3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended March 31, 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; 11,107,878 shares as of May 11, 1999
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ALYN CORPORATION
INDEX
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Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet -
March 31, 1999 (unaudited) and December 31, 1998 3
Condensed Statement of Operations -
Three months ended March 31, 1999 (unaudited) and
March 31, 1998 (unaudited) 4
Condensed Statement of Stockholders' Equity -
Three months ended March 31, 1999 (unaudited) 5
Condensed Statement of Cash Flows -
Three months ended March 31, 1999 (unaudited) and
March 31, 1998 (unaudited) 6
Notes to Condensed Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
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Alyn Corporation
Condensed Balance Sheet
(Unaudited)
March 31, December 31,
1999 1998
----------------- -----------------
Assets
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Current assets:
Cash and cash equivalents $3,264,000 $1,232,000
Restricted cash 1,883,000 2,062,000
Accounts receivable, net 1,178,000 781,000
Inventories 549,000 401,000
Other current assets 273,000 424,000
----------------- -----------------
Total current assets 7,147,000 4,900,000
----------------- -----------------
Equipment, furniture and fixtures, net 20,236,000 20,703,000
Other assets, net 849,000 626,000
Intangibles, net 775,000 732,000
----------------- -----------------
$29,007,000 $26,961,000
================= =================
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable $647,000 $663,000
Current portion of long term debt 1,869,000 1,842,000
Accrued and other current liabilities 278,000 956,000
----------------- -----------------
Total current liabilities 2,794,000 3,461,000
----------------- -----------------
Long term debt
Convertible debt 2,297,000 -
Long term debt 6,839,000 7,316,000
----------------- -----------------
Total long term debt 9,136,000 7,316,000
Redeemable preferred stock 1,367,000 -
Stockholders' equity:
Preferred stock 4,000 -
Common stock 12,000 12,000
Additional paid-in capital 39,824,000 37,796,000
Warrants to purchase common stock 293,000 -
Accumulated deficit (24,423,000) (21,624,000)
----------------- -----------------
Total stockholders' equity 15,710,000 16,184,000
----------------- -----------------
$29,007,000 $26,961,000
================= =================
See Notes to Condensed Financial Statements.
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Alyn Corporation
Condensed Statement of Operations
(Unaudited)
Three Months Ended
March 31,
1999 1998
---------------------------
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Net sales $826,000 $28,000
Costs and expenses:
Cost of goods sold 2,052,000 634,000
General and administrative expenses 570,000 616,000
Selling and marketing 281,000 303,000
Research and development 406,000 1,154,000
---------------------------
Total costs and expenses 3,309,000 2,707,000
---------------------------
Operating loss ($2,483,000) ($2,679,000)
Other income/(expense) (237,000) (36,000)
---------------------------
Loss before provision for income taxes (2,720,000) (2,715,000)
Provision for income taxes 1,000 1,000
---------------------------
Net loss (2,721,000) (2,716,000)
Deductions for preferred stock divdends 78,000 -
---------------------------
Net loss attributable to
common stockholders ($2,799,000) ($2,716,000)
===========================
Basic and diluted net loss per share ($0.25) ($0.25)
===========================
Common shares used in computing
basic and diluted net loss per share 11,107,878 10,750,000
See Notes to Condensed Financial Statements.
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Alyn Corporation
Condensed Statement of Stockholders' Equity
(Unaudited)
Preferred Stock - Additional
Series A Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Warrants Deficit
---------------------- ----------------------- -------------- ------------ ---------------
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Balance at December 31, 1998 11,108,000 $12,000 $37,796,000 ($21,624,000)
Issuance of Series A convertible
preferred stock 375,000 $4,000 1,463,000
Accretion of Series A convertible
preferred stock dividends 10,000 (10,000)
Beneficial conversion feature of the
convertible debt 555,000
Accretion of Series B redeemable
convertible preferred stock dividends (64,000)
Accrual of Series B redeemable convertible
preferred stock cash dividends (4,000)
Issuance of warrrants in conjunction with
issuance of Series B redeemable
convertible preferred stock and
convertible debt $293,000
Net loss (2,721,000)
---------------------- ----------------------- -------------- ------------ ---------------
Balance at March 31, 1999 375,000 $4,000 11,108,000 $12,000 $39,824,000 $293,000 ($24,423,000)
====================== ======================= ============== ============ ===============
See Notes to Condensed Financial Statements.
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Alyn Corporation
Condensed Statement of Cash Flows
<TABLE>
Three Months Ended
March 31,
1999 1998
---------------- ----------------
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Cash flows used in operating activities: ($3,224,000) ($1,577,000)
Cash flows used in investing activities:
Capital expenditures (170,000) (2,727,000)
Decrease in restricted cash 179,000 -
---------------- ----------------
Total cash flows from investing activities 9,000 (2,727,000)
Cash flows from financing activities:
Net payments on debt (450,000) (126,000)
Proceeds from convertible debt 2,634,000 -
Proceeds from warrants 293,000 -
Proceeds from Series A convertible preferred stock 1,467,000 -
Proceeds from Series B redeemable convertible
preferred stock 1,303,000 -
---------------- ----------------
Total cash flows from financing activities 5,247,000 (126,000)
Net increase (decrease) in cash 2,032,000 (4,430,000)
Cash and cash equivalents at beginning of period 1,232,000 13,126,000
---------------- ----------------
Cash and cash equivalents at end of period $3,264,000 $8,696,000
================ ================
Non cash financing activities:
Beneficial conversion feature of
the convertible debt (Note 3) $555,000
================
See Notes to Condensed Financial Statements
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<PAGE>
ALYN CORPORATION
NOTES TO CONDENSED 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 three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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2. Inventories
March 31, December 31,
1999 1998
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Raw materials $ 196,000 $ 237,000
Work in process 331,000 133,000
Finished goods 22,000 31,000
----------- -----------
$ 549,000 $ 401,000
=========== ===========
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3. Issuance of Convertible Debt, Redeemable Convertible Preferred Stock
and Convertible Preferred Stock
During the first quarter of 1999, the Company issued 375,000 shares of
Series A Preferred Stock ("Series A convertible preferred stock") for $1,467,000
cash, net of expenses; 1,500 shares of Series B Exchangeable Preferred Stock
("Series B redeemable convertible preferred stock") for $1,380,000 cash, net of
expenses; and a Senior Exchangeable Promissory Note ("convertible debt") for
$2,850,000 cash, net of expenses. The Series A convertible preferred stock is
convertible into common stock beginning in January 2000 at a set price of $4.00,
while the Series B redeemable convertible preferred stock and the convertible
debt are currently convertible into common stock at set prices of $3.57 and
$3.65, respectively. Additionally, each of these convertible securities has a
conversion rate that is based on the lesser of the set price or the market
price, as defined, at the time the securities are converted and, therefore, have
beneficial conversion features in accordance with EITF Topic No. D-60. The
Series B convertible preferred stock and the convertible note are each
convertible at as much as a 15% discount to the market price, as defined, if the
market price, as defined, at the time the securities are converted is less than
the set price.
The Series B redeemable convertible preferred stock must be redeemed by
the Company at 115% of its original issue price per share plus accrued and
unpaid dividends in the event the Company's common stock ceases to be listed or
quoted on a national securities exchange, the NASDAQ Stock Market or the OTC
Bulletin Board.
Each of the holders of these securities received registration rights
for the common stock underlying their securities. The Company is required to
register the common stock underlying the Series A convertible preferred stock
within one year of issuance and the Series B redeemable convertible preferred
stock and the convertible debt are required to be registered in June 1999,
subject to the timing of SEC review, if any.
In January 2000, the holders of the Series A convertible preferred
stock may receive a warrant to purchase up to 120,000 shares of common stock at
the then market price, as defined, of the underlying common stock if the market
price is less than $5.80 per share. Upon issuance, the holders of the Series B
redeemable convertible preferred stock received a warrant to purchase 65,000
shares of common stock at a price of $3.82 and the holder of the convertible
debt received a warrant to purchase 135,000 shares of common stock at a price of
$3.04. The common stock warrant attached to the Series B redeemable convertible
preferred stock, which was valued by the Company at $77,000, was reflected as a
reduction to the redeemable preferred stock and accreted as a preferred stock
dividend. The common stock warrant attached to the convertible debt, which was
valued by the Company at $216,000, was reflected as debt discount and amortized
as additional interest expense. The value of the beneficial conversion feature
of the convertible debt was also reflected as debt discount and amortized as
additional interest expense in accordance with EITF Topic No. D-60 based upon
the rate at which the debt becomes convertible.
Dividends on the Series A convertible preferred stock and Series B
redeemable convertible preferred stock are reflected as an adjustment to the net
loss attributable to common stockholders. This adjustment reflects the accrual
of a cash dividend of $4,000 based on the annual dividend of $30 (3%) per share
on the Series B redeemable convertible preferred stock and the accretion
dividends of $10,000 and $64,000 related to the beneficial conversion features
of the Series A convertible preferred stock and the Series B redeemable
convertible preferred stock, respectively, in accordance with EITF Topic No.
D-60 based upon the rate at which the preferred stock becomes convertible.
4. 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.
5. Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133 (FAS 133) "Accounting for Derivative Instruments and
Hedging Activities," which defines derivatives, requires all derivatives be
carried at fair value and provides for hedging accounting when certain
conditions are met. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Although the Company has not fully
assessed the implications of this new statement, the Company does not believe
adoption of FAS 133 will have a material impact on the Company's financial
position and results of operations.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Cautionary Statement
The following discussion and other sections of this Form 10-Q 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. These forward-looking
statements are subject to significant risks and uncertainties, including without
limitation those identified in the section of this Form 10-Q entitled "Factors
That May Affect Future Results and Financial Condition" and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission (the "SEC"). Such risks and uncertainties
may cause actual results to differ materially and adversely from those discussed
in such forward-looking statements. The forward-looking statements within this
Form 10-Q are identified by words such as "believes," "anticipates," "expects,"
"intends," "may" and other similar expressions. 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. The Company disclaims any
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-Q 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 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
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 primarily for the application of
boron carbide in combination with aluminum alloys, under the name Boralyn(R). In
the 3rd quarter of 1998, the Company made the transition from prototype
development to production with continued quarter over quarter increases in total
revenues. The Company continues its work on the MacGregor Golf line of
Tourney(R) Boralyn putters and Carbite Golf line of new Polar Balanced(R)
Boralyn(R) putters with deliveries scheduled for the 2nd and 3rd quarters of
1999, respectively. Shipments to Transnuclear of Boralyn(R), for use in dry
storage of spent nuclear fuel rods, were on schedule for the 1st quarter of 1999
and was well received by Transnuclear. Continued work on the suspension
components for General Motors NGV (Next Generation Vehicle) has progressed
nicely with prototype shipments occurring in the 1st quarter of 1999. The
Company also continues to make progress on developing hard-disk substrates using
Boralyn(R) and has produced prototype disks which meet industry standard for
"sputter ready disks" and has delivered them to several of the major producers
of hard-disk drives for their evaluation and specific product requirements. The
backlog continues to increase with approximately $1.5 million in orders
resulting from the Company's international sales and distribution partners.
While the Company expects to achieve sales of Boralyn(R) -based products in
1999, there can be no assurance that any significant sales will be achieved. The
Company was unprofitable through March 31, 1999 and incurred a loss for the full
year 1998 as a result of start-up and under absorbed expenses relating to
production orders, and will incur additional losses thereafter.
Results of Operations
For purposes of discussion, the results of operations for the quarter ended
March 31, 1999 are compared to the results of operations for the quarter ended
March 31, 1998.
Net sales for the 1st quarter of 1999 increased 2850% to $826,000 from
$28,000 in the 1st quarter of 1998. Increases in sales resulted from the
Company's transition in the 3rd quarter of 1998 from prototyping to production.
Shipments in the 1st quarter of 1999 were to companies in the nuclear,
automotive and aerospace industries.
Cost of goods sold for the 1st quarter of 1999 increased 224% to
$2,052,000 from $634,000 in the 1st quarter of 1998. The increase in cost of
goods sold in the 1st quarter of 1999 was a result of the 2850% increase in
sales as the Company moved from prototyping to production.
General and administrative expenses for the 1st quarter of 1999
decreased 7% to $570,000 from $616,000 in the 1st quarter of 1998. The change is
insignificant. These expenses may increase as the Company accelerates its
production efforts.
Selling and marketing expenses for the 1st quarter of 1999 decreased by
7% to $281,000 from $303,000 in the 1st quarter of 1998. As the Company expands
its sales efforts in certain target industries and internationally, selling and
marketing expenses are expected to increase.
Research and development expenses for the 1st quarter of 1999 decreased
65% to $406,000 from $1,154,000 in the 1st quarter of 1998. The decrease in 1st
quarter of 1999 was attributable to the Company's transition in the 3rd quarter
of 1998 from prototyping to production. The Company expects to continue
investing in research and development of new applications of Boralyn(R).
Liquidity and Capital Resources
At March 31, 1999, the Company had working capital of $4,353,000. 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 securities 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. The Company intends to use additional debt
financing for some of its existing and future working capital needs. The
Company's ability to obtain future working capital debt 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, it believes that internally generated funds, cash on hand, debt
and equity investment capital raised by the Company in the first quarter of 1999
and planned equity, equipment 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, equipment and accounts receivable
financing, inadequate capital to finance operations may result. Also, if the
Company fails to reach its planned revenue levels, additional capital may be
required. There can be so assurance the Company will ever achieve a significant
level of sales or profitability.
Factors That May Affect Future Results And Financial Condition
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 a limited operating history, limited revenues and prior losses
We commenced our materials development activities in 1990. However, we
only completed our manufacturing facilities in 1998 and therefore have a very
limited operating history. Our limited operating history has resulted in
extremely limited revenues through 1998, with total revenues of $364,000 in 1997
and $1.3 million in 1998. Due to these limited revenues and our extensive
materials development activities, we had net losses of $12.1 million, $7.3
million and $2.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. We are also expecting to incur losses in fiscal year 1999 and may
continue to incur losses thereafter. We may never generate sufficient revenues
to achieve profitability. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
Our future operating results will fluctuate significantly
We have experienced, and will likely continue to experience, long sales
cycle times, lengthy customer design processes for new product introductions,
and market trends that may significantly limit management's ability to forecast
accurately time-to-market schedules or 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
products and personnel and the size and actual delivery dates of orders for our
products. 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.
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.
We must achieve significant product sales to offset substantial lease and
capital commitments we made to establish production capability
We have entered into long-term leases for our two facilities located in
Irvine, California. For our main facility, we have entered into a lease that
expires in 2008 with a five-year option. We also have a ten-year lease expiring
in 2008 for our second Irvine facility. We have committed substantial capital to
provide both facilities with significant production capability. Unless and until
we achieve a significant level of sales of our Boralyn- based products, we will
have substantial production over-capacity and under-absorbed costs that would
cause us to incur substantial operating losses.
We have limited manufacturing history and significant manufacturing risks
Our limited operating history has resulted in limited experience in
manufacturing our products in commercial quantities. While we have made
substantial lease and capital commitments to support our manufacturing
capabilities, we cannot be sure that we will fully utilize our capacity or that
our facilities will be adequate for all of our future fabrication requirements.
In addition, the manufacture of our products presents several potential hazards.
For example, the manufacturing processes for Boralyn utilize high temperature
and high pressure and may be subject to volatile chemical reactions. In
addition, a mechanical or human failure or natural disasters such as
earthquakes, characteristic of Southern California, could result in interruption
of our manufacturing activities or significantly impact our manufacturing
capacity. Moreover, our manufacturing operations will use certain equipment
that, if damaged, inoperable or unavailable, could disrupt our manufacturing
operations. To address these risks, we have obtained business interruption
insurance with coverage for lost profits and out-of-pocket expenses of up to $8
million per occurrence. In addition, we maintain other property and casualty
coverage. Despite our efforts to minimize and insure against our manufacturing
risks, any extended interruption of our manufacturing operations would have a
material adverse effect on our business, operating results and financial
condition.
Our products have not yet gained market acceptance in commercial quantities
Market acceptance of our products in commercial quantities depends
upon pricing of products and our ability to manufacture and deliver products on
a timely basis. In addition, our ability to achieve commercial acceptance of our
products is dependent upon our ability to demonstrate the advantages of Boralyn
products over competing material methodologies and products. We also have
experienced, and will likely continue to experience, long sales cycles and
lengthy customer product design times prior to production orders. We must
address each of these factors effectively in order to achieve customer
acceptance in commercial quantities of Boralyn or our other current or future
products. The costs of our 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.
<PAGE>
We may be unable to obtain the additional capital required to grow our business
Our ability to grow our business is highly dependent upon our ability
to generate capital from our operations and to raise needed debt or equity
financing. If we are able to achieve our operating plan for 1999, we believe
that our cash on hand (including debt and equity investment capital raised in
the first quarter of 1999), capital generated from our internal operations, and
planned equipment and accounts receivable financing should satisfy our
anticipated capital needs for the next 12 months. However, if we fail to reach
our planned revenue objectives, we may have inadequate working capital. Also, if
we fail to complete our planned equipment and accounts receivable financing, we
may have inadequate capital to finance our operations. Our ability to obtain
future working capital debt financing will be dependent in part on the quality
and amount of our trade receivables, inventory and unsecured capital equipment.
If we are unable to receive adequate debt financing, we may have to seek
additional equity financing which may not be available on favorable terms, if at
all. Our ability to achieve future liquidity and capital funding requirements
through our operations will depend on numerous factors, including:
o results of marketing our metal matrix composite capabilities;
o market acceptance of our products;
o the timing of production orders and our ability to make delivery of
products;
o our costs of sales and timing of growth in sales; and
o our ability to effectively manage our marketing and manufacturing
activities.
We depend on our key personnel and management team
Our future success and profitability is substantially dependent upon
the performance of our executives , Steven S. Price (our President and Chief
Executive Officer), Robin A. Carden (our Founder), Richard L. Little (our Chief
Financial Officer and Secretary) and Jon A. Knartzer (our Vice President,
Operations). We seek to retain our key personnel with competitive compensation
and each of our senior executives has a substantial potential equity interest in
the form of stock options. However, a departure by any of these individuals or
any other key employees 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. We do maintain key-man
life insurance policies of $2.5 million each on the lives of Mr. Price and Mr.
Carden; however, we do not maintain key-man life insurance policies on either
Mr. Little or Mr. Knartzer.
Our future growth will be dependent upon our ability to attract and
retain additional qualified management, technical, scientific, administrative
and other personnel. Due to our location in Irvine, California and the nature of
our business, we believe we will experience significant competition for
qualified management, supervisory, engineering and other personnel.
We face rapid technological change in our industry which may necessitate
development of new products
We operate in a rapidly evolving field - advanced materials - that is
likely to be affected by future technological developments. Our 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 critical
factors in our ability to grow and remain competitive. We cannot be sure that we
will be able to develop new products or that any new products can be marketed
successfully. In addition, 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. If we fail to timely develop and introduce new products
or to enhance our current products, our business, operating results and
financial condition could be materially adversely affected. Moreover, we expect
to devote substantial resources to technology development efforts. For
accounting purposes, the costs of those efforts will be recorded as expenses as
they are incurred, notwithstanding that the benefits, if any, from our
technology development efforts (in the form of increased revenues or decreased
product costs) may not be reflected, if at all, until subsequent periods. As a
result, our period-to-period operating results could be adversely impacted and
difficult to predict.
<PAGE>
We currently depend on a limited number of customers
Due to the early stage nature of our business, we currently have only a
limited number of customers, several of whom may be material to our near-term
results of operations. Even after we mature, however, certain customers may be
material to our business, operations and future prospects. We cannot be sure
that one or more principal customers will not suffer business or financial
setbacks resulting in reduction or cancellation of product orders or our 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, or our failure to
successfully market our products to new customers, could have a material adverse
effect on our business, operating results and financial condition.
We currently depend on a limited number of suppliers
We presently purchase our principal ceramic raw material, boron
carbide, from a limited number of suppliers, including one supplier that
provides approximately 50% of our present requirements. Our business would be
materially and adversely affected if we are unable to continue to purchase boron
carbide at prices and on terms comparable to those presently available from our
principal suppliers. Although we believe that boron carbide is available from
other suppliers, we project that to take full advantage of the potential
opportunity, we must develop additional boron carbide supplies. There can be no
assurance that we will be able to continue to obtain desired quantities of boron
carbide on a timely basis or at prices and terms we consider reasonable.
We depend on the protection of our patents
We have been granted one United States patent that contains claims that
cover the use of Boralyn. We believe this patent provides protection for our
proprietary Boralyn technology. We have been granted additional patents,
including divisional (extension) patents and continuation-in-part patents that
stem from our original patent application. We have also applied for additional
patents. We cannot be sure that our existing patents, or any other patents that
may be granted, will be valid and enforceable or provide us with meaningful
protection from competitors. Further, we cannot be sure that any pending patent
application will issue or that any claim under pending patents will provide us
protection against infringement. 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 cannot be sure that our
future products 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 depend on our trademarks for current and future markets
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.
Our industry is very competitive
The materials industry is highly competitive. We compete in our chosen
markets against several larger domestic and multi-national companies, all of
which are well established in their respective markets and have substantially
greater financial and other resources than us. There are also several competing,
small advanced materials companies, similar to Alyn. Competitive market
conditions could adversely affect our results of operations and financial
condition if we were required to reduce product prices to remain competitive,
were unable to achieve significant sales of our products or unable to
successfully develop and sell new or enhanced products.
We face product liability risks
As a participant in the materials industry, we face an inherent
business risk of exposure to product liability claims in the event that any of
our products are alleged to be defective or cause harmful effects. The cost of
defending or settling product liability claims may be substantial. We currently
maintain, and intend to continue to maintain, product liability insurance
coverage. However, we cannot be sure that we will be able to obtain such
insurance on acceptable terms in the future or that such insurance will
adequately cover any claims.
Our stock price could be adversely affected by the sale of shares issuable to
holders of our recently issued preferred stock and exchangeable note
During the first quarter of 1999, we raised an aggregate of $6.0
million ($5.65 million, net of expenses) in financing through the issuance of
Series A Preferred Stock, Series B Preferred Stock and an Exchangeable Note. The
Series A Preferred Stock is exchangeable for common stock beginning in January
2000, while the Series B Preferred Stock and the Exchangeable Note are currently
exchangeable for common stock at set prices of $3.57 and $3.65 ("Set Prices"),
respectively. Each of the holders of these securities received registration
rights for the common stock underlying their securities and we are required to
file a registration statement for the holders of Series B Preferred Stock and
the Exchangeable Note in April 1999. Additionally, each of these exchangeable
securities has an exchange rate that is based on the lesser of the Set Price or
the market price at the time the securities are exchanged. The Series B
Preferred Stock and the Exchangeable Note are each exchangeable at up to as much
as a 15% discount to the market price if the market price at the time the
securities are exchanged is less than the Set Price. At a minimum, the number of
shares of common stock issuable upon exchange of all of these securities is
1,617,086. In addition, we may be required to issue up to 287,500 shares of
common stock pursuant to warrants granted in connection with these financings.
Any decrease in the price of our stock could result in the issuance of a
substantial number of additional common stock shares that would be immediately
available for resale on the public market for the Series B Preferred Stock and
the Exchangeable Note. Depending upon the trading volume of our stock, any
significant block sales of these shares issuable in exchange for these newly
issued securities could have an adverse effect on the market price of our stock.
Additionally, any perception by the public that these shares might be resold
immediately and are not to be held as long term investments could materially and
adversely affect our stock price. Any adverse impact on our stock price
resulting from these recently issued exchangeable securities would cause these
securities to become exchangeable for even more shares of common stock. Also,
any negative impact to our stock price caused by these exchangeable securities
could impair our ability to raise additional equity capital.
Our stock price could be adversely affected by the perception that certain
shareholders could require us to sell their shares of our stock by exercising
their registration rights
Future sales of our common stock by existing stockholders under Rule
144 could have an adverse effect on the price of our stock. In addition, certain
of our stockholders of common stock have contractual 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 our 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 our stock.
We are subject to risks associated with year 2000 compliance
We are in the process of upgrading or replacing our accounting and
management information systems to be Year 2000 compliant and believe we will be
Year 2000 compliant on a timely basis. We will use both internal and external
resources to reprogram and/or replace any deficiencies. We are not currently
aware of any other incompatibility and believe that no material expenditures
will be required. We do not believe that the Year 2000 issue will have any
material effect on our operations and we have determined there is no exposure
related to our products. Formal communications have been initiated with all
significant suppliers and large customers to determine the extent to which we
are vulnerable to such parties' failure to address their own Year 2000 issues.
We expect to have analyzed and accessed the possible risk of significant
business interruptions as a result of any such party's noncompliance by June
1999. At that time, any necessary contingency plans will be developed to address
any material consequences that we could suffer if such party is not Year 2000
compliant. Despite our efforts to assess Year 2000 compliance, we cannot be sure
that the failure of other companies to adequately address the Year 2000 issue
will not have a material adverse effect on our business, operating results or
financial condition. Overall, we expect to complete our Year 2000 compliance
efforts in 1999. The total estimated project cost, which is not considered
material, includes the estimated costs and time associated with the impact of
third party compliance. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Certain of our stockholders retain substantial influence
Certain of our present holders of common stock 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.
Additionally, those stockholders would be able to influence significantly a
proposed amendment to our charter, a merger proposal, a proposed sale of assets
or other major corporate transaction or a non-negotiated takeover attempt. Such
concentration of ownership may discourage a potential acquirer from making an
offer to buy our company, which, in turn, could adversely affect the market
price of our common stock.
Under the terms of our recently completed financings, certain holders
of the newly issued exchangeable securities must approve certain actions,
including future financings or issuance of senior securities. These restrictions
could affect our ability to raise capital or effect certain corporate changes
which could adversely affect our business, results of operations and financial
condition.
Certain of our charter provisions could adversely affect the rights of common
stock and we are subject to Delaware anti-takeover provisions
Under our charter, the 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.
Our stock price may 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. These factors include 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 our
earnings on existing or future equity-based compensation awards to management.
The market price of our common stock could also be influenced by developments or
matters not related to us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
<PAGE>
ALYN CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company's Preliminary Proxy for the 1999 annual meeting of
stockholders was filed on April 30. Because of its inclusion of certain matters
pertaining to the Company's recently filed Registration Statement on Form S-3,
the Securities and Exchange Commission has notified the Company of its intent to
formally review the Proxy Statement. Accordingly, the annual meeting of
stockholders was been rescheduled to September 16, 1999 for all shareholders of
record as of August 16, 1999.
In accordance with regulations issued by the SEC, stockholder proposals
intended for presentation at the 2000 Annual Meeting of stockholders must be
received by the Company at its principal executive office, 16761 Hale Avenue,
Irvine, CA 92606, a reasonable time before the Company begins to print and mail
its proxy materials, if such proposals are to be considered for inclusion in the
Company's proxy statement for the 2000 Annual Meeting of stockholders.
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
Form 8-K filed on April 29, 1999 describing the Company's
recently completed financing transactions and attaching the
definitive documents of the transactions.
<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: _______________________________
Arne van Roon
Chief Executive Officer and
President
By: _______________________________
Richard L. Little
Vice President, Finance and Administration
and Chief Accounting Officer
Dated: May 17, 1999
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