25
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 000-21153.
ALYN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0709359
(State or other jurisdiction of (IRS 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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Common Stock, par value $.001 per share
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 2, 1999 was $42,777,162 based on
the closing price of $4.00 that date.
As of February 2, 1999, the aggregate number of outstanding shares of
common stock of the registrant was 11,107,878.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on June 10, 1999, is incorporated by reference into Part
III (Items 10, 11, 12 and 13) of this Form 10-K.
TABLE OF CONTENTS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995
PART I.
1. BUSINESS
2. PROPERTIES
3. LEGAL PROCEEDINGS
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II.
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
6. SELECTED FINANCIAL DATA
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III.
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
11. EXECUTIVE COMPENSATION
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV.
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
SIGNATURES
Boralyn(R) is a registered trademark of Alyn Corporation
<PAGE>
PART I
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report on Form
10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or
the negatives thereof or variations thereon or similar terminology. These
statements involve known and unknown risks and uncertainties that may cause the
Company's actual results or outcomes to be materially different from those
anticipated and discussed herein. Further, the Company operates in an industry
sector where securities values may be volatile and may be influenced by factors
beyond the Company's control. Important factors that the Company believes might
cause such differences are discussed in the cautionary statements accompanying
the forward-looking statements and in the risk factors detailed in this Annual
Report on Form 10-K. In assessing forward-looking statements contained herein,
readers are urged to read carefully all cautionary statements contained in this
Annual Report on Form 10-K.. The Company is under no duty to update any of the
forward-looking statements contained in this Annual Report on Form 10-K to
conform these statements to actual results.
ITEM 1. BUSINESS.
Unless otherwise indicated, all information in this Annual Report on
Form 10-K gives effect to the merger, effective May 2, 1996, of Alyn
Corporation, a California corporation ("Old Alyn"), with and into Alyn
Corporation, a Delaware corporation formerly named AC Acquisition Corp. ("Alyn"
or the "Company"). Unless the context otherwise requires, the term Company as
used in this annual Report on Form 10-K includes the Company and its
predecessor, Old Alyn.
Development of the Company's Business
Alyn Corporation provides customized metal matrix composite (MMC)
solutions to meet the specific product needs of its customers in consumer and
industrial markets. Alyn is a vertically-integrated MMC company offering
advanced MMCs, customer-driven engineering solutions and strategically developed
manufacturing processes. Alyn engages in joint development projects with many of
its customers in selected large markets where the design and production of
MMC-based products provide customers with innovative products, reduce a
customer's overall production or operating cost, or provide value-added
performance.
In January 1996, the Company obtained its initial patent for the
application of a ceramic material in combination with a light metal or its
alloys. The ceramics include boron carbide, silicon carbide or aluminum oxide
and the metals include aluminum, titanium and magnesium. Boron carbide in
combination with aluminum and its alloys is the Company's primary initial focus
and is marketed under the name Boralyn. Boron carbide is an advanced ceramic
that is the third hardest material in the world and the hardest material
available at commercially reasonable cost. The Company believes that no other
commercially available material offers a range of properties comparable to those
of Boralyn. Boralyn is lighter and can be more easily fabricated than titanium.
It has a higher specific stiffness than aluminum and commonly-used titanium or
steel alloys. Boralyn is one-third the density of most steels and has a greater
resistance to wear than aluminum, specialty steel and titanium.
Since its initial public offering in October 1996, the Company has
focused on the design and installation of significant manufacturing assets to
meet anticipated production requirements in its targeted markets. Alyn now has
two production facilities in Irvine, California, a 35,000 square foot precision
pressure casting facility at its Hale Avenue location, and an 84,000 square foot
extrusion and forging facility at its Von Karman location. Alyn also has an
installed fabrication capability that can process Boralyn and hard-alloy
aluminum materials. Boralyn and other MMC ingot and billet production
capabilities are scalable as sales levels increase.
The Company utilizes project teams to address customer product needs,
optimize Boralyn and manufacturing methods and to bring the products to
production. In addition, the Company targets markets which are suited to
capitalize on premium-priced Boralyn and the Company's other MMCs for product
breakthroughs or cost savings in selected markets such as: (i) premium-priced
golf club heads and shafts; (ii) nuclear containment for spent fuel storage
casks; (iii) automotive components; (iv) aerospace components; and (v) disk
substrates for computer hard drives. Based on initial production orders,
responses received in connection with its currently ongoing joint development
projects and a high level of request for product quotes, the Company believes
these markets provide opportunities for growth. The Company intends to develop
products for other markets, such as bicycle components and other high-end
sporting goods and defense applications, where MMC-based products may also
provide premium pricing for value added benefits.
The Company has also developed what it believes to be superior
manufacturing processes, which benefit from the characteristics of Boralyn. The
Company was issued a U.S. patent for its soluble core method of manufacturing
MMC die-cast metal structures, which allows for forming complex hollow chambers
and passages, often within a one-piece structure, without the need for welding
together separate components or other secondary manufacturing processes. The
Company has filed numerous patent applications pertaining to materials,
processes and applications, of which eight US patents have been awarded to date.
Application patents have been awarded for the use of Boralyn for nuclear
containment and computer hard disks.
Company Strategy
Alyn's objectives are to become a leader in providing engineered
solutions to customers' product needs through MMC technologies and associated
manufacturing processes, and to establish market share and brand awareness for
Boralyn in markets where value-added premiums may be obtained. The Company
intends to achieve these objectives by: (i) focusing on customer markets with
high value-added needs; (ii) partnering with customers to develop engineered
solutions to their specific product needs; (iii) capitalizing on its existing
proprietary technology and patented processes for producing MMCs; (iv)
manufacturing customers' products; (v) ensuring effective execution through
target market teams and individual product teams; and (vi) providing a high
level of customer satisfaction.
Focusing on High Value-added Markets. The Company is initially focusing
its sales and development efforts on five markets, which have significant needs
in areas where the Company's materials and processes should offer great value.
These markets are golf, nuclear containment, automotive, aerospace and disk
substrates for computer hard-drives. The significance of the needs in each of
these markets allows premium-pricing for the Company's products, while still
providing value-added product innovation and/or cost savings for the customer.
Partnering with Customers. This element of the Company's strategy is
central to the overall objective of "Providing Engineered Solutions Through
Metal Matrix Technologies". The Company utilizes state-of-the-art software to
work with its customers' marketing, design, engineering and production personnel
in addressing their specific product needs. Such needs include product
innovation and fundamental technology advances, weight reduction, enhanced
structural properties, improved quality and fabrication improvements to reduce
cost.
Capitalizing on Metal Matrix Technologies. The Company has developed
patented and proprietary technology for the making of MMC materials utilizing
aluminum, titanium or magnesium as the base metal and boron carbide, silicon
carbide or aluminum oxide as the ceramic component. The Company has also
developed proprietary processes for the manufacture of products. By mixing
different materials in varying percentages and adjusting the processes used for
MMC production, the Company is able to "dial-in" material properties to fit
specific customer needs.
Manufacturing Customer Products. The Company's metal matrix composite
materials can be fabricated into products by extrusion, forging and casting.
Proprietary processes have been developed for fabrication of the Company's
products, providing a competitive advantage in production capabilities,
independent of the use of the MMCs themselves. In addition, significant
proprietary "know-how" has been developed for the manufacture of products from
MMCs. The Company has strategically invested in developing significant
manufacturing capacity to be able to offer a fully integrated service to its
customers requiring both limited and large production quantities.
Managing Through Teams. The Company's integration of engineering design,
development of material properties to address specific customer needs and the
production and delivery of the finished product, requires the active
participation and coordination of all functions within the Company. In order to
effectively manage this process and deliver customer satisfaction, the Company
utilizes project teams with responsibility and accountability for delivering
"on-time and on-spec", with a single point of reference and communication for
each customer. The Company believes that this methodology is essential to
delivering the highest levels of customer satisfaction.
Providing Customer Satisfaction. The Company believes that by providing
superior customer satisfaction, it can maintain a preferred position in
developing long-term relationships with its customers, which can be expanded
into broader roles within their respective companies and industries.
Characteristics of Boralyn
Boralyn is the Company's initial commercially available metal matrix
composite material, composed principally of aluminum alloy and boron carbide.
The Company believes that in target markets Boralyn compares favorably to other
materials with which it will compete with respect to weight (density), specific
strength, specific stiffness, resistance to wear, fatigue and corrosion
resistance and vibration and resonance. Boron carbide contains a naturally
occurring isotope, which also makes Boralyn well suited for radiation
containment in nuclear applications.
Broad Range of Available Grades. Boralyn is available in various grades
depending principally on the choice of aluminum alloy and the percent of boron
carbide. A specific grade can be matched to a specific application where a
specific property or properties are to be highlighted. For example, in aerospace
applications, where thermal expansion is a problem due to the extremes of the
environment, the percentage of boron carbide can be increased to lower the
thermal expansion. As another example, for better wearability, the percentage of
boron carbide can be increased to create harder surfaces.
Specific Strength/Specific Stiffness. The specific strength range of
Boralyn, which is variable dependent on the grade of Boralyn being produced, is
substantially higher than that of aluminum and somewhat higher than that of many
specialty steels and titanium. Boralyn has greater specific stiffness compared
to titanium alloy, aluminum alloy and specialty steel. For many applications,
less Boralyn is required to provide necessary strength and stiffness, and, thus,
reduces the overall product weight. Conversely, for the same weight, Boralyn can
provide significantly more strength and stiffness than other competing
materials.
Resistance to Wear. Boralyn provides greater wear resistance than aluminum
or steel due to the extreme hardness of boron carbide.
Fatigue and Corrosion Resistance. Boralyn, in a 5% salt moist
environment, endures a higher number of stress cycles than aluminum alloy. This
property makes Boralyn superior to aluminum alloy for applications, in which
many stress cycles are encountered, particularly in certain corrosive
environments. Any structural support where stress is applied repeatedly needs
high fatigue characteristics.
Vibration and Resonance. Boralyn, due in part to its high stiffness, has
lower vibration and resonance characteristics than aluminum computer hard-disk
substrates, and for some grades of Boralyn lower than glass, over rotational
speeds ranging from 1,000 to 10,000 revolutions per minute.
Neutron Absorption. Boron carbide contains a naturally occurring isotope
of boron which absorbs (attenuates) neutron radiation, the hazardous radiation
element of nuclear energy generation and various military applications. Neutron
absorption in Boralyn is primarily a function of the density (referred to as
areal density) and degree of uniformity of distribution (i.e., homogeneity) of
boron carbide particles within the material. The predictable homogeneity of
Boralyn allows for the design of structures specific to a customer's
requirements, without incorporating significant additional material.
Variety of Fabrication Methods. In addition to the properties described
above, Boralyn can be extruded and forged, can be used in a variety of casting
processes, and some grades can be brazed and welded. The Company has developed
what it believes to be superior manufacturing processes that are tailored to the
production of Boralyn. Among these processes is the Company's soluble core
technology that allows for forming complex, hollow chambers and passages, often
within a one-piece structure, thereby eliminating the need for welding or other
secondary manufacturing processes. In many instances, this may result in a cost
savings to the Company's customers.
<PAGE>
Products and Applications
The growth of interest in metal matrix composites is a result of the
engineering properties of these composites. Metal matrix composites compare
favorably to other materials with respect to weight, stiffness and strength, and
can be fabricated by standard methods utilizing normal equipment. Engineering
analyses demonstrate that these materials can provide significant savings in
weight and greater stiffness, compared to traditional metallic alloys, while
retaining key structural and design properties. They also compare favorably with
certain other composite materials, namely polymer-matrix materials, that have
temperature and strength limitations, are sensitive to moisture and, in some
cases, also release gases or moisture.
Golf Club Heads and Shafts. The U.S. wholesale market for golf equipment
in 1997 was estimated by industry sources to be approximately $2.4 billion.
Wholesale golf club sales in the U.S. increased from 1992 to 1997 at a
compounded growth rate of approximately 13%. This is primarily the result of
three factors: (i) the increasing number of new golf courses available to the
general public; (ii) increasing interest from non-traditional golfers; and (iii)
favorable population trends, including the aging of Baby Boomers. The Company
believes that the higher specific stiffness, higher specific strength and other
properties of Boralyn allow golf club heads to be designed and manufactured with
a larger "sweet spot" and better mass distribution (such as a lower center of
gravity), compared with titanium and other heads. The effect is to produce what
golfers term a "more forgiving" golf club. The higher specific stiffness of
Boralyn enables the production of a club shaft with the "feel" of steel (i.e.
greater control), but with a lighter weight.
In August and September 1998 the Company received initial production
orders from MacGregor Golf for a new line of Tourney(R) Boralyn putters and from
Carbite Golf for a new Polar Balanced(R) Boralyn putter, respectively.
Production deliveries of the Tourney(R) Boralyn putters were delayed until the
second quarter of 1999 due to late delivery of weights for the putter from a
third party vendor. Production of the Carbite putter was delayed until the
second quarter of 1999 due to late delivery of the production tooling by
Carbite. Taylor Made Golf has deferred introduction of their Boralyn metal wood
driver primarily as a result of the success of their recently introduced Fire
Sole(R) line of clubs. However, the Company continues working with Taylor Made
to bring this product to market.
In May 1997, the Company reached agreement with True Temper Sports to
market golf club shafts using Boralyn on an exclusive basis. While the exclusive
license has expired, material and production methodology refinements are
continuing.
Radiation Containment. Materials traditionally used for neutron
absorption in spent fuel rod storage require a separate neutron-absorbing
material, such as boron carbide, encased in layers of metallic alloy, such as
aluminum, in order to provide stiffness and structural integrity. This material
is then placed inside the actual storage container. The Company believes
competing materials require additional material to compensate for irregular size
and distribution of neutron-absorbing particles to achieve adequate levels of
absorption. Accordingly, Boralyn can produce the same neutron-absorbing results
as competing materials, but with less Boralyn, thereby reducing the weight and
cost of the structure. The initial opportunity in this market is for containment
material to use in conjunction with current and new designs of spent fuel dry
storage casks and "wet storage" in the cooling pools. Because of the structural
properties of Boralyn, the Company believes Boralyn could also be used in the
future to provide more of the actual structural containers as well as the
internal absorption material. The potential market for nuclear containment is
substantial and is expected to increase due to the growing volume of spent
nuclear fuel requiring storage.
The Company received its first prototype order for neutron containment
for spent fuel cask components in April 1998 from Transnuclear, the U.S.
subsidiary of a France-based leader in this field. The prototype order was
shipped in June 1998. The initial production order for $1 million was received
in December 1998. Production shipments are scheduled to begin in March 1999.
Advanced discussions are underway with other companies for prototype orders of
Boralyn for use in both wet and dry spent fuel storage applications.
Aerospace/Defense. Product areas that offer near-term opportunities for
Boralyn include structural support for overhead luggage compartments, galley
components and flooring, housings, high wear resistant components, components
requiring vibration dampening and other parts not related to safety-of-flight.
Areas of future opportunity for Boralyn are believed by the Company to include
aircraft structural members, nacelle components, low vibration rotating parts,
actuators, bearings and armor for the military. Because of the Company's
production capacity for both large and small components, it is targeting both
prime and sub-contractors to the industry for production orders of "hard-alloy"
(aluminum) components, in addition to Boralyn. By producing these hard-alloy
components, the Company may be able to leverage its available manufacturing
capacity to generate revenue and margin contributions. Importantly, this
strategy also serves as a vehicle for the introduction of the Company as an
already approved supplier to the industry.
The Company has been qualified as an approved vendor by several major
prime contractors to the industry and has received five production orders for
"hard-alloy" aluminum components. Applications produced include gantry rails for
missiles on F-16 fighters, "U" channels for housing hydraulic systems in wing
assemblies, helicopter seat ejection rails and forged hydraulic valve bodies.
The Company has begun customer discussions to convert single product customers
to multiple product customers. Broad manufacturing acceptance requires the
aerospace equivalent of ISO 9002 qualification, which the Company plans to
complete in the third quarter of 1999.
Automotive. The automotive (including trucks) market is a large market
where the properties of Boralyn and the Company's proprietary manufacturing
processes can be used to deliver value-added benefits in many component
applications. The automotive industry is particularly focused on fuel economy
(weight and design), performance (weight, strength and stiffness) and cost
savings (manufacturing processes). The truck market is also heavily focused on
durability, due to the long useful lives required of truck fleets.
In October 1997, the Company received a production order for engine
cradles for General Motors' EV-1 electric vehicle, which represented the
Company's first order from the automotive industry. Initial production began in
July 1998, but has been significantly limited due to the replacement of the EV-1
by the NGV (Next Generation Vehicle). In November 1998, the Company received the
initial prototype order for 12 different suspension components of the NGV.
Shipments of the prototypes will begin in the first quarter of 1999. Other
components currently being quoted include clutch components, transmission pumps
and engine components such as cylinder liners, pistons, and camshafts. Broad
acceptance by the new vehicle industry requires the automotive equivalent of ISO
9002 qualification, which the Company plans to complete in the third quarter of
1999.
Computer Hard-disks. The worldwide wholesale market for personal
computer hard-disk drives is estimated by industry sources to be approximately
150 million units in 1998. Each drive, on average, has approximately three
disks, yielding a total market for disk substrates of approximately 450 million
units in 1998. The Company believes that disks for high-speed, high-capacity
drives, which the Company is targeting in its product development and marketing
efforts, represent between 5% and 10% of the total market currently. New
technologies in the industry typically migrate from the high-end to the mass
market within two years. Boralyn disks exhibit minimal vibration over a broad
range of rotational speeds experienced by current and planned hard-disk drives.
The lower vibration and resonance allows for closer head-to-disk distance at
higher rotational speeds, characteristics that allow for greater storage
capabilities and faster data transfer rates.
The Company has been working since 1996 to develop hard-disk substrates
using Boralyn. The Company has produced prototype disks which meet industry
standards for "sputter ready disks" and has delivered them to several of the
major producers of hard-disk drives for evaluation and feedback as to their
specific product requirements. We know a stiffer disk will be required to
achieve very fast (e.g. 10K rpm) performance, and we are developing these
prototypes now. These disks demonstrate the viability of the material in this
application. It is the Company's objective to gain sufficient acceptance of
Boralyn by one or more potential customers so that joint development is
undertaken to produce disks that meet their specific application needs, leading
to production orders.
Consumer, Industrial and Other. The Company's capability to tailor
Boralyn's properties to meet specialized product design requirements, the
breadth of its manufacturing capabilities, and the marketing opportunity for
customers to market their products using the Boralyn name provide the basis for
the Company's marketing efforts in this general product category. The Company
believes that the areas of specific opportunity include those where weight, high
strength-to-weight ratios and wear or impact resistance are important product
requirements.
There can be no assurance with respect to whether or when the Company's
products will achieve meaningful market acceptance or whether or when the
Company will obtain material revenues or become profitable, if at all.
Marketing and Customer Support
The Company intends to achieve market penetration in selected markets
through a multi-step process with targeted customers usually consisting of: (i)
initial discussions of the product application and prospective customer's needs,
highlighting the advantages of Boralyn to address those needs; (ii) an
engineering and marketing evaluation by the prospective customer of sample
material and demonstration products; (iii) Alyn's technical personnel team with
the customer's design and production staffs to design or modify designs to fully
utilize the Company's MMCs and manufacturing capabilities; (iv) negotiation and
receipt of a purchase order for the prototype program, including production
pricing; (v) evaluation of the prototypes by the customer; and (vi) development
of a production program, including provisions for tooling, equipment and quality
control tests necessary to fulfill the customer's requirements. The Company
intends to sell primarily to OEM customers, with distribution from the Company
manufacturing sites to customer facilities. The Company's policy is to have its
customers absorb a significant portion of design and development-related direct
costs and pay for the development and fabrication of production tooling.
The Company's sales and marketing activities are expected to include
development of appropriate sales materials (such as specification sheets and
corporate brochures) and promotion through participation at selected trade shows
and selective advertising in journals and the trade press. These activities,
even if successful, may not result in proportional or any revenue increases in
the same period in which those activities occur.
The Company's marketing initially focused on prospective customers in
the United States, with international sales activities being conducted on a
narrowly focused basis primarily in the sports and neutron containment markets.
However, due to apparent demand for Boralyn as indicated by requests for
distribution rights, the Company accelerated its international expansion plans.
In December 1998, the Company granted sales and distribution rights to Van Roon
Partners for Eastern and Western Europe. Subject to meeting certain minimum
sales requirements, Van Roon Partners will have exclusive rights to sales within
their territory for all products excluding nuclear containment. In January 1999,
the Company granted sales and distribution rights to Pechiney Japon for Japan.
Subject to meeting certain minimum sales requirements, Pechiney Japon will have
exclusive rights to sales within several product categories, including
automotive, sports, electronics and industrial products. Pechiney Japon is a
wholly owned subsidiary of Paris, France based Pechiney, the fourth largest
producer of aluminum in the world. Pechiney is the Company's first strategic
partnership with a major manufacturer of aluminum products, whereby Pechiney can
broaden its product line to include higher margin, value added products.
Competition
The materials industry in which the Company operates is highly
competitive. The Company competes in its chosen markets against several larger
domestic and multi-national companies, all of which are well established in
those markets and have substantially greater financial and other resources than
those of the Company. Competitive market conditions could adversely affect the
Company's results of operations if it were required to reduce product prices to
remain competitive or were unable to achieve significant sales of its products.
The Company competes at two levels. First, the Company competes 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 typically use Boral(R), a boron
carbide and aluminum material supplied by AAR Brook & Perkins.
At the second level, the Company competes with product fabricators. In
the golf club market, companies fabricating clubs from titanium metal include
Coastcast Corp. and Sturm, Ruger & Co., Inc. In the computer disk drive market,
the aluminum disks are being made by companies such as Kobe Steel Company. In
the automotive industry, companies such as Teledyne Cast Products, Kelsey-Hayes
Co., Die Cast Products, Inc. and many others are competitors.
Manufacturing and Supply
The Company has developed what it believes to be superior manufacturing
processes that leverage the characteristics of Boralyn. Boralyn is produced
primarily by two methods. The first utilizes powder technology. By this method,
the various powdered elements are blended dry and mixed uniformly to avoid
stratification and settling. After the particulates have sufficiently mixed,
they are directed into a die and compressed at elevated temperatures in a vacuum
environment to remove unwanted gases and to compress the material into a solid
billet. These Boralyn billets are used to extrude forms such as plate, finished
shapes, rods and tubes for use in various consumer and other end uses.
The second method of manufacturing utilizes a molten process by which
boron carbide powder is added into the molten base alloy and then formed and
cooled to create ingots for casting. These ingots are subsequently remelted and
cast under high pressure into finished shapes. This proprietary process is
called Precision Pressure Casting because of the fine detail that can be
achieved by this process and because of the high pressure required to inject the
material into the dies. The Company also uses a proprietary process for forming
complex, hollow chambers and passages, often within a one-piece structure,
thereby eliminating the need for welding together of separate components or
other secondary manufacturing processes. This process is called AlynCore.
Applications include golf, automotive and various consumer products.
As of March 26, 1998 the Company had a backlog of approximately $4.0
million in customer orders scheduled for production and shipment primarily in
the second and third quarters of 1999.
The Company occupies an 84,000 square foot facility in Irvine,
California, which is dedicated to extrusion and the forging of extruded
material, where required. This facility houses the Company's new 4,000-ton
extrusion press and previously installed 725-ton extrusion press. The Company's
principal executive office building houses the Precision Pressure Casting
operations. This 48,000 square foot facility has approximately 16,000 square
feet dedicated to casting, with approximately 10,000 square feet remaining
available for near term expansion. Included in this facility is the Company's
recently installed 900-ton pressure casting machine, which is used for large
parts.
The Company maintains a strict internal quality control system to
monitor the quality of production at its facilities. Alyn's quality control
laboratory is capable of conducting both physical and chemical testing. The
Company is in the process of preparing for ISO 9002 certification. Certification
is planned for the third quarter of 1999. The Company also monitors the quality
of processes that are completed by subcontractors through frequent tests and
material certification. The Company maintains product liability insurance at
levels it believes to be adequate.
Raw materials used by Alyn are principally aluminum and boron carbide.
The Company is not dependent on the availability of supplies from any single
source. The Company presently purchases boron carbide from a limited number of
suppliers, including one supplier who provides approximately 50% of the
Company's current requirements. Although the Company believes that boron carbide
is available from other suppliers, it projects that to take full advantage of
the potential opportunity, the Company must develop additional boron carbide
supplies. There can be no assurance that the Company will be able to continue to
obtain desired quantities of boron carbide on a timely basis or at prices and
terms deemed reasonable by the Company. Alyn's other principal raw material,
aluminum, is available from numerous domestic and international suppliers.
The Company intends to maintain a sufficient inventory of raw materials
and Boralyn billets and ingots on site to meet its production requirements;
however, no assurances can be made that such raw materials will be readily
available or that the Company will have the resources to purchase and maintain
an adequate inventory of raw materials. Finished goods are expected to be
shipped at the time of production to the Company's customers by commercial
carriers and not remain at the Company's plant for any significant period of
time.
Technology Development
The Company continuously engages in the development of new products and
improvements to its existing formulations and maintains laboratory facilities
for these purposes in Irvine, California, as well as uses a network of outside
independent test laboratories. The Company also has a facility in Fremont,
California, for the purpose of technology development efforts in the computer
hard-disk market. The technology development department employed eleven people
on December 31, 1998, including six employees at the Fremont facility. The
Company's technology development efforts focus on producing MMCs for various
cast, forged and extruded Boralyn applications and on tooling and methods of
production.
It is expected that formulations and techniques will continue to be
developed and refined by the Company through empirical tests and prototype
development. The Company expects that it will continue to devote substantial
available resources to technology development efforts.
Patents
The Company believes that protection of its proprietary technology and
"know-how" is important to the development of its business. It seeks to protect
its interests through a combination of patent protection and confidentiality
agreements with all employees, as well as by limiting the availability of
certain critical information to a small number of key employees.
The Company intends to pursue a vigorous patent application program in
the United States and abroad. The Company has been issued eight United States
patents to date. The Company believes the initial patent issued, (United States
Patent No. 5,486,223, originally issued to Robin A. Carden in January 1996,
expiring in January 2014), provides protection for its proprietary Boralyn
technology and contains claims that cover the use of Boralyn in a wide range of
markets targeted by the Company.
The following table summarizes the patents issued to the Company to
date:
Patents Issued to Alyn Corporation
Title Patent No. Issue Date Description
1. Metal Matrix Composite and 5,486,223 1/23/96 Methods and processes
Method of Manufacture thereof for making Boralyn
2. Improved Metal Matrix 5,613,189 3/18/97 Divisional (extension
Compositions and Method of of 5,486,223
Manufacture Thereof
3. Metal Matrix Composites 5,669,059 9/16/97 Divisional (extension)
and Methods of Manufacture of 5,486,223
Thereof
4. Metal Matrix Compositions 5,700,962 12/23/97 Use of boron carbide
for Nuclear Shielding metal matrix
Applications composites for neutron
shielding
5. Metal Matrix Composition 5,712,014 1/27/98 Use of boron carbide
for Substrates Used to make metal matrix
Magnetic Disks for Hard composites for hard-
Drives disk substrates
6. Fabrication Methods for 5,722,033 2/24/98 Extrusion and casting
Metal composite techniques
for boron carbide
metal matrix
composites
7. Soluble Core Method of 5,803,151 9/8/98 Soluble core casting;
Manufacturing Metal and/or homogenize mix of salt
Metal Matrix Composites and ceramic
8. Process and Apparatus for 5,865,238 9/8/98 "Lock and Load" Al
Die Casting of Metal Matrix alloy with variety of
Composite Materials from a ceramics
Self-Supporting Billet
The Company has filed other patent applications, which are pending. The
Company is not aware of any reason why its pending applications should not be
granted with claims that will provide adequate coverage and protection for its
anticipated business activities, although there can be no assurance in that
regard.
Government Regulations
The Company's manufacturing operations are subject to a wide range of
federal, state and local regulations, including those covering the discharge,
handling and disposal of hazardous waste regulations contained in the
environmental laws. Plant and laboratory safety requirements of various
occupational safety and health laws are also applicable to all the Company's
facilities and operations.
The Company believes it complies in all material respects with regard to
governmental regulations applicable to it. To date, those regulations have not
materially restricted or impeded the Company's operations.
Management Information Systems
The Company has completed a survey of all computer systems and related
hardware and all operating equipment utilized by the Company for Year 2000
compliance. It has also undertaken a survey of important outside vendors and
suppliers for compliance, which is approximately 50% complete. The Company
believes its current management information systems are or will be Year 2000
compliant prior to December 31, 1999. All future systems purchased will likewise
include requirements for compliance.
Personnel
The Company employed 62 persons as of December 31, 1998, including three
Company executive officers, eleven technology development personnel, 23
manufacturing personnel and seven persons engaged in sales and marketing
activities. In April 1998, the Company hired a new president and chief executive
officer. The Company's Founder and former president and chief executive officer
remains with the Company focusing primarily on sales and technology development.
None of the Company's employees is a member of a labor union.
Risk Factors
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below when making an investment
decision. The risks and uncertainties described below are not the only ones
facing our company. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In such case,
the trading price of our common stock could decline, and you may lose all or
part of your investment.
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.
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:
* results of marketing our metal matrix composite capabilities; * market
acceptance of our products; * the timing of production orders and our ability to
make delivery of products; * our costs of sales and timing of growth in sales;
and * 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.
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 2. PROPERTIES
The Company leases its principal executive office facility in Irvine,
California, under a lease entered into in June 1996 and ending on January 31,
2008 (co-terminus with the Company's Von Karman facility), with a five-year
renewal option. The current monthly lease cost is approximately $25,000, with
periodic escalations to a maximum of approximately $27,000 per month. The 48,000
square foot, primarily single-story facility, is located on a three-acre site at
16761 Hale Avenue in Irvine in an industrial park with close proximity to truck,
rail and air (John Wayne Airport, a major regional airport in Orange County)
connections and a highly trained labor pool.
The Company leases an additional 84,000 square foot building located at
17021 Von Karman Avenue, Irvine, California, under a ten-year lease commencing
on February 1, 1998, with a five-year renewal option. The monthly lease cost for
this facility is approximately $49,000 with annual escalations based upon the
consumer price index, subject to a 3% minimum. This additional facility is
located approximately one half mile from the Company's main facility and is
dedicated to extrusion and forging.
These facilities are designed for expansion of capacity to match future
needs over the next several years, with additional warehousing to be leased at a
nearby location, if required. There can be no assurance that these facilities
will be adequate for the Company's entire future fabrication requirement or,
alternatively, that the Company will be able to fully utilize the capacity of
its facilities. The Company believes its current and additional facility will be
adequate for its contemplated needs.
A research and development facility dedicated to the development of
computer disk substrates used in hard-disk drives was established in February
1997 at 4576 Enterprise Street, Fremont, California, approximately 400 miles
from the Company's Irvine facilities. The three-year lease commenced on February
1, 1997 and will expire on January 31, 2000. The facility originally occupied
3,900 square feet of industrial space and was expanded to 7,800 square feet in
October 1997.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
best knowledge, presently threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is listed for quotation under the symbol
"ALYN" on the National Market of the NASDAQ Stock Market, Inc. The following
table sets forth the high and low per share bid prices for the Company's common
stock for each quarterly period since the Company's Initial Public Offering on
October 22, 1996.
Common Stock
Calendar Year High Low
1996
Fourth Quarter 16 10
1997
First Quarter 13.50 8.25
Second Quarter 12.62 8.38
Third Quarter 17.62 6.88
Fourth Quarter 16.62 9.50
1998
First Quarter 10.50 7.00
Second Quarter 8.88 5.88
Third Quarter 5.88 4.63
Fourth Quarter 6.00 3.63
As of February 2, 1999, there were approximately 45 holders of record of
the Company's common stock. The Company estimates that there are approximately
2,500 beneficial owners of the Company's common stock.
The Company does not anticipate paying any dividends on its common stock
in the foreseeable future. The Company presently intends to retain its earnings,
if any, to finance the development of its business. The payment of any dividends
in the future will depend on the evaluation by the Company's Board of Directors
of such factors, as it deems relevant at the time. Currently, the Board of
Directors believes that all of the Company's earnings, if any, should be
retained for the development of the Company's business.
<PAGE>
6. Selected Financial Data
(In thousands except per share data)
Alyn Old Alyn
------------------------- ---------------------------
Period Period
from from
May 2, January 1,
1996 1996
Year ended to to Year ended
December 31, Dec 31, May 1, December 31,
1998 1997 1996 1996 1995 1994
Statements of
Operations Data:
Total revenue ...... $ 1,266 $ 364 $ 90 $ 104 $ 319 $ 309
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of goods sold 5,402 323 80 34 203 92
Establishment of
manufacturing
facilities -- 1,809 262 -- -- --
General and
administrative
expenses 3,216 2,633 1,257 53 219 352
Selling and marketing 1,230 1,371 587 23 52 143
Technology developmen 2,968 2,338 283 7 79 180
------- ------- ------ ------- ------- -------
Total costs
and expenses 12,816 8,474 2,469 117 553 767
------- ------- ------ ------ ------ ------
Operating loss ... (11,550) (8,110) (2,379) (13) (234) (458)
Other income
(expense), net (518) 806 141 (2) (10) (11)
------- ------- ------- ------- ------- -------
Loss before provision
for income taxes (12,068) (7,304) (2,238) (15) (244) (469)
Provision for income
taxes 1 12 1 1 1 1
------- ------- ------- ------- ------- -------
Net loss ........... ($12,069) ($7,316) ($2,239) ($ 16) ($ 245) ($ 470)
======= ======= ======= ======= ======= =======
Per Share Data:
Basic and diluted net
loss per share ($ 1.11) ($ 0.68) ($ 0.25)
======= ======= =======
Common shares used
in computing net
loss per share 10,869 10,750 8,800
======= ======= =======
Alyn Old Alyn
---------------------------- ----------------
December 31,
------------------------------------------------
Balance Sheet Data: 1998 1997 1996 1995 1994
------ ------ ------ ----- -----
Working capital (deficit) $ 1,439 $11,717 $23,494 ($382) ($133)
Total assets 26,961 31,127 32,203 128 193
Long-term obligations 7,316 5,501 -- 128 128
Total stockholders' equity
(deficit) 16,184 23,750 31,066 ( 490) ( 245)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" under Part I, Item 1 and
elsewhere in this Annual Report on Form 10-K. The following discussion and
analysis should be read in conjunction with Item 6 (Selected Financial Data) and
our Financial Statements and Notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
Overview
Since its inception in 1990, the Company has been engaged in research,
development, and testing of its advanced metal matrix composite materials.
Following its initial public offering in October 1996, the Company first focused
on establishing its manufacturing facilities followed by prototype production
and completed its first production order in the third quarter of 1998. The
Company began shipping engine cradles to General Motors for its EV-1 electric
vehicle in the third quarter of 1998. Production under this program has been
significantly curtailed since General Motors has undertaken a successor program
called the NGV (Next Generation Vehicle). The Company was selected to provide
twelve parts for the new NGV. These parts include suspension, cross-member and
control arm components scheduled for delivery in early 1999. In the golf
industry, San Diego-based Carbite Golf placed an initial production order for
its new Polar Balanced(R) Boralyn putters with the first deliveries scheduled
for the second quarter of 1999. The MacGregor Golf Company debuted its new line
of Tourney(R) Boralyn putters in January 1999. Shipments are scheduled to begin
in the second quarter of 1999. Development continues with Taylor Made Golf
Company and True Temper Sports. The Company received a $1,000,000 initial order
from Transnuclear, Inc. for spent fuel storage casks, with shipments scheduled
to begin in the first quarter of 1999. Shipments have begun for aerospace
applications utilizing both Boralyn and hard-alloy aluminum. The Company's disk
substrate program has developed several prototype disk products with varying
characteristics and has provided these to disk drive manufacturers for
evaluation. While the Company has achieved sales of Boralyn -based products in
1998, there can be no assurance that any significant sales will be achieved. The
Company anticipates incurring operating losses for the current fiscal year, and
may continue to incur losses thereafter. There can be no assurance that the
Company will ever achieve profitability or maintain profitability, if achieved,
on a consistent basis. Moreover, the Company has two facilities totaling
approximately 132,000 square feet in Irvine, California, and has committed
substantial capital to equip both facilities with significant production
capability. Unless and until the Company achieves a significant level of sales,
the Company will continue to have substantial production overcapacity and
underabsorbed costs that would cause the Company to incur substantial additional
operating losses.
Results of Operations
For purposes of discussion, the results of operations for the year ended
December 31, 1998 are compared to the year ended December 31, 1997 and the
results of operations for the year ended December 31, 1997 are compared to the
year ended December 31, 1996.
Total revenues for the year ended December 31, 1998 increased 248% to
$1,266,000 from $364,000 in the year ended December 31, 1997. Production and
prototype orders for 1998 contributed 52% of total revenue as compared to 20%
for 1997. The Company, which began shipping production orders in the third
quarter of 1998, increased shipments in the fourth quarter. Shipments were made
to various firms in the aerospace, automotive and golf industries. Total
revenues for 1997 increased 88% to $364,000 from $194,000 in 1996. The increase
was the result of additional prototype sales of Boralyn-based products and
revenue on custom-built tooling.
Cost of goods sold for the year ended December 31, 1998 increased 1,572%
to $5,402,000 from $323,000 in the year ended December 31, 1997. In 1998, the
Company charged all excess manufacturing capacity costs to cost of goods sold.
In 1997, prior to completion of the Company's first manufacturing facility, only
labor, material and overhead associated with actual sales went to cost of goods
sold with the remainder charged to establishment of manufacturing facilities.
cost of goods sold increased 183% to $323,000 in 1997 from $114,000 in 1996. The
increase was primarily attributable to the lower margin on sales of custom-built
tooling and prototype sales.
There were no expenses for the Establishment of manufacturing facilities
during 1998 in that the Company had completed the pre-operating stage for
Boralyn at December 31, 1997. Expenses for the Establishment of a manufacturing
facilities in 1997 increased 591% to $1,809,000 from $262,000 in 1996. The
expenses were incurred for the additional manufacturing management and related
pre-operating costs as the Company built the infrastructure and installed
machinery and equipment to produce its Boralyn products. The increase in 1997
was the result of occupying the building for the entire year as compared to only
the fourth quarter in 1996.
General and administrative expenses for the year ended December 31, 1998
increased 22% to $3,216,000 from $2,633,000 in the year ended December 31, 1997.
The increase was attributed to search fees and relocation costs of obtaining two
senior executives, including a new chief executive officer. General and
administrative expenses for 1997 increased 101% to $2,633,000 from $1,310,000 in
1996. The increase was primarily the result of doubling the Company's staff in
preparation for production, including recruiting, professional services and
other administrative costs.
Selling and marketing expenses for the year ended December 31, 1998
decreased 10% to $1,230,000 from $1,371,000 in the year ended December 31, 1997.
The decrease was a result of partnering with OEMs and sharing the costs of
marketing programs. Selling and marketing expenses are expected to rise in 1999
as the Company's sales increase. Selling and marketing expenses in 1997
increased 125% to $1,371,000 from $610,000 in 1996. The increase was the result
of an increase in marketing expenses incurred in the expanding marketing efforts
for Boralyn products
Technology development expenses for the year ended December 31, 1998
increased 27% to $2,968,000 from $2,338,000 in the year ended December 31, 1997.
The increase was a direct result of development efforts associated with the
Company's computer hard-disk drive program. Technology development expenses in
1997 increased 706% to $2,338,000 from $290,000 in 1996. This increase was
attributable to an increase in ongoing development programs, including
establishment of the research facility in Fremont, California, which is focused
solely on the computer hard-disk market. Technology development expenses are
expected to increase as the Company continues to support the development of
Boralyn-based products.
Liquidity and Capital Resources
At December 31, 1998, the Company had unrestricted cash of $1.2 million
and working capital of $1.4 million as compared to $11.7 million in working
capital at December 31, 1997. The Company has 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. The Company received $4.5 million, net of expenses, from the
Common Stock Rights Offering completed in August 1998. In January 1999, the
Company completed an equity offering of $1.45 million, 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. 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 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 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.
Year 2000 Compliance.
The Company is in the process of upgrading or replacing its accounting
and management information systems to be Year 2000 compliant and believes it
will beYear 2000 compliant on a timely basis. The Company will use both internal
and external resources to reprogram and/or replace any deficiencies. The Company
is not currently aware of any other incompatibility and believes that no
material expenditures will be required and there would not be any material
effect on operations. The Company believes its management information systems
are or will be Year 2000 compliant prior to December 31, 1999. The Company has
determined it has no exposure related to its products. Formal communications
have been initiated with all significant suppliers and large customers to
determine the extent to which the Company is vulnerable to such parties' failure
to address their own Year 2000 issue. The Company expects 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 the
Company could suffer if such party is not Year 2000 compliant. However, there
can be no guarantee that the failure of other companies to adequately address
the Year 2000 issue will not have a material adverse effect on the Company. The
Company expects to complete its 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a list of the Alyn Corporation Financial Statements and
Schedules and Supplementary Information filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, insofar as it relates to
directors, is incorporated herein by reference to the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on June 10, 1999.
Directors and Executive Officers of the Company
Name Age Position
Steven S. Price 43 President, Chief Executive Officer and Director
Robin A. Carden 41 Founder and Director
Jon A. Knartzer 53 Vice President Operations
Richard L. Little 54 Vice President Finance and Administration,
Chief Financial Officer and Secretary
Harry Edelson 62 Director
James L. Hesburgh 65 Director
Michael Markbreiter 37 Director
The business experience, principal occupations and employment, as well
as the periods of service, of each of the directors and executive officers of
the Company during at least the last five years are set forth below.
Steven S. Price, 43, has been President and Chief Executive Officer
since April 20, 1998, and a Director since April 14, 1998. Mr. Price is Chairman
of the Company's Executive Committee and a member of the Compensation Committee.
From 1995 to April 1998, he was President of AlliedSignal Automotive
Aftermarket, a division of AlliedSignal, Inc., which supplies automotive parts
and products to retail, wholesale and installer sales channels. From 1993 to
1995, he was General Manager of the Residential Division of NIBCO Incorporated,
a privately held manufacturer of plumbing fittings and valves. From 1989 to
1993, he was Vice President, Marketing for Black and Decker Corporation's
subsidiary Kwikset Corporation and from 1987 to 1989, he was a Director, Sales
and Marketing for Black and Decker's Power Tool Group. From 1977 to 1987, he was
with The Procter and Gamble Company in various brand management and marketing
positions. Mr.
Price has a Bachelor of Arts degree in Economics from Brown University.
Robin A. Carden, 41, is the founder of the Company and has been a Director
since the Company's formation in 1990. Mr. Carden is a member of the Company's
Executive Committee. From the Company's formation until April 1998, he was
President and Chief Executive Officer. Prior to 1990, Mr. Carden was employed by
Ceradyne Inc., a company engaged in the development and production of advanced
ceramics products, as Senior Sales Engineer, and was engaged in developing
civilian applications for advanced ceramics products originally developed for
military use. Mr. Carden graduated from California State University, Long Beach
with a Bachelor of Science degree. A number of United States patents have been
issued to Mr. Carden.
Jon A. Knartzer, 53, has been the Vice President of Operations of the
Company since November 1998. From 1996 to 1998 Mr. Knartzer was Vice President
of Operations of Coastcast Corporation, a golf club head manufacturer. In 1995,
he was Vice President of Operations of Enertech, a manufacturer/representative
of products for the nuclear power industry. From 1992 to 1995 Mr. Knartzer was
the Director of Operations for Accuride International, a manufacturer of
precision ball bearing drawer slides. Mr. Knartzer has a Bachelor of Science
degree in Industrial Technology from California State University, Long Beach and
a Master of Engineering degree from the University of California, Los Angeles.
Richard L. Little, 54, has been the Vice President, Finance and
Administration and Chief Financial Officer of the Company since May 1997. He was
elected Secretary in September 1998. Mr. Little was Executive Vice President of
d'Essence Designer Fragrances, a marketer of fine perfumes and related products
from 1995 to 1997 and President of d'Essence International from 1996 to 1997.
From 1994 to 1995, he was Chief Operating Officer and Chief Financial Officer of
Graphix Zone, a publicly traded producer of CD-ROMS. In 1989, Mr. Little
co-founded Bainbridge International Holdings, a merchant bank specializing in
acquiring middle market companies. From 1986 to 1989, Mr. Little was Chief
Financial Officer, Vice President Finance, Treasurer and Secretary of Teradata
Corporation, a publicly traded manufacturer and marketer of supercomputers for
managing very large data bases. Prior to joining Teradata, Mr. Little was Chief
Financial Officer of Quotron Systems, a publicly traded provider of on-line
financial information services. Mr. Little has a Bachelor of Science degree in
Engineering and a Masters of Business Administration in Finance from the
University of California, Los Angeles. He is also a CPA.
Harry Edelson, 62, has been a Director of the Company since May 1996.
Mr. Edelson is Chairman of the Company's Audit Committee and a member of the
Compensation Committee. Since 1984, Mr. Edelson has been the Managing Partner of
Edelson Technology Partners, a series of four venture capital funds with ten
large corporations as the limited partners. The focus of the funds is to provide
the corporate partners with access to high technology products and services. One
of the funds, Edelson Technology Partners III, is a principal stockholder of the
Company. Edelson Technology Partners, through its related funds, has invested in
approximately 80 companies involved in a wide range of technologies, including
telecommunications, computers, semiconductors, specialty chemicals,
environmental and publishing. Prior to founding Edelson Technology Partners, Mr.
Edelson was a transmission engineer at AT&T, a senior computer engineer for
UNISYS and a technology analyst for three leading investment banking firms,
Merrill Lynch, Drexel Burnham Lambert and First Boston. Mr. Edelson has a
Bachelor of Science degree in Physics from Brooklyn College and a Masters of
Business Administration from New York University.
James L. Hesburgh, 65, was appointed to the Board of Directors in
December 1998. Mr. Hesburgh is a member of the Company's Audit Committee. Mr.
Hesburgh is currently president and chief executive officer of Battley USA Inc.,
the U.S. subsidiary of a French investment company and is president and CEO of
James L. Hesburgh International Inc., an export management and international
consulting firm. He has previously served as chairman, CEO, and owner of Donegal
International Machinery Ltd. in Ballyshannon, Ireland; chairman of Hiller
Aviation Inc.; president of Intercole Automation Inc.; and vice president of
international operations for The Wheelabrator Corporation. Mr. Hesburgh
currently serves on the boards of Battley USA, USCS International Inc., Fremont
Funding, FirstFed Corporation and First Federal Bank of California, Sinto
America and Roberts Sinto Corporation, Saint John's Health Center Foundation and
Chief Executives Organization.
Michael Markbreiter, 37, has been a Director of the Company since May
1996. Mr. Markbreiter is a member of the Company's Executive, Audit and
Compensation Committees. Since August 1995, Mr. Markbreiter has been a portfolio
manager for private equity investments for Kingdon Capital Management Corp., a
manager of investment funds. In April 1994, he co-founded Ram Investment Corp.,
a venture capital company. From March 1993 to January 1994, he served as a
portfolio manager for Kingdon Capital Management Corp. Prior to February 1993,
he worked as an analyst at Alliance Capital Management Corp. Since December
1997, Mr. Markbreiter has been a Director of Global Pharmaceutical Corporation,
a publicly traded generic pharmaceutical manufacturing company. Mr. Markbreiter
graduated from Cambridge University with a degree in Engineering.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 10, 1999.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 10, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on June 10, 1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Documents filed with this Report.
The following documents are filed as part of this report.
1. Financial Statements
The financial statements are listed in the accompanying List of
Financial Statements covered by Report of Independent
Accountants.
2. Financial Statement Schedules
None
3. Exhibits
Exhibit
Number Description
3.1* Restated Certificate of Incorporation.
3.2* By-Laws of the Registrant.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.
4.2* Stockholder Agreement, dated as of May 1, 1996, by and among
the Company and certain stockholders of the Registrant.
10.1* 1996 Stock Incentive Plan of the Registrant.
10.2* Employment Agreement between the Company and Robin A. Carden,
dated as of April 1, 1996, as amended by Amendment Number One,
dated as of April 30, 1996.
10.3* Form of Employment Agreement between the Company and certain
senior executives.
10.4* Lease, dated as of June 12, 1996, between the Registrant and
Taylor-Longman,with respect to premises at 16761 Hale Avenue,
Irvine, California.
10.5* Sale of Goods Agreement and Exclusive License, dated as of
September 10, 1996, by and between Taylor Made Golf Company, Inc
and the Registrant (for which confidential treatment has been
granted with respect to certain provisions).
10.6** Exclusive Customer Agreement, dated as of May 13,1997, by and
between True Temper Sports and the Registrant (for which
confidential treatment has been granted with respect to certain
provisions).
10.7 Lease, dated as of July 1,1997, as amended by First Amendment to
Lease, dated as of December 23, 1997, between the Registrant and
the Irvine Company, with respect to premises at 17021 Von Karman
Avenue,Irvine,California.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule for the year ended December 31, 1998.
99.1* U.S. Patent Number 5,496,223, dated January 23, 1996
(b) Reports on Form 8-K.
None ______________
* Incorporated by reference to the Registrant's Registration
Statement of Form S-1 (File no. 333-09143) and any amendments
thereto.
** Incorporated by reference to the Registrant's Current Report on
Form 8-K, dated August 13, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALYN CORPORATION
By: _______________________________
Steven S. Price
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------
Steven S. Price President, Chief Executive March 31, 1999
Officer and Director
(principal executive officer)
- -------------------
Robin A. Carden Director March 31, 1999
- -------------------
Richard L. Little Vice President, Finance and March 31, 1999
Administration and Chief
Financial Officer (principal
financial and accounting officer),
Secretary
- -------------------
Harry Edelson Director March 31, 1999
- -------------------
James L. Hesburgh Director March 31, 1999
- -------------------
Michael Markbreiter Director March 31, 1999
S-1
FORM 10-K ITEM 14 (a)(1)
ALYN CORPORATION
LIST OF FINANCIAL STATEMENTS
The following financial statements of Alyn Corporation are included in Item 8:
Report of Independent Accountants F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Alyn Corporation
We have audited the accompanying balance sheet of Alyn Corporation (the
"Company") at December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity and of cash flows for the two years ended
December 31, 1998 and for the period from May 2, 1996 through December 31, 1996.
We have also audited the statements of operations, stockholders' equity
(deficit) and of cash flows of Old Alyn for the period from January 1, 1996
through May 1, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Alyn Corporation at December 31,
1998 and 1997, and the results of operations and cash flows of the Company and
Old Alyn for the periods described in the first paragraph above, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
January 28, 1999, except as to
Notes 9 and 10, which are as of March 23, 1999
<PAGE>
Alyn Corporation
Balance Sheet
December 31, December 31,
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,232,000 $13,126,000
Restricted cash (Note 4) 2,062,000 --
Accounts receivable, net of
allowance for doubtful
accounts of $85,000 in 1998
and $25,000 in 1997 781,000 94,000
Inventories 401,000 172,000
Other current assets 424,000 201,000
------------ ------------
Total current assets 4,900,000 13,593,000
Equipment, furniture and fixtures, net 20,703,000 13,302,000
Other assets, net 626,000 3,454,000
Intangibles, net of accumulated amortization
of $258,000 in 1998 and $152,000 in 1997 732,000 778,000
------------- ------------
$26,961,000 $31,127,000
============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 663,000 $ 551,000
Current portion of long-term debt 1,842,000 999,000
Accrued and other current liabilities 956,000 326,000
-------- ---------
Total current liabilities 3,461,000 1,876,000
Long-term debt 7,316,000 5,501,000
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.01 par value;
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.001 par value;
20,000,000 shares authorized;
11,108,000 and 10,750,000 shares
issued and outstanding at December 31, 1998
and 1997, respectively 12,000 11,000
Additional paid-in capital 37,796,000 33,294,000
Accumulated deficit (21,624,000) ( 9,555,000)
------------ ------------
Total stockholders' equity 16,184,000 23,750,000
----------- ----------
$26,961,000 $31,127,000
=========== ===========
See accompanying notes to financial statements
<PAGE>
Alyn Corporation
Statement of Operations
Alyn Old Alyn
--------------------------------- ---------------
Year Period Period
from from
Ended May 2, 1996 January 1, 1996
to to
December 31, December 31, May 1,
1998 1997 1996 1996
Net sales $1,266,000 $ 305,000 $ 25,000 $ 104,000
Contract revenue -- 59,000 65,000 --
---------- -------- --------- --------
Total revenue 1,266,000 364,000 90,000 104,000
Costs and expenses:
Cost of goods sold 5,402,000 323,000 80,000 34,000
Establishment of
manufacturing facilities -- 1,809,000 262,000 --
General and administrative
expenses 3,216,000 2,633,000 1,257,000 53,000
Selling and marketing 1,230,000 1,371,000 587,000 23,000
Technology development 2,968,000 2,338,000 283,000 7,000
--------- --------- --------- ---------
Total costs and
expenses 12,816,000 8,474,000 2,469,000 117,000
---------- --------- --------- ---------
Operating loss (11,550,000) (8,110,000) (2,379,000) ( 13,000)
Other income
(expense) ( 518,000) 806,000 141,000 ( 2,000)
----------- --------- --------- ----------
Loss before provision
for income taxes (12,068,000) (7,304,000) (2,238,000) ( 15,000)
Provision for
income taxes 1,000 12,000 1,000 1,000
----------- ---------- ---------- ---------
Net loss ($12,069,000)($7,316,000) ($2,239,000) ($ 16,000)
============ =========== ========== =========
Basic and diluted
net loss per share ($1.11) ($0.68) ($0.25)
======= ======= =======
Common shares used in
computing net loss
per share 10,869,293 10,750,000 8,800,205
========== ========== =========
See accompanying notes to financial statements
<PAGE>
Alyn Corporation
Statement of Stockholders' Equity
Common Stock Common Stock
Class A Class B Accumulated
Shares Amount Shares Amount Deficit
------------------ ----------------- -----------
Old Alyn
(Notes 1 and 5)
Balance at
Dec. 31, 1995 1,700,000 $1,000 300,000 $325,000 ($816,000)
Repurchase of
common stock (200,000) (217,000) ( 43,000)
Net loss ( 16,000)
---------- ------ --------- -------- ---------
Balance at
May 1, 1996 1,700,000 $1,000 100,000 $108,000 ($875,000)
========= ====== ======= ========= ==========
________________________________________________________________________________
Preferred Additional
Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------- ----------------- --------- -------------
Alyn (Note 1)
Issuance of
common stock 4,240,000 $ 4,000 $ 1,000
Common stock issued
in exchange for
Old Alyn common stock 3,760,000 4,000 ( 4,000)
Common stock issued in
initial public offering,
net of offering costs 2,750,000 3,000 33,297,000
Net loss ($2,239,000)
----- ----- ---------- ------ ----------- -------------
Balance at
Dec. 31, 1996 -- -- 10,750,000 11,000 33,294,000 ( 2,239,000)
Net loss ( 7,316,000)
----- ----- ---------- ------ ----------- -------------
Balance at
Dec. 31, 1997 -- -- 10,750,000 11,000 33,294,000 ( 9,555,000)
Common stock
contributed (500,000) -- --
Common stock issued 858,000 1,000 4,502,000
Net loss ( 12,069,000)
----- ----- ---------- ------- ----------- -------------
Balance at
Dec. 31, 1998 -- -- 11,108,000 $12,000 $37,796,000 ($21,624,000)
===== ===== ========== ======= =========== =============
See accompanying notes to financial statements
<PAGE>
Alyn Corporation
Statement of Cash Flows
Alyn Old Alyn
---------------------------------------- -----------
Period Period
from from
Year Ended December 31, May 2, Jan 1,
1996 to 1996 to
Dec 31, May 1,
1998 1997 1996 1996
------------- ------------- ----------- -----------
Cash flows used in
operating activities:
Net loss ($12,069,000) ($7,316,000) ($2,239,000) ($ 16,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 2,395,000 856,000 111,000 1,000
Provision for allowance for
doubtful accounts 60,000 95,000 2,000 8,000
Changes in operating
assets and liabilities:
Accounts receivable ( 747,000) ( 158,000) ( 22,000) ( 30,000)
Inventories ( 229,000) ( 131,000) ( 32,000) 7,000
Other current assets ( 223,000) ( 54,000) ( 122,000) --
Deferred offering costs ( 128,000)
Other assets 150,000 ( 3,385,000) ( 1,624,000) --
Intangible assets ( 60,000) ( 99,000) ( 60,000) ( 1,000)
Accounts payable 112,000 ( 394,000) 884,000 ( 4,000)
Accrued and other
current liabilities 630,000 134,000 ( 588,000) 94,000
----------- --------- ----------- ---------
Net cash used in
operating activities ( 9,981,000) (10,452,000) ( 3,690,000) ( 69,000)
------------- ------------ ------------ ---------
Cash flows used in
investing activities:
Capital expenditures ( 7,012,000) ( 7,333,000) ( 5,075,000) ( 4,000)
Increase in restricted cash ( 2,062,000)
Net cash flows used ------------- ------------ ------------ ----------
in investing activities ( 9,074,000) ( 7,333,000) ( 5,075,000) ( 4,000)
------------- ------------ ------------ ----------
Cash flows from financing
activities:
Proceeds from initial
stock offering -- -- 33,300,000
Payment of stockholder
note payable (128,000)
Proceeds from stockholder
credit facility 4,650,000
Repayment of stockholder
credit facility ( 4,650,000)
Proceeds from long-term debt 2,658,000 6,500,000
Proceeds from common
stock issued 4,503,000
--------- ---------- ---------- -------
Net cash flows provided
by financing activities 7,161,000 6,500,000 33,172,000 --
--------- --------- ---------- -------
Net(decrease)increase in cash (11,894,000) ( 11,285,000) 24,407,000 ( 73,000)
Cash and cash equivalents
at beginning of period 13,126,000 24,411,000 4,000 77,000
---------- ---------- ----------- ---------
Cash and cash equivalents
at end of period $ 1,232,000 $13,126,000 $24,411,000 $ 4,000
=========== =========== =========== =========
Supplemental cash flow information:
Cash paid during the
period for income taxes $1,000 $12,000 $1,000 $1,000
========== =========== ========== =========
Cash paid during the
period for interest $799,000 $3,000 $144,000
========== =========== ===========
Noncash investing and financing activities:
Liability recorded for repurchase of common
stock from stockholder $260,000
========
See accompanying notes to financial statements
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business Alyn Corporation (Alyn or the Company) was
incorporated in Delaware in April 1996. In May 1996, the Company acquired Alyn
Corporation (Old Alyn), a California corporation, whereby all of the 1,800,000
outstanding shares of common stock of Old Alyn were exchanged at a ratio of
2.1-to-one for 3,760,000 shares of common stock of the Company (0.02611-to-one
for 47,000 shares pre-split discussed below). Subsequent to the acquisition, Old
Alyn stockholders owned forty-seven percent of Alyn. As a result of the change
in control of Old Alyn, the acquisition was accounted for as a purchase.
Alyn provides customized metal matrix composite (MMC) solutions to meet the
specific product needs of its customers in consumer and industrial markets in
the form of MMC and hard-alloy products. Old Alyn had developed technology, for
which it obtained a patent in January 1996, for the application of Boron Carbide
in combination with aluminum in lightweight metal matrix composites under the
name Boralyn.
In July 1996, the Company's Board of Directors amended its Certificate of
Incorporation to increase the number of shares authorized of common stock from
110,000 to 20,000,000 and to authorize 5,000,000 shares of preferred stock and
declared an 80-for-one split of its common stock. All share amounts presented
have been adjusted to give retroactive effect for this split.
In October 1996, the Company completed its initial public offering of
2,750,000 shares of common stock at a price of $13.50 per share. The Company
received net proceeds of approximately $33.3 million after underwriting
discounts and offering expenses. Subsequently, in October 1996, approximately
$4.7 million of net proceeds from the initial public offering were used for
repayment of principal, accrued interest thereon and all other amounts owing
with respect to a credit facility provided by stockholders, and the credit
facility was terminated.
In August 1998, the Company completed a common stock rights offering to its
existing stockholders. The Company received net proceeds of $4.5 million from
the sale of 858,000 new shares of common stock. Mr. Robin A. Carden, the
Company's founder, transferred to the Company, for no consideration, 500,000
shares of common stock effectively reducing the net increase of outstanding
shares to 358,000.
Summary of accounting policies
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and held in banks,
money market funds, commercial paper and other short-term investments with an
original maturity of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Equipment, furniture and fixtures
Equipment, furniture and fixtures, including tooling, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of individual assets, which range from 18 months to 20 years.
Amortization of leasehold improvements is recorded using the straight-line
method over the shorter of the life of the improvement or the term of the
related lease.
Intangible assets
Intangible assets consisting of patents for the Boralyn technology and
goodwill are amortized on a straight-line basis over the estimated economic life
of 10 years. Intangible assets are periodically reviewed for impairment to
ensure that they are fairly stated. The Company reviews the recoverability of
intangible assets by comparing cash flows on an undiscounted basis to the net
book value of the assets. In the event the projected undiscounted cash flows are
less than the net book value of the assets, the carrying value of the assets
will be written-down to their fair value, less cost to sell.
Revenue
The Company recognizes sales of product at the time of shipment. Contract
revenue of $59,000 in 1997 was recognized as the related technology development
costs of $59,000 were incurred. Contract revenue of $65,000 in 1996 was
recognized as the related technology development costs of $39,000 were incurred.
Amounts received prior to performance are classified as customer advances and
recognized as earned. The Company performs on-going credit evaluations and
maintains reserves for potential credit losses.
In 1998, three customers accounted for 49% of total revenue,
individually 22%, 15% and 12%. In 1997, three customers accounted for 74% of
total revenue, individually 48%, 14% and 12%. In 1996, two customers accounted
for 38% of total revenue, individually 19% and 19%.
Technology development
Expenditures for technology development are research
and development costs and are charged to expense as incurred.
Net loss per share
Effective in the fourth quarter of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") and the related interpretations. FAS 128 requires dual presentation of
Basic Earnings per Share ("Basic EPS") and Diluted Earnings per Share ("Diluted
EPS"). Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding during the reported period.
Diluted EPS reflects the potential dilution that could occur if stock options
were exercised. For all periods presented, stock options have been excluded from
the calculation as they produce an anti-dilutive effect. Basic and diluted net
loss per share for the Company is based upon the weighted average number of
common stock shares outstanding during the year.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Concentrations of credit risk
The Company sells its products and services to various companies across
several industries, and therefore management believes that no material
concentrations of credit risk exist.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, accrued and
other current liabilities, and long-term debt. These financial instruments are
stated at current value, which approximates fair value.
Stock-based compensation
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), effective for 1996,
the Company continues to account for stock compensation costs in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees".
2. Balance sheet components
December 31,
1998 1997
--------- --------
Inventories:
Raw materials $ 237,000 $157,000
Work in process 133,000 --
Finished goods 31,000 15,000
-------- --------
$401,000 $172,000
======== ========
Equipment, furniture and fixtures:
Machinery, equipment and tooling $15,078,000 $ 9,262,000
Furniture and office equipment 1,483,000 1,239,000
Leasehold improvements 7,259,000 3,353,000
Construction in progress - 276,000
---------- -----------
23,820,000 14,130,000
Less: accumulated depreciation and
amortization ( 3,117,000) ( 828,000)
----------- -----------
$20,703,000 $13,302,000
=========== ===========
Other assets
Deposits on machinery and equipment $ 461,000 $3,139,000
Other 165,000 315,000
---------- ----------
$ 626,000 $3,454,000
========== ==========
Accrued and other current liabilities:
Accrued compensation $ 204,000 $ 81,000
Accrued professional fees 66,000 138,000
Accrued relocation costs 561,000 -
Other 125,000 107,000
-------- ---------
$ 956,000 $ 326,000
========== ==========
3. Income taxes
The Company accounts for income taxes under the liability method.
Accordingly, deferred tax assets and liabilities are measured each year based on
the difference between the financial statement and tax bases of all assets and
liabilities at the current expected income tax rates. The provision for income
taxes for the three years ended December 31, 1998 is comprised primarily of the
annual minimum California franchise tax.
The components of deferred tax assets and liabilities were:
December 31,
---------------------
1998 1997
Deferred tax assets:
Net operating loss carryforwards 9,767,000 4,465,000
Accrued liabilities 331,000 36,000
Other 37,000 11,000
---------- ---------
10,135,000 4,512,000
---------- ---------
Deferred tax liabilities:
Equipment, furniture and fixtures (807,000) (360,000)
----------- -----------
(807,000) (360,000)
----------- -----------
Valuation allowance (9,328,000) (4,152,000)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
4. Long-term debt
December 31,
1998 1997
---------- -----------
A $2,500,000, 42-month term loan
with a commercial bank. $2,002,000 $2,500,000
An $8,000,000, 72 month term facility with
a major non-bank financial institution. 7,156,000 4,000,000
--------- ---------
9,158,000 6,500,000
Less current portion of long-term debt (1,842,000) ( 999,000)
---------- -----------
$7,316,000 $5,501,000
========== ==========
The aggregate maturities of long-term debt are as follows:
Fiscal Year
1999 $1,842,000
2000 1,951,000
2001 1,929,000
2002 1,487,000
2003 1,630,000
Thereafter 319,000
----------
$9,158,000
==========
In December 1997, the Company established a term loan with a commercial
bank. Payments were interest only from January 31, 1998 to April 30, 1998. From
May 1, 1998 to October 31, 2001, monthly payments are principal of $60,000 plus
interest equal to the prime rate plus 1%. The current prime rate is 7 3/4%.
In December 1997, the Company also established an $8,000,000 term facility
with a major non-bank financial institution. The Company has received 3 advances
to date totaling $8,000,000: (i) $4,000,000 drawn December 31, 1997 at 9.29%
payable in monthly installments of $73,000 including principal and interest
beginning February 1, 1998 to January 1, 2004, (ii) $2,000,000 drawn June 1,
1998 at 9.19% payable in monthly installments of $36,000 including principal and
interest beginning June 1, 1998 to May 1, 2004, and (iii) $2,000,000 drawn July
11, 1998 at 9.17% payable in monthly installments of $36,000 including principal
and interest beginning July 11, 1998 to July 11, 2004. The interest rates are
set at 3.5% over like-term U.S. Treasuries. At such time as the Company achieves
a specified level of profitability for two consecutive quarters, the previously
fixed rate will decrease by 1.0% for the remaining term of that advance. The
facility is secured by specific manufacturing equipment owned by the Company
based upon a 75% advance rate.
The provisions of the credit facilities require the Company to maintain
certain covenants including minimum cash and equivalents balances of $5,000,000.
The commercial bank has removed all covenants, providing the Company maintains
restricted cash balancesequal to the principal balance of the term loan. The
Company has restricted an amount equal to the principal balance of the term
loan. The major financial institution amended the minimum cash and equivalents
balances of $5,000,000, such that if the Company's cash balance is below
$5,000,000 the major financial institution may raise the interest rate .5%. The
major financial institution has removed all other covenants.
5. Stock transactions - Old Alyn
In April 1996, Old Alyn executed an agreement to repurchase 200,000
shares of the Series B common stock for $260,000 in cash. The cash was paid to
the stockholder in May 1996.
6. Related party transactions
The Company paid $50,000 in 1998, $60,000 in 1997 and $100,000 in 1996
to a firm managed by the former Chairman of the Board for sales, marketing and
consulting services.
7. Stock options
In July 1996, the Company established a stock incentive plan (the "Plan")
for key employees, non-employee directors and consultants to the Company who are
expected to contribute to the Company's future growth and success. Under the
Plan, the Company may grant options with respect to a maximum of 1,000,000
shares of common stock. The options will be granted at not less than fair market
value and vest ratably over three or four-year periods with the exception of the
President and Chief Operating Officer and certain non-employee director options.
The options of the President vested 80,000 shares at his employment date and
will vest 80,000 at his first anniversary of employment and 40,000 shares for
each additional six months of service for a total period of four years.
Non-employee director options will be fully vested at the date of grant or vest
over a two-year period. No award may be granted under the plan after June 30,
2006.
Had compensation cost been determined based on the fair value at the grant
dates for awards under the Company's incentive stock plan in accordance with
SFAS No. 123, net loss would have been increased by $1,577,000 ($0.15 per share)
in 1998, $773,000 ($0.07 per share) in 1997 and by $167,000 ($0.02 per share) in
1996. As required by SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions for 1998: historical dividend yield of 0.0%; an
expected life of five years; historical volatility of 56.31% and a risk-free
rate of return of 5.50%, for 1997: historical dividend yield of 0.0%; an
expected life of five years; historical volatility of 56.92% and a risk-free
rate of return of 6.28%, for 1996: historical dividend yield of 0.0%; an
expected life of five years; historical volatility of 58.09% and a risk-free
rate of return of 6.34%.
The following table summarizes the Company's fixed stock option plan as of
December 31, 1998, 1997 and 1996.
1998 1997 1996
---------------- ---------------- -----------------
Fixed Options Shares Weighted- Shares Weighted- Shares Weighted-
(000) Average (000) Average (000) Average
Exercise Exercise Exercise
Price Price Price
---------------- ---------------- ----------------
Outstanding at
beginning of year 525 $11.72 383 $13.50
Granted 544 7.47 261 9.41 383 $13.50
Forfeited (140) 10.95 (119) 13.16
----- ----- ---
Outstanding at
end of year 929 $ 9.35 525 $11.72 383 $13.50
=== === ===
Options exercisable
at year end 319 139 25
=== === ==
Weighted-average
fair value of options
granted during the year $ 4.02 $ 5.44 $ 7.62
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted-
Range Average Weighted-
of Number Remaining Average Number Weighted-
Exercise Outstanding Contractual Exercise Exercisable Average
Prices at 12/31/98 Life Price at 12/31/98 Price
- ---------- ----------- ----------- --------- ----------- ----------
$4 to 6 52,000 9.86 5.07 7,000 $ 5.38
7 to 8 400,000 9.25 7.62 80,000 7.62
8 to 9 177,000 9.09 8.42 37,000 8.46
9 to 10 30,000 8.44 9.69 9,000 9.66
11 to 13 31,000 8.54 11.75 18,000 11.28
13 to 14 239,000 7.82 13.47 168,000 13.50
-------- -------
$4 to 14 929,000 8.92 $ 9.10 319,000 $ 8.50
======= =======
8. Commitments and contingencies
Commitments and leases
Future minimum lease payments required under non-cancelable operating
leases are as follows: $897,000 in 1999, $852,000 in 2000, $872,000 in 2001,
$899,000 in 2002, $921,000 in 2003 and $4,020,000 thereafter.
Rent expense totaled $825,000 in 1998, $336,000 in 1997, and $84,000 in
1996. The Company leases its principal executive office facility in Irvine,
California, under a lease entered into in June 1996 and ending on January 31,
2008, with a five-year renewal option. The Company's second location is under a
ten-year lease commencing on February 1, 1998, with a five-year renewal option.
Litigation and claims
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. The litigation process is inherently
uncertain and it is possible that the resolution of such matters might have a
material adverse effect upon the financial position of the Company. However, in
the opinion of management, such matters are not expected to have a material
adverse effect on the financial position of the Company.
9. Going concern
The Company has incurred losses from operations for the past three years
which raises substantial doubt about the Company's ability to continue as a
going concern. These losses were incurred as a result of its planned transition
from a ceramics dealer (Old Alyn) to a Boralyn production and product
manufacturing company (Alyn) following its initial public offering in October
1996. The Company began its first deliveries of production orders in the third
quarter of 1998, achieving revenues of $1.3 million for the year. The Company
had total revenues of less than $1 million for the two preceding years,
consisting primarily of prototype and tooling orders. The Company anticipates
additional growth in sales of its Boralyn products, although no assurance can be
given that the Company will achieve such increased sales. The Company recently
completed the funding of $5.65 million, net of expenses, for additional working
capital (Note 10). Additional cash may be required to finance its operations and
growth going forward, although no assurance can be given that such financing, if
required, would be available. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Management
believes that actions presently being taken provide the opportunity for the
Company to continue as a going concern.
10. Subsequent events
During the first quarter of 1999, in a series of transactions, the Company
raised an aggregate of $5.65 million, net of expenses, in financing through the
issuance of 375,000 shares of Series A Preferred Stock, 1,500 shares of Series B
Preferred Stock and a Senior Exchangeable Promissory Note (the "Note"). The
Series A Preferred Stock is convertible into common stock beginning in January
2000 for a set price of $4.00 ("Set Price"), while the Series B Preferred Stock
and the Note are currently convertible into common stock at Set Prices of $3.57
and $3.65, respectively. The Note, which is subordinated to other Company debt,
has a stated rate of interest of 6%, maturing on March 10, 2002. 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 Preferred Stock within one year of issuance and
the common stock underlying the Series B Preferred Stock and the Note is
required to be registered in June 1999. Additionally, each of these convertible
securities has a conversion rate that is based on the lesser of the Set Price or
a price based upon the market price at the time the securities are converted.
The Series B Preferred Stock and the Note are each convertible at as much as a
15% discount to the market price if the market price at the time the securities
are converted is less than the Set Price. At a minimum, the number of shares of
common stock issuable upon conversion of all of these securities is 1,617,086.
In addition, the holders of Series A Preferred Stock received warrants to
purchase up to 120,000 shares of common stock at a price equal to the market
price of the common stock at the anniversary date of issuance of the Series A
Preferred Stock ("Anniversary Price"). The actual number of warrants are
determined by formula based upon the Anniversary Price, subject to a 120,000
share limitation. The holders of Series B Preferred Stock received warrants to
purchase 65,000 shares of common stock at a price of $3.82 and the Note holder
received warrants to purchase 135,000 shares of common stock at a price of
$3.04.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-38821) of Alyn Corporation of our report dated
January 28, 1999, except as to Notes 9 and 10, which are as of March 23, 1999,
appearing on Page F-2 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
April 1, 1999
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