UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 000-21153.
ALYN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0709359
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16761 Hale Avenue, Irvine, California 92606 (Address of
- --------------------------------------------------------------------------------
principal executive offices, including zip code)
(949) 475-1525
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.001 par value; 12,122,403 shares as of November 8, 1999.
<PAGE>
ALYN CORPORATION
INDEX
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PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet -
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Statement of Operations - 4
Three months ended September 30, 1999
(unaudited) and
September 30, 1998 (unaudited) and
nine months ended September
30, 1999 (unaudited) and
September 30, 1998 (unaudited)
Condensed Statement of Stockholders' Equity - 5
Nine months ended September 30, 1999 (unaudited)
Condensed Statement of Cash Flows - 6
Nine months ended September 30, 1999 (unaudited) and
September 30, 1998 (unaudited)
Notes to Condensed Financial Statements 7-8
(unaudited)
Item 2. Management's Discussion and Analysis of Financial 8-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk
PART II. OTHER INFORMATION 18
SIGNATURES 19
2
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ALYN CORPORATION
CONDENSED BALANCE SHEET
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 248,000 $ 1,232,000
Restricted cash - 2,062,000
Accounts receivable, net 874,000 781,000
Inventories (see Note 2) 1,187,000 401,000
Other current assets 339,000 424,000
------------------ ------------------
Total current assets 2,648,000 4,900,000
------------------ ------------------
Equipment, furniture and fixtures, 19,068,000 20,703,000
Other assets, net 720,000 626,000
Intangibles, net 719,000 732,000
------------------ ------------------
$ 23,155,000 $ 26,961,000
================== ==================
LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,231,000 $ 663,000
Current portion of long-term debt 1,206,000 1,842,000
Accrued and other current liabilities 278,000 956,000
Working capital line of credit
(see Note 4) 351,000 -
Bridge loan (see Note 3) 1,000,000 -
Provision for restructuring expenses
(see Note 5) 669,000 -
------------ ---------
Total current liabilities 4,735,000 3,461,000
Long-term debt
Convertible debt 2,703,000 -
Long-term debt 5,137,000 7,316,000
------------------ ------------------
Total long term debt 7,840,000 7,316,000
------------------ ------------------
Mandatory redeemable preferred stock 1,623,000 -
------------------ ------------------
Stockholders' equity:
Preferred stock 4,000 -
Common stock 12,000 12,000
Additional paid-in capital 40,967,000 37,796,000
Warrants to purchase common stock 293,000 -
Accumulated deficit (32,319,000) (21,624,000)
------------------ ------------------
Total stockholders' equity 8,957,000 16,184,000
------------------ ------------------
$ 23,155,000 $ 26,961,000
================== ==================
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
ALYN CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 721,000 $ 602,000 $ 1,886,000 $ 662,000
Costs and expenses:
Cost of goods sold 2,100,000 1,813,000 6,076,000 3,770,000
General and administrative expenses 474,000 679,000 1,921,000 2,300,000
Selling and marketing 213,000 328,000 788,000 928,000
Research and development 402,000 625,000 1,198,000 2,578,000
Restructuring expense (see Note 5) 729,000 - 729,000 -
----------------------------- --------------------------------
Total costs and expenses 3,918,000 3,445,000 10,712,000 9,576,000
Operating loss (3,197,000) (2,843,000) (8,826,000) (8,914,000)
Interest expense and other expense, net (see Note 6) (918,000) (170,000) (1,494,000) (354,000)
----------------------------- --------------------------------
Loss before provision for income taxes (4,115,000) (3,013,000) (10,320,000) (9,268,000)
Provision for income taxes - - (1,000) (1,000)
----------------------------- --------------------------------
Net loss (4,115,000) (3,013,000) (10,321,000) (9,269,000)
Deductions for preferred stock dividends (see Note 7) (85,000) - (374,000) -
----------------------------- --------------------------------
Net loss attributable to ($4,200,000) ($3,013,000) ($10,695,000) ($9,269,000)
common stockholders ============================= ================================
Basic and diluted net loss per share ($0.37) ($0.28) ($0.96) ($0.86)
============================= ================================
Common shares used in computing
basic and diluted net loss per share 11,353,437 10,869,293 11,189,731 10,789,764
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
ALYN CORPORATION
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
PREFERRED STOCK -
SERIES A COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS DEFICIT
------ ------ ------ ------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 11,107,878 $12,000 $ 37,796,000 ($21,624,000)
Issuance of Series A
convertible
preferred stock 375,000 $4,000 1,456,000
Issuance of common stock:
Stock Sale 200,000 - 554,000
Anti-dilution penalty (see Note 6) 149,213 - 464,000
Interest payment 38,352 - 112,000
Accretion of Series A
convertible
preferred stock dividends 30,000 (30,000)
Beneficial conversion
feature of the
convertible debt 555,000
Accretion of Series B
redeemable
convertible preferred
stock dividends (320,000)
Accrual of Series B
redeemable convertible
preferred stock cash dividends (24,000)
Issuance of warrants
in conjunction with:
Issuance of Series B redeemable
Convertible preferred stock and
Convertible debt $293,000
Net loss (10,321,000)
------- ------ ---------- ------- ------------ -------- -------------
Balance at September 30, 1999 375,000 $4,000 11,495,443 $12,000 $ 40,967,000 $293,000 ($32,319,000)
======= ====== ========== ======= ============ ======== =============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
ALYN CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows used in operating activities: $(7,478,000) $(7,759,000)
------------ -----------
Cash flows used in investing activities:
Capital expenditures (339,000) (7,044,000)
Decrease in restricted cash 2,062,000 -
------------ -----------
Total cash flows from investing activities 1,723,000 (7,044,000)
------------ -----------
Cash flows from financing activities:
Dividends paid on Series B redeemable
convertible preferred stock (16,000) -
Net payments on debt (2,814,000) -
Proceeds from working capital line of credit
(see Note 4) 351,000 -
Proceeds from bridge loan (see Note 3) 1,000,000
Proceeds from long-term debt, net of issuance
costs - 3,103,000
Proceeds from common stock subscription, net of
issuance costs 560,000 4,502,000
Proceeds from convertible debt, net of issuance
costs 2,634,000 -
Proceeds from warrants, net of issuance costs 293,000 -
Proceeds from Series A convertible preferred stock,
net of issuance costs 1,460,000 -
Proceeds from Series B redeemable convertible
preferred stock, net of Issuance costs 1,303,000 -
----------- -----------
Total cash flows from financing activities 4,771,000 7,605,000
----------- -----------
Net decrease in cash (984,000) (7,198,000)
Cash and cash equivalents at beginning of period 1,232,000 13,126,000
----------- -----------
Cash and cash equivalents at end of period $ 248,000 $ 5,928,000
=========== ===========
Non cash financing activities:
Anti-dilution stock issuance (see Note 6) $ 466,000
Stock issuance in lieu of cash interest payment
(see Note 6) 113,000
Beneficial conversion feature of
the convertible debt ( see Note 7) 555,000
----------
$ 1,134,000
=============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
6
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1998, included in the Company's Annual Report on Form 10-K, which is on file
with the Securities and Exchange Commission. Operating results for the nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
2. INVENTORIES
September 30, December 31,
1999 1998
---- ----
Raw materials $ 576,000 $ 237,000
Work in process 210,000 133,000
Finished goods 401,000 31,000
--------------- ------------
$1,187,000 $ 401,000
=============== ============
3. ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND BRIDGE NOTE
On October 8, 1999, the Company issued 75,000 shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") for approximately
$7,300,000 cash, net of expenses. In anticipation of the October 8 purchase of
the Series C Preferred Stock, the purchasers of the Series C Preferred Stock
provided a $1,000,000 bridge loan to the Company on September 29, 1999 in the
form of a demand promissory note (the "Note"). The bridge loan was used for
general working capital to reduce outstanding accounts payable. Under the terms
of the Note, the loan was due and payable on the earlier of (i) December 31,
1999, (ii) the closing of the Series C Preferred Stock purchase, or (iii) an
event of default. The Note was to be interest free through October 12, 1999 and
carried an increasing rate thereafter up to a maximum of prime plus 6%. The Note
was paid in full from the proceeds of the Series C Preferred Stock issuance on
October 8, 1999.
The Series C Preferred Stock is convertible into common stock at a set
price of $3.00, subject to certain anti-dilution provisions in the event the
Company issues common stock or securities convertible into common stock at a
price less than $3.00 per share. The holders of the Series C Preferred Stock
received registration rights for the common stock underlying their securities.
In accordance with the provisions of the agreements, the Company filed an
amended Registration Statement on Form S-3/A on October 29, 1999 including such
underlying common stock.
Upon issuance of the Series C Preferred Stock, the holders were issued
warrants to purchase up to 1,875,000 shares of common stock at a price of $3.00
per share. The number of shares subject to purchase will be determined on
December 31, 2000, based upon the Company meeting certain target levels of
revenue and earnings before interest, depreciation and amortization (EBITDA),
and may vary from the full 1,875,000 to zero shares.
The Series C Preferred Stock carries no provision for dividends.
4. WORKING CAPITAL LINE OF CREDIT
On August 25, 1999 the Company established a working capital line of credit
for up to $700,000 through the sale of its accounts receivable to a non-bank
financial institution. Under the terms of the agreement, the Company paid a
finance charge of 2% plus interest at the rate of prime plus 3%. This line was
paid in full and retired on October 14, 1999.
5. RESTRUCTURING EXPENSE
On September 1, 1999, the Company provided a reserve for restructuring
expenses of $729,000 for the planned closure of the Company's computer disk
research facility in Fremont, California. This facility had been established to
develop the finishing process for Boralyn(R) computer hard-drive disk substrates
to demonstrate the feasibility of the Company's material in that application.
Upon completion of the facility's planned activities, on September 30, 1999 the
facility was closed. Due to the closure of this facility, a total of five
employees (four production, one manager) are to be laid off and receive
severance. Of these employees, three were laid off as of September 1, 1999 and
the last production employee was laid off on November 5, 1999. The manager will
remain to aid in the facility's closure, and the sale and removal of the
remaining equipment. All equipment not being currently sold was removed from the
facility by October 31, 1999. The Company expects to have completed the sale of
equipment to be sold by December 31, 1999. At September 30, 1999, $669,000 of
the restructuring expense reserve remained on the Company's balance sheet:
Restructuring Reduction Remaining
Reserve at of Reserves at
Components of Expense Sept. 1, 1999 Reserve Sept. 30, 1999
- --------------------- ------------- ------- --------------
Loss on equipment to be sold $ (605,000) - $ (605,000)
Employee severance (53,000) $ 16,000 (37,000)
Remaining lease payments (26,000) - (26,000)
Write-Off of leasehold
improvements and other (45,000) 44,000 (1,000)
----------- -------- -----------
$ (729,000) $ 60,000 $ (669,000)
=========== ======== ===========
The reserve includes provision for the remaining four months of the facility's
lease term, severance payments, and a reserve for the expected losses on the
sale of certain assets used in the production of disk substrates by the facility
that are no longer to be used. No reserves were generated susequent to the
commitment date of September 1,1999.
7
<PAGE>
6. INTEREST EXPENSE
On August 2, 1999 the Company issued 149,213 shares of common stock to the
holder of the exchangeable note under the anti-dilution provisions of the
exchangeable note (the exchangeable note was issued on March 10, 1999 in
connection with a $3.0 million financing to provide working capital). On
September 15, 1999, the Company issued 38,352 shares of common stock to the same
holder in lieu of a $90,000 cash semi-annual interest payment. The fair value of
such stock issued was charged to interest expense on the date of issue at the
closing price of the Company's common stock as quoted on the Nasdaq National
Market for that date. The charges to interest expense were $466,000 and
$113,000, respectively.
7. NET LOSS PER SHARE
Net loss per share includes the deductions for preferred stock dividends.
However, the Company did not include potential common stock equivalents from the
exercise of common stock options, the conversion of preferred stock or debt and
the exercise of common stock warrants in the calculation of net loss per share
as such inclusion would have an anti-dilutive effect.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
The following discussion and other sections of this Form 10-Q/A may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. The forward-looking
statements within this Form 10-Q/A are identified by words such as "believes,"
"anticipates," "expects," "intends," "may" and other similar expressions and
include, but are not limited to, statements concerning our projected revenue,
the market acceptance of our products, the outcome of current evaluations of our
products by potential customers, our ability to achieve manufacturing
efficiencies, our ability to reduce our costs and expenses, our need for capital
and ability to raise additional funding, the impact of the Year 2000 issue on
our business and the cost of our Year 2000 compliance. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. These
forward-looking statements are subject to significant risks and uncertainties,
including without limitation the market acceptance of our product, our history
of losses, our ability to manufacture products in sufficient quantities and
quality for current and future applications, our ability to raise additional
capital, the possible issuance of a large number of additional shares of common
stock, fluctuation in operating results, our ability to successfully expand our
sales and marketing staff and activities, and those other risks identified in
the section of this Form 10-Q/A entitled "Risk Factors" and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 as filed with
the SEC. Such risks and uncertainties may cause actual results to differ
materially and adversely from those discussed in such forward-looking
statements. The Company disclaims any obligation to publicly revise these
forward-looking statements to reflect events or circumstances occurring
subsequent to the filing of this Form 10-Q/A with the SEC or otherwise to revise
or update any oral or written forward-looking statement that may be made from
time to time by or on behalf of the Company. The information contained in this
Form 10-Q/A is not a complete description of the Company's business or the risks
associated with an investment in the Company. Readers are urged to carefully
review and consider the various disclosures made by the Company in this Report
and in the Company's other filings with the SEC, including its Annual Report on
Form 10-K for the year ended December 31, 1998, that attempt to advise
interested parties of certain risks, uncertainties and other factors that may
affect the Company's business.
OVERVIEW
From the Company's inception in 1990 through the second quarter of 1998,
the Company was engaged in research, development, testing and prototype
production of advanced metal matrix composite materials, utilizing proprietary
technology primarily for the application of boron carbide in combination with
aluminum alloys, under the name Boralyn(R). In the third quarter of 1998, the
Company made the initial transition from prototype development to production.
The Company's extrusion facility was completed in late 1998 and became fully
operational in the first quarter of 1999. The Company's first major Boralyn
production order was received from Transnuclear, a customer, in the fourth
quarter of 1998 and was for use as shielding material in dry storage casks for
spent nuclear fuel rods. Shipments began in the first quarter of 1999 and
continued throughout the second and third quarters, with completion scheduled
for the fourth quarter. The Boralyn shielding has been well received by
Transnuclear and has generated a high level of interest in the Company's nuclear
shielding for both the dry and wet storage markets. During the first quarter of
1999, the Company received initial orders for Boralyn for use in components for
Formula
8
<PAGE>
One race cars. The successful use of the Company's material led to a cooperation
and development agreement being executed with Ferrari SpA during the second
quarter of 1999. This agreement provides for the development of specialized
custom Boralyn alloys for the production of components for Ferrari Formula One
and GT cars. The work with Formula One teams has resulted in interest from
several leading automotive companies. These companies have started testing
Boralyn for use in engines and other automotive components for high-performance
production automobiles. The Company has received its first major production
order for extruded Boralyn to produce bicycle components in the sporting goods
industry. The Company has also expanded its manufacture of non-Boralyn
components for the aerospace industry to gain acceptance by the industry and to
generate near-term revenues. Other application areas of Boralyn are in
evaluation by different customers and trial orders have been executed. The
Company is anticipating positive results from these evaluations with production
orders to follow for 2000. While the Company expects to achieve increasing sales
levels of Boralyn -based products in 2000, there can be no assurance that such
increases will be achieved. The Company was unprofitable through September 30,
1999 and incurred a loss for the full year 1998 as a result of start-up costs
and the ongoing costs of maintaining significant production capacity in
anticipation of sales growth, and will incur additional losses thereafter.
RESULTS OF OPERATIONS
For purposes of discussion, the results of operations for the three-month
period ended September 30, 1999 are compared to the results of operations for
the three-month period ended September 30, 1998 and the results of operations
for the nine-month period ended September 30, 1999 are compared to the
nine-month period ended September 30, 1998.
Net Sales. Net sales for the third quarter of 1999 increased 20% to
$721,000 from $602,000 in the third quarter of 1998. Net sales for the
nine-month period ended September 30, 1999 increased 185% to $1,886,000 from
$662,000 in the nine-month period ended September 30, 1998. The increase in
sales from the comparable prior year quarter is not meaningful. The increase in
sales for the nine months resulted from the Company's transition in the third
quarter of 1998 from prototyping to production. Shipments in the third quarter
of 1999 were primarily to companies in the nuclear, automotive and aerospace
industries.
Cost of Goods Sold. Cost of goods sold for the third quarter of 1999
increased 16% to $2,100,000 from $1,813,000 in the third quarter of 1998. Cost
of goods sold for the nine-month period ended September 30, 1999 increased 63%
to $6,076,000 from $3,724,000 in the nine-month period ended September 30, 1998.
The absolute increase was attributable to the Company's transition from product
development in the first half of 1998 to production in the third quarter of
1998. However, the total cost of goods sold as a percentage of sales for the
third quarter decreased somewhat in comparison to the comparable prior year
quarter. In absolute terms, the Company anticipates cost of goods sold will
continue to increase as revenues rise. As a percentage of sales, the Company
expects cost of good sold to decline as the manufacturing facilities are more
fully utilized.
General and Administrative Expenses. General and administrative expenses
for the third quarter of 1999 decreased 30% to $474,000 from $679,000 in the
third quarter of 1998. General and administrative expenses for the nine-month
period ended September 30, 1999 decreased 18% to $1,921,000 from $2,347,000 in
the nine-month period ended September 30, 1998. This continued decrease
represents the Company's focus on reducing general and administrative expenses
as a percent of sales. Overall, the general and administrative expense level
incurred in the third quarter of 1999 should be maintained through the end of
the year.
Selling and Marketing Expenses. Selling and marketing expenses for the
third quarter of 1999 decreased 35% to $213,000 from $328,000 in the third
quarter of 1998. Selling and marketing expenses for the nine-month period ended
September 30, 1999 decreased 15% to $788,000 from $927,000 in the nine-month
period ended September 30, 1998. The Company expects sales and marketing
spending in the fourth quarter of 1999 to remain relatively flat, but begin to
increase in 2000, both in absolute terms and relative to sales.
Research and Development Expenses. Research and development expenses for
the third quarter of 1999 decreased 36% to $402,000 from $625,000 in the second
quarter of 1998. Research and development expenses for the nine-month period
ended September 30, 1999 decreased 54% to $1,198,000 from $2,578,000 in the
nine-month period ended September 30, 1998. This decrease was primarily
attributable to the Company's transition from a primary focus of product
development to production in the third quarter of 1998. The Company still
expects to continue investing in research and development for new Boralyn
materials and improvements in existing materials and processes.
Restructuring Expense. In September 1999, the Company established a
reserve of $729,000 for closure of its computer disk research facility located
in Fremont, California. No comparable action was taken in prior periods and no
further such actions are planned.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had a working capital deficit of
$2,087,000. In October 1999, the Company completed an equity offering of $7.3
million, net of expense. In August 1999 the Company issued 200,000 shares of its
common stock, receiving $570,000, net of expenses. In March 1999, the Company
completed an equity offering of $1.4 million, net of expenses, and an
exchangeable debt offering of $2.8 million, net of expenses. In January 1999,
the Company completed an equity offering of $1.45 million, net of expenses. The
Company received $4.5 million, net of expenses, from its common stock rights
offering completed in August 1998. Prior to August 1998, the Company funded its
operations through proceeds from its initial public offering in October 1996 of
$33.3 million, net of expenses, and through debt financing of $10.5 million, of
which $6.5 million was completed in December 1997 and $4.0 million was completed
in the second quarter of 1998. Cash balances in excess of those required to fund
operations are invested in interest-bearing high quality short-term investment
grade corporate and government securities in accordance with investment
guidelines approved by the Company's Board of Directors.
The Company's future liquidity and capital funding requirements will depend
on numerous factors, including results of marketing its metal matrix composite
materials, their acceptance in the market, the timing of production orders and
their delivery, and the costs and timing of growth in sales, marketing and
manufacturing activities. The Company's working capital needs will rise as the
Company increases production. In October, the Company received $7,300,000, net
of expenses, from the sale of convertible preferred stock to a large investment
fund. $1,000,000 of the proceeds was used to repay a bridge loan provided by the
fund on September 29, 1999, in anticipation of the closing of the preferred
stock sale. The proceeds of the bridge loan were used to reduce the Company's
outstanding payables. On August 2, 1999, the Company raised $570,000, net of
expenses, from an existing shareholder in a private placement of 200,000 shares
of common stock at $3.00 per share. The Company is currently in negotiations
with two non-bank financial institutions to provide accounts receivable and
inventory working capital financing. The Company's ability to obtain future
working capital financing will be dependent in part on the quality and amount of
the Company's trade receivables, inventory and unsecured capital equipment. If
the Company achieves its operating plan for 1999 and 2000 and completes its
equity funding program, it believes that internally generated funds, cash on
hand, and equipment, inventory and accounts receivable financing should satisfy
the Company's anticipated capital needs for the next 12 months. However, if the
Company fails to complete its planned equity funding program, inadequate working
capital to finance operations could result. If the Company fails to complete its
planned inventory and accounts receivable financing, inadequate capital to
execute its business plan may result. Also, if the Company fails to reach its
planned revenue levels, additional funding may be required. It is possible that
the Company may not be able to ever achieve a significant level of sales or
profitability or that such additional funding would be available or available
upon terms acceptable to the Company.
YEAR 2000 COMPLIANCE
The Company is currently evaluating our Year 2000 readiness, both in terms of
the compliance of our internal information systems and compliance of
applications which monitor all aspects of our business, including financial
systems, manufacturing equipment, customer services, marketing information,
infrastructure and telecommunications equipment. We have tested and evaluated
our internal information systems and, based upon these tests, believe that they
are substantially Year 2000 compliant. The Company is in the process of testing
and evaluating the computerized elements of our manufacturing equipment and
expects to complete this evaluation in sufficient time to make necessary
upgrades, if any. At this point, based in part upon the timing of purchase of
much of the Company's equipment, the Company believes that its manufacturing
equipment will be Year 2000 compliant on a timely basis. The Company believes it
has no exposure related to its products. The Company does not believe it is
vulnerable to the failure of significant suppliers to address their own Year
2000 issues. It is possible that failure to fully address Year 2000 issues by
large customers could result in the delay of orders that could cause significant
business interruptions. Contingency plans are being developed to address any
material consequences the Company could suffer if third parties are not Year
2000 compliant. However, the failure of other companies to adequately address
their own Year 2000 issues could have a material adverse effect on the Company.
The Company expects to complete its Year 2000 compliance efforts in 1999. We
believe that the total estimated project cost is not material and includes the
estimated costs and time associated with the impact of third party compliance.
However, it is possible that the actual cost of compliance and the impact of
Year 2000 issues could differ materially from those planned.
RISK FACTORS
In future periods the Company's business, financial condition and results
of operations may be affected in a material and adverse manner by many factors,
including, but not limited to, the following:
WE HAVE YET TO GAIN MARKET ACCEPTANCE OF OUR MATERIALS IN COMMERCIAL QUANTITIES.
10
<PAGE>
Our materials have yet to attain significant commercial acceptance. Other
materials, such as aluminum, and to a lesser extent titanium, magnesium and
beryllium, have become the standard materials in the automotive and other target
industries for our materials. Boral and borated stainless steel have been the
standard materials in the nuclear industry. We may not be able to demonstrate
the advantages of our materials over existing, more traditional materials, which
could make it difficult for us to win substantial contracts in various
industries. If we are not able to market our materials in commercial quantities,
our business and results of operations will suffer dramatically. Initially, we
directed our resources to the manufacture of final products, particularly golf
club heads. We have recently changed our focus to marketing our advanced
materials as raw materials to be used in products manufactured by others. The
principal use of our materials for the nine months ended September 30, 1999 was
for various applications in the nuclear and automobile industries, but our
materials have not yet achieved market acceptance in these industries on a broad
scale. We believe that our ability to achieve commercial acceptance of our
materials will be largely dependent upon our pricing practices, our ability to
manufacture and deliver materials on a timely basis, and our ability to
demonstrate the advantages of our materials over competing materials. Because
the application of our materials may entail long customer order-related sales
cycles, can be affected by lengthy customer product design times and, in nuclear
applications, certification requirements prior to production orders, we may not
realize the benefits of our marketing and development costs, if at all, until
subsequent periods. We must address each of these factors effectively in order
to achieve market acceptance in commercial quantities of Boralyn or our other
current or future materials.
WE HAVE A HISTORY OF LOSSES WHICH WE EXPECT WILL CONTINUE, AND WE MAY NOT BE
ABLE TO ACHIEVE PROFITABILITY.
We have had a limited operating history and generated revenues of only
$364,000 in 1997, $1.3 million in 1998 and $1.9 million for the nine months
ended September 30, 1999. We incurred net losses of $7.3 million in 1997, $12.1
million in 1998 and $10.7 million for the nine months ended September 30, 1999.
We expect to continue to incur losses in 1999 and may never generate sufficient
revenues to achieve profitability in the future. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. Our prior inability to generate significant revenues
and expected continued losses has raised substantial doubt about our ability to
continue as a going concern. Our auditors have included a going concern
modification in their report for the year ended December 31, 1998. We cannot
assure you that steps taken by management will result in the removal of our
auditor's going concern modification from any future reports.
OUR LIMITED MANUFACTURING HISTORY AND THE SIGNIFICANT MANUFACTURING RISKS
ASSOCIATED WITH OUR PRODUCTION OF MATERIALS MAY MAKE IT DIFFICULT FOR US TO
ESTABLISH OR MAINTAIN PROFITABLE MANUFACTURING OPERATIONS.
Our limited experience in manufacturing our materials in commercial
quantities has led to delays and resulted in increased costs that we have not
been able to offset to date with significant sales. The manufacturing processes
for Boralyn, for example, utilize high temperature and high pressure and may be
subject to volatile chemical reactions. We initially experienced improper
temperature settings, difficulties in dealing with inconsistent materials and
problems establishing standard and repeatable manufacturing procedures. If we
fail to effectively manage and maintain our manufacturing capabilities, our
business will suffer and we may never generate significant revenues or achieve
profitability. In addition, natural disasters such as earthquakes, which are
characteristic of Southern California, the location of our manufacturing
facilities, could result in the interruption of our manufacturing activities or
could significantly impact our manufacturing operations or capacity. We
currently do not maintain earthquake insurance and any significant earthquake
could suspend our manufacturing capabilities. Our manufacturing operations
currently use specially-designed equipment that, if damaged, inoperable or
unavailable, could disrupt our manufacturing operations and may not be able to
be repaired or replaced on a timely basis or at reasonable costs.
IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT HAVE SUFFICIENT FUNDS TO
FINANCE OUR CURRENT BUSINESS PLANS OVER THE NEXT TWELVE MONTHS.
We had cash on hand of only $248,000 at September 30, 1999. While we
raised approximately $7.8 million, net of expenses, in two private placements
between August 1999 and October 1999, we may require additional funds to finance
our operations for the next twelve months. We are currently in negotiations with
two non-bank financial institutions to provide accounts receivable and inventory
working capital financing and capital equipment financing. If we are unable to
raise the additional equity, if required, or accounts receivable, inventory
working capital and equipment financing, we may not be able to fully execute our
business plan. Our ability to obtain debt financing will be dependent in part on
the quality and amount of our revenues, trade receivables, inventory and
unsecured capital equipment.
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IF WE DO NOT INCREASE OUR PRODUCT SALES, WE MAY NOT BE ABLE TO OFFSET OUR
SUBSTANTIAL LEASE COMMITMENTS AND SIGNIFICANT CAPITAL INVESTMENTS, WHICH COULD
LEAD TO CONTINUED LOSSES.
Unless and until we achieve a significant level of sales of our materials,
we will have substantial production over-capacity and under-absorbed costs that
will continue to cause us to incur substantial operating losses. In order to
establish manufacturing capacity, we entered into long-term leases for our two
facilities located in Irvine, California. The lease for our headquarters in
Irvine, California, expires in 2008 and requires monthly lease payments of
approximately $27,000. We also have a ten-year lease expiring in 2008 for our
second Irvine facility, with monthly lease payments of $45,000. Through
September 30, 1999, we have invested more than $20 million to equip and
implement our manufacturing operations in these facilities. If we fail to
generate significant revenues from these manufacturing facilities, we will not
be able to offset the costs of those facilities and our business and operating
results will suffer.
WE MAY BE REQUIRED TO ISSUE A LARGE NUMBER OF ADDITIONAL SHARES OF COMMON STOCK
UPON CONVERSION OF OUR PREFERRED STOCK, EXCHANGE OF OUR EXCHANGEABLE NOTE, AND
UPON EXERCISE OF OUTSTANDING WARRANTS THAT WILL BE IMMEDIATELY AVAILABLE FOR
RESALE. THESE SALES COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Our Series A preferred stock, Series C preferred stock, exchangeable note
and outstanding warrants are currently convertible and exchangeable for a large
number of shares of our common stock. Beginning in January 2000, our Series A
preferred stock will also be convertible into shares of our common stock. All of
the holders of these securities have registration rights. A registration
statement was filed to register (i) the common stock issuable upon exchange of
the exchangeable note and exercise of related warrants; (ii) the common stock
issuable upon the conversion of the Series A preferred stock and exercise of
related warrants; (iii) the common stock issued and the common stock issuable as
a result of the exercise of warrants sold to AMRO International, S.A.; (iv) the
common stock issued upon conversion of our Series B preferred stock; (v) the
common stock issuable upon the exercise of warrants issued to the Series B
stockholders in March and October 1999; and (vi) the common stock issuable upon
conversion of our Series C preferred stock and exercise of related warrants. As
a result, upon registration, all of the shares of common stock issuable upon
exchange or conversion of the preferred stock and the exchangeable note, and
upon exercise of the related warrants, will be immediately available for resale
and the increase in supply of our common stock could cause the price of our
common stock to decline. The sale by these holders of a significant amount of
common stock could also encourage short selling, which could cause our stock
price to decline further. Furthermore, any negative impact to our stock price
caused by these securities could impair our ability to raise additional equity
capital, if required. Our Series A preferred stock, Series C preferred stock and
exchangeable note are subject to price protection provisions that require us to
reduce the conversion price for the securities and ultimately to issue
additional shares of common stock to these holders without additional
consideration if the Company issues additional shares of common stock at a price
below their fixed conversion prices. In addition, we have also granted piggyback
registration rights to register up to 211,000 shares of common stock issuable
upon exercise of an outstanding warrant relating to our initial public offering
in October 1996. Furthermore, 6,381,955 shares of our common stock outstanding
at October 25, 1999 are immediately available for resale in the public market
under Rule 144 or Rule 701 of the Securities Act of 1933, as amended.
The following table sets forth the number of shares of our common stock
that we have issued and the maximum number of shares of our common stock that we
would be required to issue assuming that all of the following securities are
immediately exchanged, converted or exercised for common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CONVERSION/ COMMON STOCK ISSUED PERCENT OF
EXCHANGE OR AND ISSUABLE UPON OUTSTANDING
TYPE OF SECURITY ISSUE PRICE FULL CONVERSION COMMON STOCK
---------------- ----------- --------------- ------------
<S> <C> <C> <C>
Series A preferred stock $2.00 750,000 3.8%
Related warrants issued in Not yet determined 120,000 0.6%
January 1999
Common stock issued in $2.3925 626,960 3.2%
October 1999 to Series B
stockholders as a result of
conversion of the Series B
preferred stock
Warrants issued in March $3.82 65,000 0.3%
1999 to Series B stockholders
Warrants issued in October 1999 $3.25 150,000 0.8%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CONVERSION/ COMMON STOCK ISSUED PERCENT OF
EXCHANGE OR AND ISSUABLE UPON OUTSTANDING
TYPE OF SECURITY ISSUE PRICE FULL CONVERSION COMMON STOCK
- ---------------- ----------- --------------- ------------
<S> <C> <C> <C>
to Series B stockholders
Common stock issued in $ 3.00 200,000 1.0%
August 1999 to AMRO
International, S.A
Warrants issued in August $ 3.50 50,000 0.3%
1999 to AMRO International,S.A
Exchangeable note $ 2.00 1,500,000 7.7%
Related warrants issued in $3.0375 135,000 0.7%
March 1999
Related warrants issued in $ 3.00 300,000 1.5%
October 1999
Common stock issued in $ 3.125 149,213 0.8%
August 1999
Common stock issued in $ 2.938 38,352 0.2%
September 1999 as interest
payment
Series C preferred stock $ 3.00 2,500,000 12.8%
Related warrants issued in $ 3.00 1,875,000 9.6%
October 1999
Total ` 8,459,525 43.2%
</TABLE>
Because we cannot determine the exact conversion price of the Series A
preferred stock, the Series C preferred stock, the warrants and the exchangeable
note due to the price protection provisions, we have made the following
assumptions in computing the calculations in this table:
o Because the conversion price for the Series A preferred stock and
the exchangeable note cannot be less than $2.00 per share, the
foregoing table reflects the maximum number of shares of common
stock that we would be required to issue to these holders. We may,
however, be required to issue additional shares of common stock to
the holder of our exchangeable note in the event we do not pay the
accrued interest or penalty, if any, on this note in cash.
o The warrants associated with the Series A preferred stock (up to
120,000 shares) and their exercise price will be determined on
January 8, 2000, based upon the average stock price for our common
stock for the 25 consecutive trading days prior to January 8, 2000.
Since, for purposes of the above table, we have assumed the maximum
number of shares of common stock that could be issued under the
warrants, the exercise price is not relevant.
o Calculation of the number of shares of common stock issuable upon
conversion of the Series C preferred stock (2,500,000) was based on
its fixed conversion price of $3.00 per share. The actual number of
shares may increase in the event of the occurrence of certain
dilutive events relating to the issuance of common stock at prices
lower than its fixed conversion price.
o The percentage calculation has been derived using the total number
of shares of our common stock outstanding as of October 25, 1999,
plus the shares underlying the exchangeable, exercisable or
convertible securities included in the above table (19,567,403
shares, of which 12,122,403 shares were issued and outstanding. Of
the 12,122,403, 11,495,443 shares were issued and outstanding as of
September 30, 1999 and 626,960 shares were issued as a result of the
conversion of the Series B preferred stock in October 1999.)
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<PAGE>
WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS TO CONTINUE, WHICH COULD CAUSE
OUR STOCK PRICE TO DECLINE.
Fluctuations caused by variations in quarterly operating results or our
failure to meet market analysts' projections or public expectations could cause
the market price of our common stock to decline and perhaps decline
significantly. Due to the nature of our business, we may experience long
customer order-related sales cycle times and are affected by lengthy customer
design processes for new product introductions and market trends that may
significantly limit our ability to forecast accurately our production schedules
and short-term results of operations. We cannot predict our operating results
due to the uncertainty of these factors and our limited operating history. Our
operating results may vary significantly from quarter to quarter, in part
because of the costs associated with changes in our materials, personnel and the
size and actual delivery dates of orders for our materials. As a result, our
operating results for any particular quarter should not be considered indicative
of any future results and period-to-period comparisons of our operating results
will not necessarily be meaningful.
IF WE LOSE ANY OF OUR KEY MANAGERS, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We rely on a relatively new management team and need additional personnel
to expand our business. Our future success and profitability is substantially
dependent upon the personal efforts and abilities of our key executives, Arne
van Roon (our President and Chief Executive Officer who joined Alyn in April
1999), Robin A. Carden (our founder) and Richard L. Little (our Chief Financial
Officer and Secretary). None of our key managers has a long-term employment
agreement with Alyn, and accordingly, they may terminate their association with
us with little or no notice. We also do not maintain key man life insurance on
Messrs. van Roon or Little. If any of these individuals or any other key
employees were to leave Alyn Corporation, their departure could significantly
diminish our level of management, technical, marketing and sales expertise, and
we would have the difficult task of finding and hiring replacements who have
these skills. Furthermore, the departure of any of our manufacturing personnel
may interrupt our manufacturing operations and lengthen the time necessary to
deliver products to market.
We believe that our future growth will be dependent in large part on our
ability to attract and retain additional qualified management, technical,
manufacturing, administrative and other personnel. Due to our location in
Irvine, California and the nature of our business, we believe that we will
experience significant competition for qualified personnel.
BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR OPERATING
RESULTS.
Since inception, we have derived a substantial portion of our revenues
from sales to a relatively small number of customers. As a result, the loss of
any significant customer could materially and adversely affect our financial
condition and results of operations. Sales to our largest three customers for
the nine months ended September 30, 1999 and their respective percentage of our
net sales were as follows: Transnuclear (30%), Marvin Engineering (26%) and
Parker Hannifin (8%). Sales to our largest three customers for the year ended
December 31, 1998 and their respective percentage of net sales for that period
were as follows: General Motors (22%), Taylor Made Golf (15%) and MacGregor Golf
(12%). Sales to our largest three customers for the year ended December 31, 1997
and their respective percentage of net sales for that period were as follows:
Taylor Made Golf (47%), Defense Logistics Company (14%) and Mersey (12%). It is
possible that one or more key customers could suffer business or financial
setbacks resulting in the reduction or cancellation of product orders or our
being unable to obtain payment from such customers at any time or from time to
time. We expect that our key customers will continue to account for a
substantial portion of our revenues for 1999 and in the future. Accordingly, our
future operating results will continue to depend on the success of our largest
customers and on our ability to sell products to these customers in significant
quantities.
WE DEPEND ON TWO SUPPLIERS FOR ONE OF OUR PRINCIPAL RAW MATERIALS. ANY FAILURE
TO OBTAIN THESE RAW MATERIALS COULD RESULT IN SIGNIFICANT DELAYS IN OUR ABILITY
TO SHIP PRODUCT AND COULD ADVERSELY AFFECT OUR REVENUES AND OUR RELATIONSHIPS
WITH OUR CUSTOMERS.
We presently purchase one of our principal raw materials, boron carbide,
primarily from two suppliers. We currently do not have any long-term supply
agreements with either of these suppliers. Our business would be materially and
adversely affected if we were unable to continue to purchase our required
quantities of boron carbide at prices and on terms comparable to those presently
available from our principal suppliers.
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<PAGE>
IN THE EVENT WE ARE NOT ABLE TO ENFORCE OUR PATENTS, OUR COMPETITORS COULD
INTRODUCE SIMILAR MATERIALS OR TECHNOLOGIES, WHICH COULD SERIOUSLY HARM OUR
BUSINESS.
We believe our United States patent that contains claims covering the
manufacture of our Boralyn material is critical to our success and our ability
to prevent competitors from introducing similar materials. We have been granted
additional patents and have other patent applications pending, including
divisional (extension) patents and continuation-in-part patents, many of which
stem from our originally issued patent. We cannot be sure that any additional
patents will be granted or that our existing or future patents will be valid and
enforceable, or will provide us with meaningful protection from our competitors.
If our present or future patent rights are ineffective in protecting us against
infringement, our marketing efforts and future revenues could be materially and
adversely affected. Moreover, if a competitor were to infringe any of our
patents, the costs of enforcing our patent rights may be substantial or even
prohibitive. We also cannot be sure that our future materials will not infringe
the patent rights of others or that we will not be forced to expend substantial
funds to defend against infringement claims of, or to obtain licenses from,
third parties. We currently have only limited patent protection for our
technology outside the United States, and we may be unable to obtain even
limited protection for our proprietary technology in certain foreign countries.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR TRADEMARKS OR TRADE
NAMES, WHICH COULD HARM OUR GOODWILL AND DILUTE OUR BRAND RECOGNITION.
The market for our products is and will remain dependent in part upon the
goodwill engendered by our trademarks and trade names. Trademark protection is
therefore material to our business. Although Boralyn is a registered trademark
in the United States, we cannot be certain that we can successfully assert
trademark or trade name protection for our significant marks and names in the
United States or other markets, and the costs of such efforts could be
substantial.
WE FACE INTENSE COMPETITION IN THE ADVANCED MATERIALS MARKET FROM LESS EXPENSIVE
MATERIALS AND FROM COMPETITORS WHO HAVE GREATER RESOURCES AND MANUFACTURING
EXPERIENCE THAN WE HAVE.
The advanced materials industry is highly competitive, and other materials
such as specialized aluminum alloys, borated stainless steel for nuclear
shielding applications, and to a much lesser extent, titanium, magnesium and
beryllium, are readily available for similar applications generally at
comparable or lower prices than our materials. We believe additional competitive
pressures could require us to reduce our product prices to remain competitive,
and accordingly, could adversely affect our results of operations.
We compete in our target markets with several larger domestic and
multinational companies, all of which are well established in their respective
markets and have substantially more manufacturing experience and substantially
greater financial and other resources than us. We compete with material
producers, i.e. companies that produce and market a choice of materials for
specific applications. In this area, the Company competes with: (i) titanium,
supplied by companies such as RMI Titanium Company, Tremont Industries, Inc.,
and Titanium Metals Corporation of America (Timet); (ii) aluminum alloys,
supplied by companies such as the Aluminum Corporation of America (Alcoa),
Reynolds Metals Co., and Oregon Metallurgical Corporation; and (iii) other metal
matrix composites, such as those supplied by Duralcan Inc. For nuclear
containment, current storage containers often use Boral(R), a boron carbide and
aluminum material supplied by AAR Brook & Perkins and borated aluminum supplied
by Eagle Pitcher. Certain of our competitors who provide competing materials for
the nuclear industry have already obtained quality certification (similar to ISO
certification) from the Nuclear Regulatory Commission, which can enable them to
qualify for certain nuclear projects much quicker and cheaper than we can. We
are in the process of applying for the quality certification, but we cannot be
sure that we will ever be able to obtain this certification.
THE PRINCIPAL APPLICATIONS FOR OUR MATERIALS COULD SUBJECT US TO SIGNIFICANT
PRODUCT LIABILITY ACTIONS, IN EXCESS OF OUR INSURANCE COVERAGE LIMITS.
The principal uses of our materials currently include automotive
applications, including engines and structural members, as well as application
for use in products used to store nuclear waste. Both the automotive and nuclear
industries involve significant risks of personal injury and have historically
been the subject of many product liability actions. We cannot be sure that our
liability insurance will be sufficient to adequately cover any potential claims,
or that this insurance will continue to be available on acceptable terms in the
future.
15
<PAGE>
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ NATIONAL MARKET, OUR COMMON
STOCK WILL BECOME LESS EASILY TRADABLE AND OUR STOCK PRICE COULD DECLINE.
Holders of our common stock currently enjoy the substantial benefit of
being able to easily buy or sell our common stock because our common stock is
listed on the Nasdaq National Market. For continued listing of our common stock
on the Nasdaq National Market, we must, among other things, maintain a minimum
bid price of at least $1.00 per share. In February 1998, our stock price
declined to $1.50 per share. If our stock price declines or if we continue to
experience losses from our operations, we may not be able to maintain the
standards for continued listing on the Nasdaq National Market. In the event our
common stock is removed from the Nasdaq National Market, any trading in our
common stock might then be conducted on the Nasdaq Small Cap Market, which is a
significantly less active market than the Nasdaq National Market. As a result,
you could find it more difficult to dispose of our common stock. Furthermore, if
we did not qualify for listing on the Nasdaq SmallCap Market or if our common
stock was subsequently delisted from the Nasdaq SmallCap Market, our common
stock could be subject to what are known as the "penny stock" rules, which place
additional requirements on broker-dealers who sell or make a market in such
securities. Consequently, if we fail to qualify for listing on, or if we were
removed from, the Nasdaq SmallCap Market, the ability or willingness of
broker-dealers to sell or make a market in our common stock could decline. Also,
the terms of our Series B and Series C preferred stock purchase agreements and
our exchangeable note, require that we maintain a listing of our common stock
with Nasdaq or other nationally recognized market. Failure to do so could result
in unspecified consequences.
IF OUR INTERNAL SYSTEMS AND THE SYSTEMS OF THE THIRD PARTIES WITH WHOM WE
INTERACT ARE NOT YEAR 2000 COMPLIANT, WE MAY SUFFER BUSINESS INTERRUPTIONS AND
OUR BUSINESS COULD BE SERIOUSLY HARMED.
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field. These systems and
software applications will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, these systems and
applications will need to be upgraded to comply with the Year 2000 requirements
or risk system failure, miscalculations or other disruptions to normal business
activities.
We are currently evaluating our Year 2000 readiness, both in terms of the
compliance of our internal information systems and compliance of applications
which monitor all aspects of our business, including financial systems,
manufacturing equipment, customer services, marketing information,
infrastructure and telecommunications equipment. While we believe our internal
information systems will adequately function in the Year 2000, we cannot be sure
of the effect of the Year 2000 issue until the Year 2000 arrives. We are in the
process of testing and evaluating the computerized elements of our manufacturing
equipment and expect to complete this evaluation in sufficient time to make
necessary upgrades, but we may not be able to complete these upgrades in a
timely manner or at reasonable costs. We also may not be able to anticipate the
extent of the Year 2000 impact until the Year 2000 arrives due to the
interaction between our own systems and products and the systems and products of
third parties. We believe our greatest exposure to Year 2000 risks relates to
the readiness of our third party suppliers who provide us with raw materials,
our customers who incorporate our products into their own products and other
parties who provide services for us. Any failure of these third parties to
resolve their own Year 2000 issues in a timely manner could cause a material
disruption in our business. We believe the worst case scenario of the Year 2000
impact on our business would be a decline in our sales due to our customers
inability to order or purchase products and our inability to interact with our
suppliers and other third party providers. While we do plan to increase our
stock of certain production materials and supplies in the fourth quarter of
1999, we do not plan to develop any contingency plans to address any material
consequences that we could suffer if we are not able to resolve our Year 2000
issues or those issues faced by the key third parties with whom we regularly
interact. We also cannot be sure that our present estimates of the cost to
remedy the Year 2000 problem are not understated.
OUR PRINCIPAL STOCKHOLDERS CONTROL ALYN CORPORATION AND COULD PREVENT A CHANGE
IN CONTROL OR FINANCING THAT MIGHT OTHERWISE BE IN THE BEST INTERESTS OF THE
STOCKHOLDERS.
As of October 25, 1999, Kingdon Capital Management Corp. and its
affiliates, Robin A. Carden and Harry Edelson beneficially owned an aggregate of
52.6% of our outstanding common stock. In addition, in October 1999, Fleming
U.S. Discovery Fund III, L.P. and Fleming U.S. Discovery Offshore Fund III, L.P.
purchased the Series C Convertible Preferred Stock, which is convertible into
2,500,000 shares of common stock. Under the terms of the related purchase
agreements, they have the right to vote the 2,500,000 shares as if they were
issued and outstanding at the time of such stockholder vote. At such time, our
principal stockholders would vote 60.7% of the shares then available to vote.
Accordingly, these stockholders have the ability to elect a majority of our
directors and to control the outcome of all other issues submitted to our
stockholders. The holders of the Series C preferred stock have significant
influence on key decisions of the company and have exercised their rights under
the Series C purchase agreements to appoint two members to our Board of
Directors. In October 1999, Mr. Robert Burr and Mr. David Edwards were appointed
to the Board of Directors, and Mr. Burr was subsequently elected its chairman.
16
<PAGE>
The terms of our Series A preferred stock and Series C preferred stock also
prohibit us from amending our charter documents, liquidating, merging, selling
substantially all of our assets, or issuing additional securities without the
consent of these stockholders. As a result, this concentration of ownership and
our contractual consent rights may discourage a potential acquirer from making
an offer to buy Alyn Corporation or may prohibit us from completing a major
corporate transaction or raising additional capital, which might otherwise be in
the best interest of our stockholders.
In addition, the following provisions of our exchangeable note could also
discourage some potential purchasers from acquiring Alyn Corporation or make an
asset sale more difficult and expensive:
o the requirement that upon a change of control, we must offer to
buy the exchangeable note at the greater of 135% of the principal plus
accrued and unpaid interest and penalties or the product of the number of
shares into which the exchangeable note can be exchanged and the market
price on the applicable date; and
o the prohibition against selling or transferring all or
substantially all of our assets unless we have their approval.
We have also agreed to grant the holders of our Series A preferred stock a
right of first refusal and our Series C preferred stock, and the exchangeable
note a right of first offer with respect to certain issuances of equity or debt
securities, and we are prohibited from obtaining additional senior indebtedness
for borrowed money beyond defined limits without the written consent of the
holder of the exchangeable note, unless the indebtedness junior to the
exchangeable note or that the borrowed money is for equipment financing or
customary working capital lines of credit.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE VOLATILE.
Trading volume and prices for our common stock could be subject to wide
fluctuations in response to quarterly variations in our operations and 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 us. Since January 1, 1998, the price of our
common stock has declined from a high of $10 in February 1998 to $1.50 in
February 1999 and to $3.375 on September 23, 1999. The factors causing these
variations include the low average daily trading volume of our common stock, the
sale or attempted sale of a relatively large amount of securities in the public
market, the registration for resale of any shares of common stock, the
antidilution provisions in our preferred stock, exchangeable note and warrants,
manufacturing and product development delays and our earnings to date. The
market price of our common stock could also be influenced by developments or
matters not related to our performance, such as the general volatility of the
stock market.
OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD ADVERSELY AFFECT THE RIGHTS OF
COMMON STOCK AND COULD PROHIBIT CERTAIN CHANGES IN CONTROL THAT MAY OTHERWISE BE
BENEFICIAL TO OUR STOCKHOLDERS.
Under our certificate of incorporation, our Board of Directors has the
authority to issue shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote of, or
action by, our 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 has been issued or may be issued in the future. Issuance of
preferred stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have an effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock. Certain provisions of Delaware law applicable to us
may also discourage third-party attempts to acquire control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
17
<PAGE>
ALYN CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 2, 1999 the Company issued 200,000 shares of its common stock
for cash at $3.00 per share - the use of proceeds was for general
working capital.
On August 2, 1999 the Company issued 149,113 shares of its common stock to
the holder of the Company's exchangeable note as an anti-dilution
penalty. The penalty resulted from the issuance of the 200,000
shares of common stock identified above at a price below the
applicable exchange price of the exchangeable note.
On September 15, 1999 the Company issued 38,352 shares of its common stock
to the holder of the Company's exchangeable note in lieu of the
semi-annual interest payment due under the note.
On October 8, 1999 the Company issued 75,000 shares of Series Cconvertible
preferred stock for approximately $7,300,000 net of expenses - the
use of proceeds was for general working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is filed as part of this report:
EXHIBIT
NO. DESCRIPTION
--- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALYN CORPORATION
(Registrant)
By: /s/ Arne van Roon
----------------------------
Arne van Roon
President and
Chief Executive Officer
By: /s/ Richard L. Little
------------------------------
Richard L. Little
Vice President, Finance
and Administration
and Chief Accounting and
Financial Officer
Dated: December 15, 1999
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