurance that the Company would
ultimately prevail or that the outcome of such litigation would not have a
material adverse effect on the Company's financial position or results of
operations. No action has been commenced against the Company by the prospective
customer.
Also, in the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial position of the Company.
However, in the opinion of management, such matters are not expected to have a
material adverse effect on the financial position of the Company.
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENT OF ALYN CORPORATION FOR THE TWELVE MONTH PERIOD
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 24,411,000
<SECURITIES> 0
<RECEIVABLES> 61,000
<ALLOWANCES> 4,000
<INVENTORY> 41,000
<CURRENT-ASSETS> 24,631,000
<PP&E> 5,094,000
<DEPRECIATION> 67,000
<TOTAL-ASSETS> 32,203,000
<CURRENT-LIABILITIES> 1,137,000
<BONDS> 0
0
0
<COMMON> 11,000
<OTHER-SE> 31,055,000
<TOTAL-LIABILITY-AND-EQUITY> 32,203,000
<SALES> 129,000
<TOTAL-REVENUES> 194,000
<CGS> 114,000
<TOTAL-COSTS> 153,000
<OTHER-EXPENSES> 2,433,000
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 144,000
<INCOME-PRETAX> (2,253,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (2,255,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,255,000)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
