AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission file number 000-21153.
ALYN CORPORATION
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(Exact name of registrant as specified in its charter)
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DELAWARE 33-0709359
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16761 Hale Avenue, Irvine, California 92606
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(Address of principal executive offices, including zip code)
(949) 475-1525
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(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
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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 14, 2000 was $20,456,555 based
on the closing price of $1.6875 on that date.
As of February 14, 2000, the aggregate number of outstanding shares of
common stock of the registrant was 12,122,403.
Stock registrar - Chase Mellon Shareholder Services (213) 553-9723.
www.chasemellon.com
<PAGE>
TABLE OF CONTENTS
PAGE
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Section 1.02
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995 1
PART I. 1
1. BUSINESS 1
2. PROPERTIES 15
3. LEGAL PROCEEDINGS 15
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II. 16
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 16
STOCKHOLDER MATTERS
6. SELECTED FINANCIAL DATA 17
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III. 21
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
11. EXECUTIVE COMPENSATION 23
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 24
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
PART IV. 25
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 25
SIGNATURES S-1
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)
technology to meet the specific product needs of its customers in consumer and
industrial markets. Alyn engages in joint development projects with some of its
customers in selected large markets where the design and production of MMC-based
products provide customers with opportunities to add new technology and product
design.
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, all sold under the
Boralyn brand name.
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 facility at
its Hale Avenue location, and an 84,000 square foot facility at its Von Karman
location. Manufacturing activities are material MMC production, extrusion and
precision pressure casting. Boralyn ingot and billet production capabilities are
scalable as sales levels increase.
The Company targets markets which are suited to capitalize on
premium-priced Boralyn for product breakthroughs in selected markets such as:
(i) sporting goods equipment; (ii) nuclear containment for spent fuel storage
casks; (iii) automotive components; and (iv) aerospace components.
The Company has 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 twelve U.S. patents have been awarded to date.
Application patents have been awarded for the use of Boralyn for nuclear
containment.
COMPANY STRATEGY
Alyn's objectives are to become a leader in providing advance engineered
materials to meet customers' product needs 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) 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 or Volume Markets. The Company is initially
focusing its sales and development efforts on four markets, which have
significant needs in areas where the Company's materials and processes should
offer great value. These markets are sporting goods, nuclear containment,
automotive and aerospace.
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 changed its strategic
direction as announced in August 1999 by focusing its manufacturing and sales
efforts on providing customers with metal matrix composite materials. The major
exception to this strategy is for the production of products for the nuclear
industry where finished products are being offered.
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, boron carbide and
other metal ceramic combinations which have followed. 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.
Broad Range of Available Grades. Boralyn is available in various grades
depending principally on the choice of aluminum alloy and the percent of
ceramics. 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 ceramics 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 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 the ceramics used.
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.
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.
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.
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
be used 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 began in March 1999 and was completed in December 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. 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 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 second or third quarter of 2000.
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. Alyn
has established a group of customers in Formula 1 racing, which includes
Ferrari, and is working on projects with a number of manufacturers of production
vehicles and motorcycles.
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). The Company received the initial prototype order for 12
different suspension components of the NGV. Shipments of the prototypes began
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. Acceptance by the automotive industry requires
the company obtaining QS9000 certification which it plans to complete in the
third or fourth quarter of fiscal year 2000.
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. Applications include robotic arms, computers, cell phone casings,
wear products and wheelchairs.
Sporting Goods. Markets include bicycles, golf products and other sporting
goods equipment. Constant performance improvement enables the Company's Boralyn
product to provide the strength and lightweight characteristics being pursued by
the industry.
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.
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 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
ceramics 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
into finished shapes. 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.
As of December 31, 1999 the Company had a backlog of approximately $1.8
million in customer orders scheduled for production and shipment primarily in
the second and third quarters of 2000.
The Company occupies two leased facilities located in Irvine, California.
One facility totaling 84,000 square feet is dedicated to extrusion and the
forging of extruded material, where required. This facility houses the Company's
4,000-ton extrusion press and previously installed 725-ton extrusion press. The
Company's other facility is where they have their principal executive offices,
as well as its 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 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 with the pre-assessment
audit scheduled for April 2000. Other certifications planned during 2000 include
QS9000 and 10CFR50, Appendix B. 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 ceramics. The
Company is not dependent on the availability of supplies from any single source.
TECHNOLOGY DEVELOPMENT AND QUALITY ASSURANCE
The Company continuously engages in the development of new materials 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's technology development and quality
assurance area currently has 7 employees and 1 consultant. Its 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 quality assurance and 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 twelve 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
<TABLE>
<CAPTION>
Title Patent No. Issue Date Description
----- ---------- ---------- -----------
<S> <C> <C> <C>
1. Metal Matrix Composite 5,486,223 1/23/96 Methods and processes for
and Method of making Boralyn
Manufacture Thereof
2. Improved Metal Matrix 5,613,189 3/18/97 Divisional (extension) of
Compositions and Method 5,486,223
of Manufacture Thereof
3. Metal Matrix 5,669,059 9/16/97 Divisional (extension) of
Composites and Methods of 5,486,223
Manufacture Thereof
4. Metal Matrix 5,700,962 12/23/97 Use of boron carbide metal
Compositions for Nuclear matrix composites for
Shielding Applications neutron shielding
5. Metal Matrix 5,712,014 1/27/98 Use of boron carbide metal
Composition for matrix composites for
Substrates Used to make hard-disk substrates
Magnetic Disks for Hard
Drives
6. Fabrication Methods 5,722,033 2/24/98 Extrusion and casting
for 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 homogenize mix of salt and
and/or Metal Matrix ceramic
Composites
8. Process and Apparatus 5,865,238 2/2/99 "Lock and Load" A1 alloy
for Die Casting of Metal with variety of ceramics
Matrix Composite
Materials from a
Self-Supporting Billet
9. Metal matrix 5,895,696 4/20/99 A rigid disk substrate for a
compositions for magnetic recording disk is
substrates used to make formed of a metal-clad
magnetic disks for hard ceramic-metal matrix
disk drives composite sandwich structure
10. Soluble Core for 5,921,312 7/13/99 An improved soluble core for
Casting die casting metals or metal
matrix composites
11. Ceramic-Metal Matrix 5,948,495 9/7/99 A rigid disk substrate for a
Composites for Magnetic magnetic recording disk is
Disk Substrates for Hard formed of a ceramic-metal
Disk Drives matrix composite
12. Metal Matrix Composite 5,980,602 11/9/99 An improved metal matrix composite
utilizes boron carbide as a
ceramic additive to a base
material metal
</TABLE>
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.
PERSONNEL
The Company employed or contracted as consultants 52 persons as of
December 31, 1999, including 3 Company executives, 10 technology development and
quality assurance personnel, 29 manufacturing personnel, 4 in finance and
administration and 6 persons engaged in sales and marketing activities. In April
1999, 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 on a consulting basis 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 1999, with total revenues of $2.2 million in
1999, $1.3 million in 1998, $364,000 in 1997 and $194,000 in 1996. Due to these
limited revenues and our extensive materials and facilities development
activities, we had net losses attributable to common stockholders of $16.3
million, $12.1 million, $7.3 million and $2.3 million for the years ended
December 31, 1999, 1998, 1997 and 1996, respectively.
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.
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 higher than normal operating losses.
WE HAVE LIMITED MANUFACTURING HISTORY AND A HIGH LEVEL OF 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
$2.8 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 AND CONTINUE AS A GOING CONCERN
Our ability to grow our business and continue as a going concern is highly
dependent upon our ability to generate capital from our operations and to raise
needed debt or equity financing. If we can achieve our operating plan for 2000,
we believe that our cash on hand (including the debt and equity investment
capital we plan to raise in the second quarter of 2000), plus the capital
generated from our internal operations, and the equipment and accounts
receivable financing we have in place will 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. Our ability to obtain future
working capital debt financing will be dependent in part on the quality and
amount of our trade receivables, inventory and unsecured capital equipment. If
we are unable to receive adequate debt financing, we may have to seek additional
equity financing which may not be available on favorable terms, if at all. Our
ability to achieve future liquidity and capital funding requirements through our
operations will depend on numerous factors, including:
o results of marketing our metal matrix composite capabilities;
o market acceptance of our products;
o the timing of production orders and our ability to deliver
products on a timely basis;
o our costs of sales and timing of growth in sales; and
o our ability to effectively manage our marketing and manufacturing
activities against our operating plan.
WE DEPEND ON OUR KEY PERSONNEL AND MANAGEMENT TEAM
Our future success and profitability is substantially dependent upon the
performance of our executives, Arne Van Roon (our President and Chief Executive
Officer), Ray E. Brooks (our Chief Financial Officer and Secretary) and Maurizio
Tosca (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 not maintain key-man life insurance policies on either Messrs. Van
Roon, Brooks or Tosca. 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. Customers
comprising 10% or more of our revenues are Transnuclear, Inc. at $995,000 or 44%
and Marvin Engineering at $371,000 or 17% in 1999.
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 ISSUED SERIES A, SERIES B AND SERIES C PREFERRED STOCK AND
EXCHANGEABLE NOTE
During fiscal year 1999, Alyn Corporation raised a net of $13,132,000 for
working capital and paydown of bank debt which is broken down as follows:
Series A Convertible Preferred Stock $1,460,000
Series B Redeemable Convertible
Preferred Stock $1,380,000
Series C Mandatorily Redeemable
Convertible Preferred Stock $7,292,000
Convertible Senior Exchangeable Note $3,000,000
The Series A Preferred Stock is exchangeable for common stock beginning in
January 2000, while the Series B Exchangeable Preferred Stock was converted in
October 1999 to 626,960 shares of common stock at $2.08. The Exchangeable Note
is currently exchangeable for common stock at a set price of $3.645 ("Set
Price"). Each of the holders of these securities received registration rights
for the common stock underlying their securities and filed a registration
statement for the holders of Series B Exchangeable Preferred Stock
("Exchangeable 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 Exchangeable 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 are required
to issue a minimum 200,000 shares, up to a maximum of 320,000 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 Exchangeable 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.
On October 8, 1999, the company issued 75,000 shares of Series c
Convertible preferred stock ("Series C Preferred Stock") for $7,292,000 cash,
net of expenses. In anticipation of the october 8 purchase of the Series c
Preferred stock, the purchasers of the Series C Preferred Stock provided a
$1,000,000 bridge loan to the company on September 29, 1999 in the form of a
Demand Promissory Note (the "Note"). The Bridge Loan was used for General
Working Capital to reduce outstanding accounts payable. Under the terms of the
Note, the Loan was due and payable on the earlier of (i) December 31, 1999, (ii)
the closing of the Series C Preferred Stock Purchase, or (iii) an Event of
Default. The note was to be interest free through October 12, 1999 and carried
an increasing rate thereafter up to a maximum of prime plus 6%. The Note was
paid in full from the proceeds of the Series C Preferred Stock issuance on
October 8, 1999. The Series C Preferred Stock is convertible into Common Stock
at a set price of $3.00, subject to certain anti-dilution provisions in the
event the Company issues Common Stock or Securities convertible into Common
Stock at a price less than $3.00 per share. The holders of the Series C
Preferred Stock received registration rights for the Common Stock underlying
their Securities. In accordance with the provisions of the Agreements, the
Company filed an Amended Registration Statement on Form S-3/A on October 29,
1999, including such underlying Common Stock. Upon issuance of the Series C
Preferred Stock, the Holders were issued Warrants to purchase up to 1,875,000
shares of Common Stock at a price of $3.00 per share. The number of shares
subject to purchase will be determined on December 31, 2000, based upon the
Company meeting certain target levels of revenue and earnings before interest,
depreciation and amortization (EBITDA), and may vary from the full 1,875,000 to
zero shares. The Series C Preferred Stock carries no provision for dividends.
We may be required to issue a large number of additional shares of common stock
upon conversion of our preferred stock, exchange of our exchangeable note, and
upon exercise of outstanding warrants that will be immediately available for
resale. These sales could cause the market price of our common stock to decline
significantly, even if our business is doing well.
We registered under the Securities Act of 1933 our Series A preferred
stock, Series B preferred stock, Series C preferred stock, the exchangeable
promissory note and outstanding warrants. They are currently convertible and
exchangeable for a large number of shares of our common stock. Those shares of
common stock were registered under the Securities Act of 1933. Sales by the
holders of this significant amount of common stock could encourage short
selling, which could cause our stock price to decline further. Furthermore, any
negative impact on our stock price caused by these securities could impair our
ability to raise additional equity capital, if required. Our Series A preferred
stock, the related warrants, Series C preferred stock and exchangeable note are
subject to price protection provisions that require us to reduce the conversion,
exercise or exchange price for the securities and ultimately to issue additional
shares of common stock to these holders without additional consideration if the
Company issues additional shares of common stock at a price below their fixed
conversion, exercise or exchange price. In addition, we have also granted
piggyback registration rights to register up to 211,000 shares of common stock
issuable upon exercise of an outstanding warrant relating to our initial public
offering in October 1996. Furthermore, 6,381,955 shares of our common stock
outstanding at October 25, 1999, are immediately available for resale in the
public market under Rule 144 or Rule 701 of the Securities Act of 1933, as
amended.
The following table sets forth the number of shares of our common stock that
we have issued and the maximum number of shares of our common stock that we
would be required to issue assuming that all of the following securities are
immediately exchanged, converted or exercised for common stock:
<TABLE>
<CAPTION>
================================================================================
NUMBER OF SHARES
OF COMMON STOCK
CONVERSION/ ISSUED AND PERCENT OF
EXCHANGE OR ISSUABLE UPON OUTSTANDING
TYPE OF SECURITY ISSUE PRICE FULL CONVERSION COMMON STOCK
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A preferred stock $2.00 750,000 3.8%
- --------------------------------------------------------------------------------
Related warrants issued $1.91 120,000 0.6%
in January 2000
- --------------------------------------------------------------------------------
Common stock issued in $2.3925 626,960 3.2%
October 1999 to Series
B stockholders as a
result of conversion of
the Series B preferred
stock
- --------------------------------------------------------------------------------
Warrants issued in $3.82 65,000 0.3%
March 1999 to Series B
stockholders
- --------------------------------------------------------------------------------
Warrants issued in $3.25 150,000 0.8%
October 1999 to Series
B stockholders
- --------------------------------------------------------------------------------
Common stock issued in $3.00 200,000 1.0%
August 1999 to AMRO
International, S.A.
- --------------------------------------------------------------------------------
Warrants issued in $3.50 50,000 0.3%
August 1999 to AMRO
International, S.A.
- --------------------------------------------------------------------------------
Exchangeable note $2.00 1,500,000 7.7%
- --------------------------------------------------------------------------------
Related warrants $3.0375 135,000 0.7%
issued in March 1999
- --------------------------------------------------------------------------------
Related warrants $3.00 300,000 1.5%
issued in October 1999
- --------------------------------------------------------------------------------
Common stock issued N/A 149,213 0.8%
in August 1999
- --------------------------------------------------------------------------------
Common stock issued $2.3467 38,352 0.2%
in September 1999 as
interest payment
- --------------------------------------------------------------------------------
Series C preferred $3.00 2,500,000 12.8%
stock
- --------------------------------------------------------------------------------
Related warrants $3.00 1,875,000 9.6%
issued in October
1999
- --------------------------------------------------------------------------------
Total 8,459,525 43.2%
================================================================================
</TABLE>
We determined the conversion price of the Series A warrants which totaled
120,000 shares were valued at $257,000 using the Black-Scholes pricing model.
Using the same model the Series B warrants totaled 150,000 shares were valued at
$231,000; in addition the Series B also had warrants totaling 65,000 shares
valued at $77,000. The Series C warrants totaling 1,875,000 were ascribed a
value of $3,009,000. The common stock holders issued 200,000 shares of common
stock in August 1999 and received warrants to purchase 50,000 warrants which are
valued at $74,000. The holder of the promissory note received warrants to
purchase 135,000 shares of common stock valued at $216,000; in addition the
noteholders in October 1999 were issued warrants totaling 300,000 which are
valued at $482,000.
THE OWNERSHIP LIMITATIONS OF OUR PREFERRED STOCK AND EXCHANGEABLE NOTE MAY NOT
PROTECT AGAINST DILUTION
We may not issue shares of our common stock to holders of our preferred
stock if such issuance would result in such holders beneficially owning more
than 19.9% of our outstanding common stock.
Also, under the rules of the National Association of Securities Dealers,
Inc., the holders of our Series A preferred stock, our Exchangeable Preferred
Stock and our Exchangeable Note may not exchange their securities for common
stock if such exchange would lead to the issuance of more than 19.9% of our
outstanding common stock as of the respective issue dates of the exchangeable
securities. However, the 19.9% limitation will cease to exist if we receive
stockholder approval for issuances in excess of 19.9%.
WE MAY BE REQUIRED TO MAKE CASH PAYMENTS TO HOLDERS OF OUR PREFERRED STOCK AND
EXCHANGEABLE NOTE
We may be required to make cash payments to holders of our preferred stock
and Exchangeable Note if we do not timely deliver common stock upon exchange of
the securities or if we fail to keep a registration statement effective for the
underlying shares of common stock. Such cash payments would adversely affect our
financial condition and ability to implement our business plans. In addition, if
we do not obtain stockholder approval to remove the 19.9% limit, we would be
required to make cash payments in the event the holders of the exchangeable
securities attempted to convert over the 19.9% limit. The cash payments would be
equal to the number of shares of common stock that we could not issue because of
the 19.9% limit multiplied by the market price at the time of the attempted
conversion. In such an event, we will be required to raise funds elsewhere,
which could be difficult. If we do not receive stockholder approval as we are
required, there can be no assurance that we would be able to obtain adequate
sources of additional capital.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY THE PERCEPTION THAT CERTAIN
STOCKHOLDERS 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.
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 of our directors and to control the outcome of all
other issues submitted to our 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.
In addition, 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 provisions of our Exchangeable Note could discourage some
potential purchasers by making an acquisition of our Company or an asset sale
more difficult and expensive, including:
o adjustments to the exchange price of the Exchangeable Note upon
merger or consolidation events, reflecting adjustments made to the
underlying common stock;
o requirement that upon a change of control, we make an offer to buy
the Exchangeable Note at the greater of 150% of the principal plus
accrued and unpaid interest and penalties or the product of the
number of shares into which such Exchangeable Note can be exchanged
and the market price on the applicable date; and
o prohibition against selling or transferring all or substantially all
of our assets to any subsidiary or affiliate except for cash or cash
equivalent consideration.
We have also agreed to grant the holders of the Exchangeable Note a right
of first offer with respect to certain issuances of equity or debt securities,
and we are prohibited from obtaining additional senior indebtedness for borrowed
money without written consent of the holders of the Exchangeable Note unless
such indebtedness is not on par with or senior or superior to the Exchangeable
Note or that such borrowed money is for equipment financing or customary working
capital lines of credit.
Moreover, the terms of our Exchangeable Preferred Stock prohibit any
merger or consolidation unless the resulting entity assumes obligations to the
holders of the Exchangeable Preferred Stock.
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 such as the general volatility of the stock market.
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
17221 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. There can be no assurance that these
facilities will be adequate for the Company's fabrication requirements or,
alternatively, that the Company will be able to fully utilize the capacity of
its facilities. The Company believes its current facilities will be adequate for
its contemplated needs.
ITEM 3. LEGAL PROCEEDINGS
There are several legal proceedings pending, but none are considered
material. To the Company's best knowledge, there are no material lawsuits
threatened against the Company. The Company announced on March 24, 2000 an
agreement with Epicor Software Corporation to settle a lawsuit it filed against
DataWorks which it had acquired in December 1998. Epicor agreed to pay Alyn the
sum of $1.8 million, of which Alyn Corporation received a net sum of $1,057,000
with the balance of $743,000 being paid for legal expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of stockholders held on December 16, 1999 the Stockholders
approved the 1999 Stock Incentive Plan under which 1,500,000 shares of the
Company's common stock have been reserved for issuance. Votes were: 8,425,281
"for"; 476,463 "against" and 0 abstentions.
The 1999 Plan is intended to serve as a comprehensive equity incentive program
for the Company's officers, employees and non-employee Board members which
will encourage such individuals to remain in the Company's service and more
closely align their interests with those of the stockholders.
<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.
<TABLE>
<CAPTION>
Common Stock
------------
Calendar Year High Low
------------- ---- ---
<S> <C> <C>
1996
Fourth Quarter 16.00 10.00
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
1999
First Quarter 3.00 2.75
Second Quarter 3.41 2.94
Third Quarter 2.75 2.52
Fourth Quarter 2.25 2.00
</TABLE>
As of February 14, 2000, there were approximately 55 holders of record of
the Company's common stock. The Company estimates that there are approximately
3,000 beneficial owners of the Company's common stock.
Although $24,000 in cash dividends was paid in 1999, 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.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per share data)
<TABLE>
<CAPTION>
ALYN CORPORATION
Years ended December 31,
1999 1998 1997 1996 1995
Statements of Operations Data: --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $2,248 $1,266 $364 $194 $319
Costs and expenses:
Cost of goods sold 7,934 5,402 323 114 203
Establishment of manufacturing facilities - - 1,809 262 -
General and administrative expenses 3,825 3,216 2,633 1,310 219
Selling and marketing 1,176 1,230 1,371 610 52
Research and development 1,437 2,968 2,338 290 79
Restructuring expenses 729 -
--------------------------------------------------------------------
Total costs and expenses 15,101 12,816 8,474 2,586 553
--------------------------------------------------------------------
Operating loss (12,853) (11,550) (8,110) (2,392) (234)
Other income (expense), net (2,594) (518) 806 139 (10)
--------------------------------------------------------------------
Loss before provision for income taxes (15,447) (12,068) (7,304) (2,253) (244)
Provision for income taxes 1 1 12 2 1
--------------------------------------------------------------------
Net loss ($15,448) ($12,069) ($7,316) ($2,255) ($245)
====================================================================
Value of beneficial conversion feature (360)
Series B preferred stock dividends (24)
Accretion on preferred stock (477)
--------------------------------------------------------------------
Net loss attributable to common
stockholders ($16,309) ($12,069) ($7,316) ($2,255)
===================================================
Net loss per share-basic and diluted ($1.43) ($1.11) ($0.68) ($0.26)
===================================================
Weighted average common shares-basic
and diluted 11,406 10,869 10,750 8,800
===================================================
ALYN CORPORATION
Years ended December 31,
1999 1998 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) 1,744 1,439 11,717 23,494 (382)
Total assets 24,110 26,961 31,127 32,203 128
Long-term debt 7,310 7,316 5,501 - 128
Redeemable preferred stock 4,552 - - - -
Total stockholders' equity (deficit) 8,907 16,184 23,750 31,066 (490)
</TABLE>
See independent auditors' report and accompanying notes to financial statements
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
From the Company's inception in 1990 through the second quarter of 1998,
the Company was engaged in research, development, testing and prototype
production of advanced metal matrix composite materials, utilizing proprietary
technology primarily for the application of boron carbide in combination with
aluminum alloys, under the name Boralyn(R). In the third quarter of 1998, the
Company made the initial transition from prototype development to production.
The Company's extrusion facility was completed in late 1998 and became fully
operational in the first quarter of 1999. The Company's first major Boralyn
production order was received from Transnuclear, a customer, in the fourth
quarter of 1998 and was for use as shielding material in dry storage casks for
spent nuclear fuel rods. Shipments began in the first quarter of 1999 and
continued throughout the year. The Boralyn shielding has been well received by
Transnuclear and has generated a high level of interest in the Company's nuclear
shielding for both the dry and wet storage markets. During the first quarter of
1999, the Company received initial orders for Boralyn for use in components for
Formula One-race cars. The successful use of the Company's material led to a
cooperation and development agreement being executed with Ferrari SpA during the
second quarter of 1999. This agreement provides for the development of
specialized custom Boralyn alloys for the production of components for Ferrari
Formula One and GT cars. The work with Formula One teams has resulted in
interest from several leading automotive companies. These companies have started
testing Boralyn for use in engines and other automotive components for
high-performance production automobiles. The Company has received its first
major production order for extruded Boralyn to produce bicycle components in the
sporting goods industry. Alyn has developed a new line of composite material,
which have increased strength and can be shaped rather easily. Most of the
shapes would be drawn or bent from a tube of Boralyn. Applications in the
sporting goods industry include bicycle frames and components, snowshoes and
structural assemblies.
The Company is focusing on relationships with secondary process
companies. This strategy will expedite the "development" to "production" phase
of the sporting goods products. Such processes may be drawing, machining,
bending or welding of the Boralyn composite material. A variety of sporting
goods companies received the new material and are undergoing product testing and
evaluation. The Company intends to brand name the metal matrix material by
having corporate logos on products as well as advertising literature. The
Company has also expanded its manufacture of non-Boralyn components for the
aerospace industry to gain acceptance by the industry and to generate near-term
revenues. Other application areas of Boralyn are in evaluation by different
customers and trial orders have been executed. The Company is anticipating
positive results from these evaluations with production orders to follow for
2000. While the Company expects to achieve increasing sales levels of Boralyn-
based products in 2000, there can be no assurance that such increases will be
achieved. The Company was unprofitable this past fiscal year 1999 as well as in
1998 as a result of start-up costs, restructuring charges, and the ongoing costs
of maintaining significant production capacity in anticipation of sales growth,
and will incur additional losses thereafter.
RESULTS OF OPERATIONS
For purposes of discussion, the results of operations for the year ended
December 31, 1999 are compared to the year ended December 31, 1998 and the
results of operations for the year ended December 31, 1998 are compared to the
year ended December 31, 1997.
Total revenues for the year ended December 31, 1999 increased 78% to
$2,248,000 from $1,266,000 in the year ended December 31, 1998. Shipments were
made in 1999 to various firms in the aerospace, automotive, nuclear and sporting
goods industries. Total revenues for 1998 increased 248% to $1,266,000 from
$364,000 in 1997. 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, 1999 increased 47% to
$7,934,000 from $5,402,000 in the year ended December 31, 1998. In 1998 and
1999, 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 1,572% to $5,402,000 in 1998 from
$323,000 in 1997. The increase was primarily attributable to the lower margin on
sales of custom-built tooling and prototype sales.
General and administrative expenses for the year ended December 31, 1999
increased 19% to $3,825,000 from $3,216,000 in the year ended December 31, 1998.
The increase was primarily attributed to search fees, relocation costs of
obtaining two senior executives, including a new chief executive officer and
higher utilities and rental expense. General and administrative expenses for
1998 increased 22% to $3,216,000 from $2,633,000 in 1997. The increase was
primarily the result of doubling the Company's staff in preparation for
production, including recruiting, professional services and other administrative
costs. Goodwill of $767,000 gross and $492,000 net was not considered
recoverable and was therefore written off in 1999.
Selling and marketing expenses for the year ended December 31, 1999
decreased 4% to $1,176,000 from $1,230,000 in the year ended December 31, 1998.
The decrease was a result of partnering with OEMs and sharing the costs of
marketing programs.
Research and development expenses for the year ended December 31, 1999
decreased 52% to $1,437,000 from $2,968,000 in the year ended December 31, 1998.
The decrease was a direct result of the phase out of the Fremont, California
research facility. Research and development expenses in 1998 increased 27% to
$2,968,000 from $2,338,000 in 1997. This increase was attributable to an
increase in ongoing development programs, including establishment of the
research facility in Fremont, California, which focused solely on the computer
hard-disk market. Research and development expenses are expected to increase as
the Company continues to support the development of Boralyn-based products.
A provision for restructuring of $729,000 has been expensed in 1999 to
reserve for estimated closedown costs of the Fremont, California disk research
facility. The facility was closed during September, 1999. The assets have not
yet been sold as of December 31, 1999. At December 31, 1999, $590,000 of the
restructuring reserve remained on the Company's balance sheet and is netted
against the assets held for sale. The reserve includes a provision for the
remaining four months of the facility's lease term, severance payments and a
reserve for the expected losses on the sale of certain assets used in the
production of disk substrates by the facility that are no longer used.
Other income (expense) of ($2,594,000) in 1999 and ($518,000) in 1998 were
comprised mainly of interest expense on indebtedness.
Provision for income taxes reflects the $1,000 minimum state franchise tax
for both 1999 and 1998. For the year ended December 31, 1999, net loss
applicable to common stock was $16,309,000 representing net loss for the year of
$15,448,000 plus value of the beneficial conversion feature on the Series A
preferred stock ($4,000) and the Series B preferred stock ($320,000), the Series
B preferred stock cash dividends ($24,000) the accretion on the Series A, B and
C preferred stock ($477,000).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had unrestricted cash of $2.6 million
and working capital of $1.7 million as compared to $1.4 million in working
capital at December 31, 1998. The Company has funded its operations through the
net proceeds from its initial public offering in October 1996 of $33.3 million;
debt financing of $10.5 million--$6.5 million in December 1997; $4.0 million 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 a Series A Convertible preferred stock offering of $1.46
million, net of expenses. In March 1999, the Company completed a Series B
Exchangeable preferred stock offering of $1.4 million, net of expenses, and an
exchangeable debt offering of $2.8 million, net of expenses. In August 1999 the
Company completed a common stock financing of $554,000 net of expenses. During
October, 1999, the Company completed a Series C Mandatorily Redeemable Preferred
Stock equity offering of $7.3 million, net of expenses.
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 2000, it believes that internally generated funds, cash on hand, debt
and equity investment capital raised by the Company and planned equipment and
accounts receivable financing should satisfy the Company's anticipated capital
needs for the next 12 months. 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.
During 1999 the Company was provided with $10,870,000 in cash flow from
financing activities and used $8,629,000 in operating activities and $829,000 in
investing activities. The Company achieved a positive cash flow of $1,412,000
for 1999 compared with a cash outflow of $11,894,000 in 1998. The net cash used
in operating activities of $10,691,100 was primarily comprised of a net loss of
$15,448,000 with an additional $1,152,000 used for inventory purchases reduced
by non-cash depreciation and amortization of $2,666,000 and writeoff of goodwill
and other intangibles of $530,000; interest expenses related to the beneficial
conversion feature on convertible debt of $555,000; loss on disposal of
equipment, furniture and fixtures of $746,000 and expense for the anti-dilution
penalty on convertible debt in the form of common stock.
Cash flows used in investing activities of $1,233,000, net, included a
$2,062,000 increase in restricted cash used for the repayment of long term debt
offset by $829,000 used for the purchase of equipment, furniture and fixtures.
Cash flows from financing activities of $10,870,000 included proceeds from
borrowings on convertible debt of $3,000,000, net proceeds from issuance of
Series A convertible preferred stock and warrants of $1,460,000, net proceeds
from issuance of Series B redeemable convertible preferred stock and warrants of
$1,380,000 and net proceeds from issuance of Series C mandatorily redeemable
convertible preferred stock and warrants of $7,292,000 offset by the $2,816,000
repayment of long term debt to a major bank.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and long-term debt. At December 31,
1999, the carrying value of our financial instruments approximated their fair
values based on current market prices and rates.
It is our current policy not to enter into derivative financial
instruments. We do not currently have any significant foreign currency exposure
since we do not transact business in foreign currencies. Due to this, we do not
have any significant overall currency exposure at December 31, 1999.
YEAR 2000 COMPLIANCE
On January 1, 2000, many companies faced a potentially serious information
systems (computer) problem because many software applications and operational
programs written in the past did not properly recognize calendar dates beginning
in the Year 2000. This problem could have forced computers or machines which
utilize date dependent software to either shutdown or provide incorrect data or
information. We examined our computer and information systems and contacted our
software and hardware providers to determine whether our software applications
and computer information systems were compliant with the Year 2000. We also
performed our internal tests of our software and hardware to confirm that they
were Year 2000 compliant.
At this time we have not experienced any material Year 2000 related
problems with our information systems and computer software, and we have not
experienced any material problems with our key suppliers or customers related to
the Year 2000.
It is not possible to quantify the aggregate cost of upgrading our
computer operating system and software since they were part of the software and
hardware providers' normal upgrades to our systems. However, the costs for
upgrading our information systems were funded through our operating cash flows.
We intend to continue to review our information systems as well as monitor
our key suppliers and customers for any undetected Year 2000 problems which may
not yet be apparent. However, we do not currently believe that there are any
undetected Year 2000 problems that could have a material impact on our business,
financial condition or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which we are required to adopt effective in our fiscal year 2001.
SFAS 133 will require us to record all derivatives on the balance sheet at fair
value. We do not currently engage in hedgeing activities and will continue to
evaluate the effects of adopting SFAS NO. 133. We will adopt SFAS No. 133 in our
fiscal year 2001.
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
The Company has engaged Deloitte & Touche LLP to be its principal
accountant effective February 4, 2000, to audit its accounting statements for
the year ended December 31, 1999. Alyn has dismissed, and therefore has
terminated its client-auditor relationship with, PricewaterhouseCoopers LLP, its
previous principal accountant with respect to the audit of Alyn's financial
statements. PricewaterhouseCoopers LLP issued an unqualified opinion on the
Company's consolidated financial statements as of and for the year ended
December 31, 1997, and a qualified opinion as of and for the year ended December
31, 1998.
PricewaterhouseCoopers LLP qualified its opinion for the year ended
December 31, 1998, by including a going concern modification.
PricewaterhouseCoopers LLP qualified its opinion because at that time the
Company needed to raise additional capital in order to continue operations at
then-current levels for the next twelve months and the Company lacked a history
of operations that would adequately suggest that it would raise such funds.
The decision to change accountants was approved by the Board of Directors
of the Company by unanimous written consent.
During the two most recent fiscal years and the subsequent interim period
preceding this termination, there were no disagreements over accounting matters,
financial disclosures, or any other limitations on the scope or procedure of the
independent auditor in the course of performing professional services. The
Company has authorized PricewaterhouseCoopers LLP to respond fully to any
inquiries of Deloitte & Touche LLP concerning the work done and conclusions
drawn in performing previous audits of the Company and concerning the reasons
for termination of the services of PricewaterhouseCoopers LLP.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Arne van Roon 55 President, Chief Executive Officer and
Director
Robin A. Carden 43 Founder and Director
Raymond E. Brooks 58 Vice President Finance and Administration,
Chief Financial Officer and Secretary
Robert L. Burr 49 Director & Chairman of the Board
Michael Markbreiter 38 Director
David Edwards 34 Director
</TABLE>
The business experience, principal occupations and employment, as well as
the periods of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below.
Arne van Roon, 55, has been President, Chief Executive Officer and a
Director since April 15, 1999. Mr. van Roon is Chairman of the Company's
Executive Committee and a member of the Compensation Committee. From 1984 to
1999, he was founder and President of Van Roon Partners, Ltd., a firm
specializing in the development and implementation of growth strategies for
emerging companies with new technologies. From 1971 to 1984 he was with Philips
Electronics, a Netherlands-based global electronics company, in a variety of
senior positions in finance, marketing and executive management in Holland,
Germany, Italy, East Africa and the Middle East. Mr. van Roon has a degree from
Erasmus University in Rotterdam, The Netherlands.
Robin A. Carden, 43, 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 Long Beach State University with a
Bachelor of Science degree. A number of United States patents have been issued
to Mr. Carden.
James Hesburgh, former Director and Chairman of the Board, Jon A.
Knartzer, former Vice President of Operations of the Company and Harry Edelson,
Director, resigned from the Board in 1999 to pursue other interests.
Raymond E. Brooks, 58, succeeded Richard Little as Vice President, Finance
and Administration and Chief Financial Officer of the Company in early 2000
after Mr. Little resigned to pursue other interests. Prior to joining Alyn, Mr.
Brooks was the Chief Financial Officer and Director of Administration for Rohm
Electronics, USA, LLC, based in Nashville, Tennessee, a subsidiary of Rohm Co.
Ltd., Kyoto, Japan, a manufacturer and distributor of electronic components to
the automotive, computer, telecommunications and consumer industries. He served
in that capacity from 1994 to 1999. Prior to that he was Chief Financial
Officer/Controller with Rohm Electronics. Mr. Brooks earned his MBA degree, with
Honors, from Golden Gate University in San Francisco, and has a Bachelor of
Science degree, with Honors, from Arizona State University.
Robert L. Burr, 49, joined the Board of Directors and was elected Chairman
in November, 1999. Since 1995, Mr. Burr has been a Director of Fleming Asset
Management, a part of Robert Fleming Holdings Limited, a global asset management
and merchant banking firm. From 1992 to 1995, Mr. Burr managed Kidder, Peabody &
Company's Private Equity group. Prior to joining Kidder, Peabody, the majority
of this time was spent at Morgan Stanley as the Managing General Partner of
Morgan Stanley Ventures and also a General Partner of Morgan Stanley Venture
Capital Fund I. Prior to becoming an investor, Mr. Burr was a corporate lending
officer with Citibank, N.A. and received an MBA from Columbia University and a
B.A. from Stanford. He is currently on the Board of Directors of Hudson
Technologies, Inc. and Caliber Learning Network, Inc.
Michael Markbreiter, 38, 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.
David J. Edwards, 34, became a Director of the Company in November, 1999.
Mr. Edwards has been a Vice President at Fleming Asset Management, a part of
Robert Fleming Holdings Limited, a global asset management and merchant banking
firm, since 1994. Prior to joining Fleming Asset Management, Mr. Edwards was an
Associate with Booz Allen & Hamilton, a strategic management consulting company
based in New York. From 1987 to 1990, Mr. Edwards was a Process Engineer with
Exxon Chemical Corporation. Mr. Edwards received an MBA from Harvard Business
School and a Masters in Engineering from Cambridge University. He is currently
on the Board of Directors of Impax Laboratories, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the Chief Executive
Officer of the Company and the four most highly paid executive officers, other
than the Chief Executive Officer (collectively, the "Named Executive Officers")
for services rendered in all capacities to the Company during such period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION NUMBER OF
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS(2) COMPENSATION OPTIONS COMPENSATION(1)
- -------- ---- ------ -------- ------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven S. Price 1999 $267,016 -- -- 160,000 $4,550
formerly 1998 170,830 41,670 -- -- 5,950
President and 1997 -- -- --
Chief 1996
Executive Officer
Robin A. Carden 1999 $162,070 -- -- -- 7,200
Founder, 1998 162,521 -- -- -- 6,900
Formerly 1997 156,667 -- -- --
President and 1996 100,000 28,500 310,985
Chief Executive
Officer
Arne van Roon 1999 $121,813 750,000 4,550
President and
Chief
Executive Officer
Walter R. Menetrey 1999 $ 5,666 -- -- --
Formerly 1998 148,408 -- -- --
Executive Vice 1997 117,708 $27,500 50,000 --
President and 1996 65,000 -- --
Chief Operating
Officer
Richard L. Little, 1999 $140,176 $50,000 -- 60,000 3,900
formerly Vice 1998 135,000 20,000 -- -- 2,400
President, 1997 84,375 -- -- 40,000 1,500
Finance and 1996 -- -- -- --
Administration
and Chief
Financial Officer
Jon A. Knartzer, 1999 $54,175 -- -- -- 1,700
formerly Vice 1998 50,833 -- -- 35,000 800
President of 1997 -- -- -- -- --
Operations 1996 -- -- --
</TABLE>
- --------------------------------
(1) For 1999, represents car allowance for Mr. Van Roon of $4,550, for Mr.
Price of $4,550, for Mr. Little of $3,900 and for Mr. Knartzer of
$1,700. For 1998, represents car allowance for Mr. Price of $5,950, Mr.
Carden $7,200, Mr. Knartzer $800 and Mr. Little of $2,400. For 1997,
represents car allowances for Mr. Carden of $6,900 and Mr. Little of
$1,500. For 1996, represents Mr. Carden's $4,800 car allowance, $283,100
in deferred compensation and $22,995 interest on his loan to the Company.
(2) In 1998, Mr. Little received a $50,000 bonus that was paid in 1999. In
1997 Mr. Little received a $20,000 bonus that was paid in 1998.
STOCK OPTION GRANTS AND EXERCISE
The following table sets forth information regarding stock options granted to
each Named Executive Officer during fiscal year 1999 pursuant to the Company's
1996 Stock Option Plan.
<TABLE>
% of Total
Awards Grant
Granted to Exercise Date
Options Employees or Base Present
Granted(1) in Fiscal Price(3) Expiration Value(4)
Name (#) Year(2) ($/Sh) Date ($/Sh)
---- --- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Harry Edelson 100,000 7.5% 3.00 04/09/08 $1.64
Richard Little 60,000 4.5% 3.50 11/02/08 $1.91
James Hesburgh 50,000 3.7% 2.63 12/09/08 $1.44
Arne van Roon 750,000 56.2% 2.63 04/09/09 $1.43
</TABLE>
- ----------
(1) Options granted to Mr. Van Roon shall be subject to the provisions discussed
above under "Agreements with Key Executives". Options granted to Mr. Price
were granted subject to certain vesting provisions as described above. Of
the options included in the table above, only 160,000 for Mr. Price remain
issued and outstanding. The remaining 275,000 have been cancelled. Each
option must be exercised within 10 years of the grant date, subject to
earlier termination in the event of the optionee's termination of employment
with the Company. An incentive stock option granted to a person owning more
than 10% of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company (a "Ten Percent
Stockholder") must be exercised within five years of the grant date. For
incentive stock options granted to a Ten Percent Stockholder, the exercise
price shall not be less than 110% of the Fair Value per share of common
stock.
(2) A total of 1,335,000 options were granted for the fiscal year ended December
31, 1999. At December 31, 1999, 928,500 options were outstanding. Of these,
547,000 options were exercisable. At December 31, 1998 there were 71,500
shares of common stock reserved under the plan for future stock option
grants. A total of 260,500 options were granted for the fiscal year ended
December 31, 1997. At December 31, 1997, 524,500 shares were outstanding. Of
these, 138,894 options were exercisable. At December 31, 1997 there were
475,500 shares of common stock reserved under the plan for future stock
option grants. In October 1996, the Company granted options for the purchase
of 383,000 shares of common stock at the initial public offering price, all
of which were outstanding at December 31, 1996. Of the options outstanding
at December 31, 1996, 25,000 options were exercisable.
(3) The exercise price for each option granted under the 1996 Stock Option Plan
shall not be less than 100% of the fair market value (the "Fair Value") per
share of common stock on the date such option is granted. The exercise price
may be paid in cash (by check), by transferring shares of common stock owned
by the option holder and having a Fair Value on the date of surrender equal
to the aggregate exercise price of the option or, solely with respect to
options other than those granted to non-employee Directors, by cash payments
in installments or pursuant to a full recourse promissory note, in either
case, upon the terms and conditions as the Compensation Committee shall
determine. Upon the exercise of any option, the Company is required to
comply with all applicable withholding tax requirements.
(4) Represents grant date valuation computed under the Black-Scholes option
pricing model adapted for use in valuing stock options. The actual value, if
any, that may be realized will depend on the excess of the stock price over
the exercise price on the date the option is exercised, so there can be no
assurance that the value realized will be at or near the value estimated by
the Black-Scholes model. Grant date values were determined based in part on
the following assumptions for 1999: risk-free rate of return of 6%, no
dividend yield, expected life of 5 years and historical volatility of 56%;
1998: risk-free rate of return of 5.50%, no dividend yield, expected life of
5 years, and historical volatility of 56.31%.
OPTION EXERCISES AND HOLDINGS AS OF DECEMBER 31, 1999
No stock options were exercised in fiscal year 1999 by any of the Named
Executive Officers. The following table sets forth, as of December 31, 1998, the
number of unexercised options held by each Named Executive Officer and the value
thereof based on the closing price of the common stock of $2.0625 December 31,
1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at FY-End FY-End ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Steven S. Price 160,000/0
Robin A. Carden NA NA
Richard L. Little 100,000/100,000 0/0
</TABLE>
(1) Represents (i) the number of shares of common stock underlying options
(including options the exercise price of which was more than the market
value of the underlying securities) multiplied by (ii) the closing price at
December 31, 1998 of $4.25 minus the exercise price.
DIRECTOR COMPENSATION
Members of the Board of Directors of the Company presently receive no annual
remuneration for acting in that capacity. During the period James L. Hesburgh
was Chairman of the Board and an employee of the Company (April to October
1999), he received annualized compensation of $72,000. The Company's
non-employee Directors are compensated at the rate of $1,500 (plus reasonable
expenses) for each attended meeting of the Board of Directors and $500 for each
telephonic meeting in which each participates. Non-employee Directors are also
eligible for the grant of options under the 1996 Stock Incentive Plan (the "1996
Plan") that provides for each non-employee Director (currently, Messrs. Burr,
Edelson, Edwards, Hesburgh and Markbreiter) to receive an initial grant of
options to purchase 5,000 shares of common stock and an annual grant of options,
to be granted as of the date of the Annual Meeting of Stockholders, to purchase
10,000 shares of common stock. Following approval by the Company's stockholders
of the 1999 Stock Incentive Plan, all such future grants will be under the 1999
Stock Incentive Plan.
EMPLOYMENT CONTRACTS
In April 1999, the Company entered into an agreement with Arne van Roon, the
Company's newly appointed President and Chief Executive Officer. The agreement
provided that Mr. van Roon shall be paid annual base compensation of $164,320.
In June 1999, the Board adjusted Mr. van Roon's annual base compensation to
$175,000. The agreement also provides that Mr. van Roon shall be granted options
to purchase 750,000 shares of the Company's common stock to vest on April 15,
2004, subject to the following acceleration provisions: (i) 100,000 to be vested
on December 31, 1999; (ii) 100,000 to vest on December 31, 2000 if the Company's
common stock price is at or above $4.00 per share on that date; and (iii) 50,000
to vest for every whole dollar per share that the Company's common stock price
at December 31, 2000 is above $4 per share up to a maximum of $15 per share. On
February 18, 1999 Mr. van Roon was granted warrants to purchase up to 50,000
shares of the Company's common stock, subject to vesting based upon the
Company's European sales exceeding certain minimum requirements for 1999.
In April 1999, the Company entered into an agreement with James L. Hesburgh, the
Company's then newly elected Chairman of the Board, to provide additional
assistance to the Company. The agreement provided that Mr. Hesburgh's annualized
compensation would be $72,000. The agreement also provided that Mr. Hesburgh
would be granted options to purchase 100,000 shares of the Company's common
stock which would vest on December 31, 1999, if such period of additional
assistance was still in effect as of that date. On October 21, 1999, Mr.
Hesburgh's period of additional assistance terminated and he ceased to be
Chairman of the Board; however, he continues to remain as a Director. On
November 5, 1999, the terms of the vesting schedule for Mr. Hesburgh's options
for such additional assistance were amended to provide, in part, for full
vesting of options to purchase 50,000 shares of common stock, with the remaining
50,000 options cancelled and returned to the option pool available to grant.
In April 1998, the Company entered into a two-year employment agreement with
Steven S. Price, the Company's former President and Chief Executive Officer.
Subject to the termination provisions provided therein, the term of Mr. Price's
employment agreement was to be automatically renewed for a one-year term after
the expiration of the initial two-year term. The employment agreement provided
that Mr. Price's annual base salary was to be $200,000 during the initial year
and not less than $200,000, as determined by the Compensation Committee, during
the second year of the initial two-year term. In addition to his base salary
during the initial two-year term, Mr. Price was entitled to an annual bonus of
up to one hundred percent (100%) of his base salary, subject to a $100,000
minimum guarantee. He was also to receive a Company paid personal term life
insurance policy in an amount of not less than $1 million, reimbursement of
certain relocation costs and a customary benefits package. The employment
agreement provided that Mr. Price be granted options to purchase 400,000 shares
of the Company's common stock, to be vested in the following amounts and at the
times indicated: (i) 80,000 shares on the date of execution of his employment
agreement; (ii) 80,000 shares on the last day of the first year of employment;
and (iii) 40,000 shares upon completion of each succeeding six month period of
employment for a period of three years. Under the termination provisions of Mr.
Price's employment agreement, if he was not terminated for cause, he may not be
terminated during the first year of his employment. If terminated during the
second year of his employment other than for cause, he would be entitled to
continuation of salary and benefits, plus the minimum guaranteed bonus, paid
monthly, up to a period of one (1) year. The employment agreement prohibits Mr.
Price from (i) competing with the Company for a period of two years following
termination of employment with the Company and (ii) disclosing confidential
information or trade secrets in any unauthorized manner.
Effective April 15, 1999, Mr. Price was no longer President and Chief Executive
Officer of the Company. On October 15, 1999, after paying six months of
severance, the Company's severance obligations under the employment agreement
were completed, due to Mr. Price's employment by another company.
In May 1996, the Company entered into a three-year employment agreement with
Robin A. Carden, then the Company's President and Chief Executive Officer. On
April 20, 1998, Mr. Carden was replaced by Mr. Price as President and Chief
Executive Officer. Subject to the provisions for termination provided in his May
1996 agreement, the term of Mr. Carden's employment agreement shall
automatically be renewed for a one-year term after the expiration of the initial
three-year term, and for successive one-year terms thereafter for a maximum of
10 years. The employment agreement provides that Mr. Carden's annual base salary
shall be determined by the Board of Directors, but in no event shall such annual
salary be less than $150,000, which amount shall be increased annually in an
amount equal to at least the annual Consumer Price Index. In addition to his
base salary, Mr. Carden is entitled to bonus consideration and a customary
benefits package. The employment agreement prohibits Mr. Carden from (i)
competing with the Company for a period of two years following termination of
employment with the Company and (ii) disclosing confidential information or
trade secrets in any unauthorized manner.
In May 1997, Richard L. Little entered into a one-year employment agreement with
the Company for the position of Vice President, Finance and Administration and
Chief Financial Officer. Subject to the termination provisions provided therein,
Mr. Little's employment agreement was to automatically be renewed for a one-year
term after the expiration of the initial term, and for successive one-year terms
thereafter. Mr. Little's agreement was renewed for its first one-year extension.
His employment agreement provides for an annual base salary to be determined by
the Compensation Committee of the Board of Directors, but in no event shall such
annual salary be less than $135,000. In addition to an annual base salary, Mr.
Little's employment agreement provides for a minimum annual bonus of $20,000 and
a customary benefits package. The employment agreement prohibits Mr. Little from
(i) competing with the Company for a period of two years following termination
of employment with the Company and (ii) disclosing confidential information or
trade secrets in any unauthorized manner. In May 1998, Mr. Little and other
senior management of the Company were given notice of the Company's intent to
allow certain existing employment agreements to expire at their next anniversary
date and that such employees would become "at will" employees as defined by
California labor law. Mr. Little's employment agreement expired on May 19, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Burr, van Roon,
Edwards and Markbreiter. Mr. van Roon has been President and Chief Executive
Officer of the Company since April 1999. Mr. Burr has been Chairman of the
Board of the Company since October 21, 1999, succeeding Mr. Hesburgh, who
was Chairman of the Board from April 1999 to October 1999.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Four of Alyn's Directors, Messrs. Burr (Chairman), van Roon, Hesburgh and
Markbreiter, currently constitute the Compensation Committee, which, among other
things, is responsible for (1) reviewing and approving salaries, benefits and
bonuses for all executive officers of the Company; (2) reviewing and approving
stock option grants to employees of the Company; and (3) reviewing and
recommending to the Board of Directors matters relating to employee compensation
and employee benefit plans. The Board of Directors did not modify or reject any
action or recommendation of the Compensation Committee regarding compensation
for the 1998 fiscal year.
This report sets out the Company's executive compensation philosophy and
objectives, describes the components of its executive compensation program and
describes the bases on which 1999 executive compensation determinations were
made with respect to the executive officers of the Company, including those
named in the Summary Compensation Table preceding this report.
In establishing and evaluating the effectiveness of compensation programs for
executive officers, as well as other employees of the Company, the Compensation
Committee is guided by three basic principles:
o The Company must offer competitive salaries to be able to attract and
retain highly-qualified and experienced executives and other management
personnel;
o Executive cash compensation in excess of base salaries should be tied
to Company and individual performance; and
o The financial interests of the Company's executives should be aligned with
the financial interests of the stockholders, primarily through stock option
grants and incentive compensation.
Consistent with the Company's executive compensation objectives, compensation
for its senior executives consists of three elements: an annual base salary,
annual incentive compensation and long-term incentive compensation.
Annual Base Salary. The Compensation Committee annually reviews each executive's
base salary. Salary levels are generally targeted at and correspond to the
median of the range of compensation paid by similarly situated companies. Actual
salaries are based on individual performance contributions within a competitive
salary range for each position that is established through job evaluation and
market comparisons. Base pay levels for the executive officers are competitive
within a range that the Compensation Committee considers to be reasonable and
necessary to attract and retain qualified executives. Increases in base salary
are primarily the result of individual performance, which includes meeting
specific goals established by the Compensation Committee. The criteria used in
evaluating individual performance varies depending on the executive's function,
but generally include leadership inside and outside the Company; advancing the
Company's interests with customers, vendors and in other business relationships;
product quality and development; and advancement in skills and responsibility.
Annual Incentive Compensation. The Compensation Committee annually considers the
performance of the Company and of each executive in determining the amount of
cash compensation to be paid in excess of base salaries. The Compensation
Committee also considers Management recommendations regarding bonus compensation
for all other employees, which are also based upon Company and individual
performance.
Long-Term Incentive Compensation. The 1996 Stock Incentive Plan authorizes the
Compensation Committee to make grants and awards of stock options to the
Company's employees. The stock options are granted with an exercise price equal
to the market price of the Company's common stock on the date of grant, have a
duration of ten years, and vest over three or four years. This approach is
designed to motivate management to increase stockholder value over the long-term
since, the full benefit of the compensation package cannot be realized unless
stock price appreciation occurs over a number of years. In determining the
number of options awarded, the Compensation Committee considers competitive
practices, the duties and scope of responsibilities of each officer's position
and the amount and terms of options already held by management.
Chief Executive Officer's Compensation. Mr. Price, who was appointed President
and Chief Executive Officer on April 20, 1998, and served in that capacity for
approximately one year, had a base annual salary of $200,000, a guaranteed
minimum bonus compensation of $100,000 per year and in April 1998 received
options to purchase 400,000 shares of the Company's common stock. On April 15,
1999, Mr. van Roon succeeded Mr. Price as President and Chief Executive Officer
at an annual base compensation of $164,320 and received options to purchase
750,000 shares of the Company's common stock. On June 23, 1999, the Board of
Directors raised Mr. van Roon's annual base compensation to $175,000.
The Compensation Committee believes that the compensation program for the
executives of the Company is comparable with the compensation programs provided
by comparable companies and serves the best interests of the stockholders of the
Company. The Compensation Committee also believes that annual performance pay is
appropriately linked to individual performance, annual financial performance of
the Company and stockholder value. Messrs. Burr and van Roon were not members of
the Board of Directors or Compensation Committee in 1998 and, accordingly, were
not involved in the matters discussed in this Report on Executive Compensation
or in the preparation of this report.
PERFORMANCE MEASUREMENT COMPARISON
The following graph provides a comparison of the cumulative total stockholder
return for the period from December 31, 1997 through December 31, 1999 (assuming
reinvestment of any dividends) among the Company, the NASDAQ Stock Market-U.S.
Index and the Russell 2000 Index.
COMPARISON OF 12 MONTH CUMULATIVE TOTAL RETURN
AMONG ALYN CORPORATION, THE NASDAQ STOCK MARKET U.S. INDEX
AND THE RUSSELL 2000 INDEX FOR PERIOD ENDED DECEMBER 31, 1998*
* ASSUMES THAT THE VALUE OF THE INVESTMENT IN ALYN CORPORATION COMMON STOCK AND
EACH INDEX WAS $100 ON DECEMBER 31, 1997 AND THAT ALL DIVIDENDS WERE REINVESTED.
[Graphic Omitted]
The foregoing graph is based upon the following data:
Cumulative Total Return
-----------------------
Dec-97 Dec-98 Dec-99
------ ------ ------
Alyn Corporation 97 39 14
NASDAQ Stock 124 170 247
Market-U.S. Index
Russell 2000 Index 121 116 137
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
beneficially owned, as of December 31, 1999, by (i) each stockholder known to
the Company to be a beneficial owner of more than 5% of the Common Stock, (ii)
each director and nominee for director and (iii) the directors and officers of
the Company as a group. Unless otherwise noted, all shares are owned directly
with sole voting and dispositive powers.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Name and address
of beneficial
Name owner (1) No. of Shares % of Total
- ---- --------- ------------- ----------
<S> <C> <C> <C>
Kingdon Capital Management Corp.(2) 5,666,910 33.9%
Robin A. Carden 2,413,500 14.4%
Harry Edelson(3) 562,000 3.4%
CEDE & Co. 4,505,877 27.0%
Talisman Capital Opportunity 187,465 1.1%
Walter R. Menetrey(4) 100
Michael Markbreiter(5) 31,667
AMRO International 513,480 3.1%
All executive officers and directors of 2,833,455 17.0%
the Company as a group (six persons)(6)
</TABLE>
- -------------------------------
*Less than 1%.
(1) The address for each of the persons in the table below is c/o Alyn
Corporation, 16761 Hale Avenue, Irvine, California 92606.
(2) Includes shares of Common Stock held by M. Kingdon Offshore NV, Kingdon
Associates, L.P. and Kingdon Partners, L.P. Does not include the shares of
Common Stock underlying immediately exercisable options that appear in the
table above opposite the name of Michael Markbreiter, a Director of the
Company and an employee of Kingdon Capital Management Corp. Mr. Mark
Kingdon is the sole shareholder, director and executive officer of Kingdon
Capital Management Corp.
(3) Includes 562,000 shares of Common Stock held by Edelson Technology
Partners III, with respect to which Mr. Edelson disclaims beneficial
ownership.
(4) Includes options immediately exercisable for 100 shares of Common Stock.
(5) Includes options immediately exercisable for 31,667 shares of Common
Stock.
(6) Includes options immediately exercisable for 296,651 shares of Common
Stock. Does not include (i) 562,000 shares of Common Stock held by Edelson
Technology Partners III, with respect to which Mr. Edelson, a Director,
disclaims beneficial ownership and (ii) shares of Common Stock held by
Kingdon Partners, L.P., Kingdon Associates, L.P. and M. Kingdon Offshore
NV, with respect to which Mr. Markbreiter, a Director, disclaims
beneficial ownership.
ITEM 13. NONE
<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.
4.3** Certificate of Designations of Series A Convertible
Preferred Stock filed on January 8, 1999.
4.4** Warrant to Purchase Shares of Common Stock of Alyn
Corporation dated January 8, 1999 by and between Alyn
and Seaside Partners, L.P.
4.5** 6% Senior Exchangeable Promissory Note due March
10, 2002 issued by Alyn to Talisman Capital
Opportunity Fund Ltd.
4.6** Registration Rights Agreement dated March 10, 1999
by and between Alyn and Talisman Capital
Opportunity Fund Ltd.
4.7** Warrant Agreement dated March 10, 1999 by and
between Alyn and Talisman Capital Opportunity Fund
Ltd.
4.8** Certificate of Designations, Preferences and Rights
of Series B Exchangeable Preferred Stock filed
March 18, 1999.
4.9** Registration Rights Agreement dated March 15, 1999
issued by and between Alyn and each of the Series B
Investors listed therein.
4.10** Certificate of Designations of Series C Convertible
Preferred Stock filed on October 4, 1999.
4.11** Registration Rights Agreement dated October 5, 1999
between Alyn and Fleming US Discovery Fund III,
L.P. and Fleming US Discovery Fund III, L.P.
4.12** Warrant to Purchase Common Stock of Alyn
Corporation dated October 8, 1999 by and between
Alyn Corporation and Fleming U.S. Discovery
Offshore Fund III, L.P.
4.13** Warrant to Purchase Common Stock of Alyn Corporation
dated October 8, 1999 by and between Alyn Corporation
and Fleming US Discovery Offshore Fund III, L.P.
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 17221 Von Karman Avenue, Irvine,
California.
10.8** Series A Convertible Preferred Stock Purchase Agreement
dated January 8, 1999 by and between Alyn and Seaside
Partners, L.P.
10.9** Loan Agreement dated March 10, 1999 by and between
Alyn and Talisman Capital Opportunity Fund Ltd.
10.10** Series B Exchangeable Preferred Stock and Warrant
Purchase Agreement dated March 15, 1999 by and between
Alyn and each of the Investors listed therein.
10.11** Stock and Warrant Purchase Agreement dated September 29,
1999 by and between Alyn and Fleming US Discovery Fund
III, L.P.
10.12** Stock and Warrant Purchase Agreement dated September 29,
1999 by and between Alyn and Fleming US Discovery
Offshore Fund III, L.P.
23.1 Independent Accountants consent. To be filed as an
amendment hereto.
23.2 Independent Auditors' Consent.
27.1 Financial Data Schedule for the year ended December
31, 1999.
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 on Form S-1 (File no. 333-09143) and any amendments
thereto.
** Incorporated by reference to the Registrant's Registration Statement
on Form S-3 (File no. 333-94829) and any amendments thereto.
*** Incorporated by reference to the Registrant's Current Report on Form
8-K, dated August 13, 1997.
+ Incorporated by reference to the Registrant's Form 10K, dated March
25, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALYN CORPORATION
By: /s/ Arne van Roon
------------------
Arne van Roon
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.
Section 1.10
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arne van Roon President, Chief Executive April 14, 2000
- ------------------ Officer and Director
Arne van Roon (principal executive officer)
/s/ Robin A. Carden Director April 14, 2000
- -------------------
Robin A. Carden
/s/ Raymond Brooks Vice President, April 14, 2000
- ------------------ Chief Financial Officer
Raymond Brooks and Secretary
/s/ David Edwards Director April 14, 2000
- -----------------
David Edwards
/s/ Robert Burr Chairman of the Board April 14, 2000
- ---------------
Robert Burr
/s/ Michael Markbreiter Director April 14, 2000
- -----------------------
Michael Markbreiter
</TABLE>
ALYN CORPORATION
SCHEDULE I
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements/Schedule
Independent Auditor's Report - for the year ended December 31, 1999.
Report of Independent Accountants - for the years ended December 31, 1998 and
1997.
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Three years ended December 31, 1999
Statements of Stockholders' Equity - Three years ended December 31, 1999
Statements of Cash Flows - Three years ended December 31, 1999
SCHEDULE II
Valuation and Qualifying Accounts - Three years ended December 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To be filed as an amendment hereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1999, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1999. Our
audit also included the financial statement schedule listed in Item 8.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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Alyn Corporation as of December 31, 1999,
and the results of its operations and cash flows for the year ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's losses from operations and accumulated
deficit raises substantial doubt about its ability to continue as a going
concern. Management's plans concerning this matter are described in Note 1.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
February 28, 2000 except for Notes 6 and 14 as to which the date is March 24,
2000.
<PAGE>
<TABLE>
ALYN CORPORATION
BALANCE SHEETS
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,644,000 $1,232,000
Restricted cash 2,062,000
Accounts receivable, net of allowance for doubtful accounts of
$271,000 in 1999 and $85,000 in 1998 643,000 781,000
Inventory 1,515,000 401,000
Other current assets 114,000 424,000
----------- -----------
Total current assets 4,916,000 4,900,000
Equipment, furniture and fixtures, net 17,751,000 20,703,000
Assets held for sale, net 488,000
Other assets, net 786,000 626,000
Intangible assets, net of accumulated amortization of $35,000 in 1999
and $258,000 in 1998 189,000 732,000
----------- -----------
$24,110,000 $26,961,000
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $792,000 $663,000
Accrued and other current liabilities 1,106,000 956,000
Current portion of capital lease obligations 47,000
Current portion of long term debt 1,227,000 1,842,000
----------- -----------
Total current liabilities 3,172,000 3,461,000
Capital lease obligations, less current portion 169,000
Long term debt
Convertible debt 2,412,000
Long-term debt, less current portion 4,898,000 7,316,000
----------- -----------
Total long term debt 7,310,000 7,316,000
Series C Mandatorily redeemable convertible preferred stock. 01 par value;
2,500,000 shares authorized, 75,000 shares issued and outstanding at
December 31, 1999 (aggregate liquidation value of
$7,500,000) 4,552,000
Commitments and contingencies (Note 12)
Stockholders' equity:
Series A convertible preferred stock, .01 par value; 750,000 shares
authorized, 375,000 shares issued and outstanding at December 31,
1999 (aggregate liquidation value of $1,500,000) 4,000
Common stock, .001 par value, 20,000,000 shares authorized, 12,122,403 and
11,107,878 shares issued and outstanding at
December 31, 1999 and 1998 13,000 12,000
Additional paid in capital 42,477,000 37,798,000
Warrants to purchase common stock 4,346,000
Accumulated deficit (37,933,000) (21,624,000)
----------- -----------
Total stockholders equity 8,907,000 16,184,000
----------- -----------
$24,110,000 $26,961,000
=========== ===========
SEE INDEPENDENT AUDITORS' REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
ALYN CORPORATION
STATEMENTS OF OPERATIONS
<CAPTION>
YEARS
ENDED
DECEMBER 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net sales $2,248,000 $1,266,000 $364,000
Costs and expenses
Cost of goods sold 7,934,000 5,402,000 323,000
Establishment of manufacturing facilities - - 1,809,000
General and administrative expenses 3,825,000 3,216,000 2,633,000
Selling and marketing 1,176,000 1,230,000 1,371,000
Research and development 1,437,000 2,968,000 2,338,000
Restructuring expenses 729,000
------------ ------------ -----------
Total costs and expenses 15,101,000 12,816,000 8,474,000
------------ ------------ -----------
Operating loss (12,853,000) (11,550,000) (8,110,000)
Interest Expense (2,077,000) (799,000) (3,000)
Other Income (expense), net (517,000) (281,000) 809,000
------------ ------------ -----------
Loss before provision for income taxes (15,447,000) (12,068,000) (7,304,000)
Provision for income taxes 1,000 1,000 12,000
------------ ------------ -----------
Net loss ($15,448,000) ($12,069,000) ($7,316,000)
Value of beneficial conversion feature (360,000)
Series B preferred stock dividends (24,000)
Accretion on preferred stock (477,000)
Net loss attributable to common stockholders ($16,309,000) ($12,069,000) ($7,316,000)
============ ============ ===========
Net loss per share-basic and diluted ($1.43) ($1.11) ($0.68)
============ ============ ===========
Weighted average common shares-basic and diluted 11,405,324 10,669,293 10,750,000
============ ============ ===========
SEE INDEPENDENT AUDITORS' REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
ALYN CORPORATION
STATEMENTS OF STOCKHOLDERS EQUITY
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
------------------------ ------------------------ ---------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 10,749,878 11,000
Net loss - -
---------- ----------
Balance at December 31, 1997 10,749,878 11,000
Common stock contributed (500,000) -
Common stock issued 858,000 1,000
Net loss - -
---------- ----------
Balance at December 31, 1998 11,107,878 $12,000
========== ==========
Issuance of Series A convertible preferred stock
and warrants $375,000 $4,000
Issuance of Series B redeemable convertible
preferred stock and warrants 1,500 -
Issuance of Series C mandatorily redeemable
convertible preferred stock and warrants
Sale of common stock and warrants 200,000
Issuance of warrants in connection with
common stock related to anti-dilution
penalty on convertible debt 149,213
Issuance of common stock in lieu of interest
payment on convertible debt 38,352
Conversion of Series B redeemable convertible
preferred stock to common stock and issuance
of warrants. (1,500) 626,960 1,000
Value of Series A beneficial conversion feature
Value of Series B beneficial conversion feature
Value of beneficial conversion on convertible debt
Accretion on Series A and Series B convertible
preferred stock
Accretion on Series C mandatorily redeemable
convertible preferred stock
Payment of Series B redeemable convertible
preferred stock cash dividends
Issuance of warrants in connection with issuance
of convertible debt
Issuance of warrants in connection with amendment
of convertible debt
Net loss
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 375,000 $4,000 0 $0 12,122,403 $13,000
========== ========== ========== ========== ========== ==========
SEE INDEPENDENT AUDITORS' REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
ALYN CORPORATION
STATEMENTS OF STOCKHOLDERS EQUITY
<CAPTION>
ADDITIONAL WARRANTS TO
PAID-IN PURCHASE ACCUMULATED
CAPITAL COMMON STOCK DEFICIT TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 33,294,00 (2,239,000) 31,066,000
Net loss - (7,316,000) (7,316,000)
------------ ------------ ------------ ------------
Balance at December 31, 1997 33,294,000 (9,555,000) 23,750,000
Common stock contributed - - -
Common stock issued 4,502,000 - 4,503,000
Net loss - (12,069,000) (12,069,000)
------------ ------------ ------------ ------------
Balance at December 31, 1998 $37,796,000 ($21,624,000) $16,184,000
============ ============ ============ ============
Issuance of Series A convertible preferred stock
and warrants 1,199,000 257,000 1,460,000
Issuance of Series B redeemable convertible
preferred stock and warrants 1,303,000 77,000 1,380,000
Issuance of Series C mandatorily redeemable
convertible preferred stock and warrants 3,009,000 3,009,000
Sale of common stock and warrants 480,000 74,000 554,000
Issuance of common stock related to anti-dilution
penalty on convertible debt 464,000 464,000
Issuance of common stock in lieu of interest
payment on convertible debt 112,000 112,000
Conversion of Series B redeemable convertible
preferred stock to common stock and issuance
of warrants. (1,000) 231,000 231,000
Value of Series A beneficial conversion feature 40,000 (40,000) -
Value of Series B beneficial conversion feature 320,000 (320,000) -
Value of beneficial conversion on convertible debt 555,000 555,000
Accretion on Series A and Series B convertible
preferred stock 209,000 (209,000) -
Accretion on Series C mandatorily redeemable
convertible preferred stock (268,000) (268,000)
Payment of Series B redeemable convertible
preferred stock cash dividends (24,000) (24,000)
Issuance of warrants in connection with issuance
of convertible debt 216,000 216,000
Issuance of warrants in connection with amendment
of convertible debt 482,000 482,000
Net loss (15,448,000) (15,448,000)
------------ ------------ ------------ ------------
Balance at December 31, 1999 $42,477,000 $4,346,000 ($37,933,000) $8,907,000
============ ============ ============ ============
SEE INDEPENDENT AUDITORS' REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
ALYN CORPORATION
STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($15,448,000) ($12,069,000) ($7,316,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,666,000 2,395,000 856,000
Provision for allowance for doubtful accounts 186,000 60,000 95,000
Provision for excess and obsolete inventories 38,000
Writeoff of goodwill and other assets 530,000
Interest expense related to grant of warrants in
connection with convertible debt amendment 50,000
Expense related to grant of warrants upon conversion
of Series B redeemable convertible preferred stock 231,000
Expense related to beneficial conversion feature on
convertible debt 555,000
Interest expense related to warrants granted upon
issuance of convertible debt 60,000
Interest expense on convertible debt in the form of
common stock 112,000
Expense for anti-dilution penalty on convertible debt
in the form of common stock 464,000
Payment of cash dividends to Series B redeemable
convertible preferred stock holders (24,000)
Loss on disposal of equipment furniture and fixtures 746,000
Changes in operating assets and liabilities:
Accounts receivable, gross (48,000) (747,000) (158,000)
Inventories, gross (1,152,000) (229,000) (131,000)
Other current assets 310,000 (223,000) (54,000)
Intangible assets (106,000) (60,000) (99,000)
Accounts Payable 129,000 112,000 (394,000)
Accrued and other current liabilities 150,000 630,000 134,000
Increase in other assets (140,000) 150,000 (3,385,000)
------------ ------------ ------------
Net cash used in operating activities ($10,691,000) ($9,981,000) ($10,452,000)
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of equipment, furniture and fixtures (829,000) (7,012,000) (7,333,000)
Increase (decrease) in restricted cash 2,062,000 (2,062,000) -
------------ ------------ ------------
Net cash flows provided by (used in) investing activities 1,233,000 (9,074,000) (7,333,000)
------------ ------------ ------------
Cash flows from financing activities:
Repayment on long-term debt (2,816,000)
Proceeds from borrowings on convertible debt 3,000,000
Proceeds from borrowings on long-term debt 2,658,000 6,500,000
Net proceeds from issuance of Series A convertible
preferred stock and warrants 1,460,000
Net proceeds from issuance of Series B redeemable
convertible preferred stock and warrants 1,380,000
Net proceeds from issuance of Series C mandatorily
redeemable convertible preferred stock and warrants 7,292,000
Proceeds from common stock issued 554,000 4,503,000
------------ ------------ ------------
Total cash flows provided by financing activities 10,870,000 7,161,000 6,500,000
Net increase (decrease) in cash and cash equivalents 1,412,000 (11,894,000) (11,285,000)
Cash and cash equivalents at beginning of period 1,232,000 13,126,000 24,411,000
------------ ------------ ------------
Cash and cash equivalents at end of period $2,644,000 $1,232,000 $13,312,600
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
ALYN CORPORATION
STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for income taxes $800 $1,000 $12,000
============ ============ ============
Cash paid during the period for interest $2,077,000 $799,000 $3,000
============ ============ ============
Non-cash Items:
Accretion of Series A and B preferred stock $209,000
============
Accretion of Series C mandatorily redeemable convertible
preferred stock $268,000
============
Record Series A convertible preferred stock beneficial
conversion feature $40,000
============
Record Series B redeemable convertible preferred stock
beneficial conversion feature $320,000
============
Conversion of Series B redeemable convertible preferred stock
to common stock $1,000
============
Issuance of warrants in connection with amendment of
convertible debt $482,000
============
Issuance of warrants in connection with issuance of
convertible debt $216,000
============
SEE INDEPENDENT AUDITORS' REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Alyn Corporation (Alyn or the Company) was incorporated in Delaware in
April 1996. 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. The Company 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.
Going concern
The Company has incurred significant losses from operations since inception
which raises substantial doubt about the Company's ability to continue as a
going concern. In October, 1999 the Company completed the sale of Series C
Mandatorily Redeemable Convertible Preferred Stock resulting in net proceeds of
$7.3 million for additional working capital. During 2000, the Company will need
significant additional amounts of financing to meet its working capital needs.
The Company can provide no assurances that additional financing will be
available or at commercially reasonable terms. 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.
The Company's ability to grow its business and continue as a going concern
is highly dependent upon its ability to generate sufficient cash from its
operations and to raise needed debt or equity financing. Managements' plans to
address these issues include achievement of its operating plan for 2000, raising
additional debt and equity investment capital, and use of existing equipment and
accounts receivable financing. However, if the Company fails to achieve its
operating plan and revenue objectives, working capital may become inadequate.
The Company's ability to obtain future working capital debt financing will be
dependent in part on the quality and amount of its trade receivables, inventory
and unsecured capital equipment. If the Company is unable to receive adequate
debt financing, additional equity financing may be required which may not be
available on favorable terms, if at all. The Company's ability to achieve future
liquidity and capital funding requirements through its operations will depend on
numerous factors, including:
o results of marketing our metal matrix composite capabilities;
o market acceptance of our products;
o the timing of production orders and our ability to delivery products on a
timely basis;
o our costs of sales and timing of growth in sales; and
o our ability to effectively manage our marketing and manufacturing
activities against our operating plan.
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 first-in, first-out cost or market.
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.
Assets held for sale
Assets held for sale as of December 31, 1999 primarily include equipment
and other assets related to the Companys' computer disk research facility in
Fremont, California which was closed during September 1999 and are recorded at
their estimated net realizable value, net of estimated selling costs. As of
December 31, 1999, a reserve for restructuring of $590,000 remains on the
balance sheet and is netted against the net book value of assets held for sale.
This represents an expected loss on the sale of certain assets used in the
production of disk substrates that are no longer used. It is likely that the
facility will be leased as of May, 2000 with an option to buy the equipment
available in July 2000.
Intangible assets
Intangible assets consist of patents for the Boralyn technology. Goodwill
and other intangible assets are reviewed for impairment based on estimated
undiscounted future cash flows. Goodwill and other intangible assets of $873,000
gross ($530,000 net of accumulated amortization) were written off in 1999 as
management determined that the Company would not recover these assets based on
an undiscounted cash flow analysis. The Company has reviewed the recoverability
of its remaining intangible assets by comparing cash flows on an undiscounted
basis to the net book value of the assets. At December 31, 1999 the Company
believes there has been no impairment of the value of these intangible assets.
Intangible assets are amortized over the estimated useful life which is ten
years.
Income taxes
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes." This statement requires the recognition of deferred tax assets
and liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS 109
requires an evaluation of the probability of being able to realized the future
benefits indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
Long lived assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances which indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of long-lived
assets to determine whether or not an impairment to such value has occurred
based on an undiscounted cash flow analysis. As of December 31, 1999, no such
impairment was noted based on the undiscounted cash flow analysis, other than as
described elsewhere in Note 1.
Revenue Recognition
The Company recognizes sales of product at the time of shipment. Payments
received prior to performance are recorded as customer advances and recognized
upon shipment. The Company performs on-going credit evaluations and maintains
reserves for potential credit losses.
Customer concentration
In 1999, three customers accounted for 67% of total revenue, individually
$995,000, 44%; $371,000, 17%; and $126,000, 6%. 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%. The loss of or reduction in sales to any of these customers could have a
material adverse effect on the Company's business financial condition and
results of operations. As of December 31, 1999, two customers account for 53%
of total accounts receivable, individually $340, 000 and $142,000 16%.
Supplier concentration
Certain of the Company's products utilize materials that are available in
the short- term only from a single or a limited number of sources. In addition,
in order to take advantage of volume pricing discounts, the Company purchases
certain materials from a single source. Any inability to obtain single sourced
materials in the amounts needed on a timely basis or at commercially reasonable
prices could result in delays in product shipments or increases in product
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations until alternative sources could be
developed at a reasonable cost.
Technology development
Expenditures for technology development are classified as research and
development costs and are charged to expense as incurred.
Net loss per share
Basic net loss per share excludes dilution and is computed by dividing net
loss available to common shareholders 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.
Use of estimates
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. Actual results could differ from those estimates.
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".
Comprehensive loss
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." For
the years ended December 31, 1999, 1998 and 1997, the Company has no reportable
differences between net loss and comprehensive loss. Therefore, statements of
comprehensive loss have not been presented.
New Accounting Pronouncements
In June 1998, the Financial Accountancy Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which the Company is required to adopt effective in its fiscal year 2001. SFAS
No. 133 will require the Company to record all derivatives on the balance sheet
at fair value. The Company does not currently engage in hedging activities and
will continue to evaluate the effect of adopting SFAS No. 133. The Company will
adopt SFAS No. 133 in fiscal year 2001.
The Company has adopted SFAS No. 131, "Disclosures About Segments in an
Enterprise and Related Information". In accordance with SFAS No. 131, the
Company has disclosed in Note 13 certain information about operating segments
and certain information about the Company's products and geographic areas to
which the Company sells its products and major customers.
The following schedule presents an analysis of the Company's net sales based
upon geographic location to which a product was shipped. North American sales
include sales to the United States, Canada and Mexico. International sales
include sales to all other foreign countries. There is no single foreign country
which comprises greater than 10% of the Company's net sales.
<TABLE>
<CAPTION>
NORTH AMERICAN INTERNATIONAL TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales for the year ended December 31, 1999 $2,127,000 $121,000 $2,248,000
Net sales for the year ended December 31, 1998 $1,164,000 $102,000 $1,266,000
Net sales for the year ended December 31, 1997 $339,000 $25,000 $364,000
</TABLE>
NOTE 2. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $1,142,000 $237,000
Work in process 346,000 133,000
Finished goods 27,000 31,000
----------- -----------
$1,515,000 $401,000
=========== ===========
</TABLE>
NOTE 3. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Machinery, equipment and tooling $14,100,000 $15,078,000
Furniture and office equipment 1,452,000 1,483,000
Leasehold improvements 7,209,000 7,259,000
22,761,000 23,820,000
Less: accumulated depreciation and amortization (5,010,000) (3,117,000)
----------- -----------
$17,751,000 $20,703,000
=========== ===========
</TABLE>
NOTE 4. OTHER ASSETS
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deposits on machinery and equipment $474,000 $461,000
Other 292,000 165,000
----------- -----------
$766,000 $626,000
=========== ===========
</TABLE>
NOTE 5. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accrued compensation $73,000 $204,000
Accrued professional fees 501,000 66,000
Accrued relocation costs - 561,000
Deferred rent 345,000 -
Other 187,000 125,000
----------- -----------
$1,106,000 $956,000
=========== ===========
</TABLE>
<PAGE>
NOTE 6. LONG TERM DEBT
Long-term Debt consists of the following at December 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Convertible debt $2,412,000
A $2,500,000, 42-month term loan with a commercial
bank repaid in 1999. $2,002,000
An $8,000,000, 72-month term facility with a major
non-bank financial institution 6,125,000 7,156,000
----------- -----------
$8,537,000 $9,158,000
Less current portion of long-term debt (1,227,000) (1,842,000)
----------- -----------
$7,310,000 $7,316,000
=========== ===========
</TABLE>
The aggregate maturities of long-term debt are as follows:
2000 1,227,000
2001 1,345,000
2002 3,887,000
2003 1,617,000
2004 461,000
-----------
$8,537,000
===========
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 through May, 1999, monthly principal payments were $60,000 plus
interest equal to the prime rate plus 1%. The loan was paid off in May, 1999.
In December 1997, the Company established an $8,000,000 term facility with
a major non-bank financial institution. The Company has received three 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, 1996 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 subject to adjustments under the terms of the term facility. The
facility is secured by specific manufacturing equipment owned by the Company.
The provisions of the term facility require the Company to maintain certain
financial covenants, including minimum cash and equivalents balances of
$5,000,000. The Company received a waiver dated March 30, 2000 for
non-compliance with these covenants as of December 31, 1999 and through
December 31, 1999.
NOTE 7. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 is
comprised of the following:
1999 1998 1997
---- ---- ----
Current:
State 1,000 1,000 12,000
----- ----- ------
Total Provision 1,000 1,000 12,000
===== ===== ======
The reported provision for income taxes for the fiscal year ended December
31, 1999 differs from the amount computed by applying the statutory federal
income tax rate of 34% of the consolidated income (loss) before income taxes as
follows:
1999
----
Benefits computed at statutory rates (34.00%)
Increase resulting from:
Goodwill 1.07%
Other, net 0.05%
Change in Valuation Allowance 32.88%
-------
0.00%
=======
For the years ended December 31, 1998 and 1997, the main reconciling item
between the reported provision for income taxes and the amount computed by
applying the statutory federal income tax rate of 34% to the consolidated income
(loss) before income taxes is the Change in Valuation Allowance.
The tax effects of temporary differences and carryforwards that give rise
to the Company's deferred income tax assets and liabilities consist of the
following:
1999 1998 1997
---- ---- ----
Net Operating Loss Carryforward $ 14,787,000 $ 9,767,000 $ 4,465,000
Accrued Liabilities 615,000 331,000 36,000
Other
252,000 37,000 11,000
------------ ----------- ----------
Deferred tax assets 15,654,000 10,135,000 4,512,000
Equipment, furniture & fixtures (448,000) (807,000) (360,000)
------------ ----------- -----------
Deferred tax liabilities (448,000) (807,000) (360,000)
Valuation allowance (15,206,000) (9,328,000) (4,152,000)
------------ ----------- -----------
============ =========== ===========
Net deferred income tax asset $ - $ - $ -
============ =========== ===========
As of December 31, 1999, the Company has provided a valuation allowance of
$15,206,000 because realization of the Company's net deferred tax asset is more
likely than not due to the historical losses incurred by the Company, and the
uncertainty as to profits in the future. Any realization of the Company's net
deferred tax asset would reduce the company's effective tax rate in future
periods.
The Company has federal and state net operating loss carryforwards as of
December 31, 1999 and 1998 of approximately $36,000,000 and $29,000,000
respectively. The federal and state losses begin to expire in the year 2011 and
2001 respectively.
Utilization of the federal and state net operating loss and research and
development credit carryforwards could be limited in future years if the Company
were to experience a greater than 50 percent change in ownership within a three
year period as defined in Section 382 of the United States Internal Revenue Code
of 1986.
NOTE 8. CAPITAL LEASES
Capital lease obligations have been recorded in the accompanying financial
statements at the present value of future minimum lease payments.
Assets financed under capital leases included in equipment, furniture and
fixtures are as follows as of December 31, 1999 (there were no assets financed
under capital leases as of December 31, 1998):
Equipment $270,000
Less accumulated depreciation and amortization (2,000)
--------
$268,000
========
Depreciation and amortization expense of property financed under capital
leases was insignificant for the year ended December 31, 1999.
Future minimum lease payments under capital leases and the present value of
future minimum lease payments are as follows:
December 31,
------------
2000 $ 47,000
2001 52,000
2002 56,000
2003 60,000
2004 1,000
--------
Total future minimum lease payments 216,000
Less amount representing interest (58,000)
--------
Present value of future minimum lease payments 158,000
Less current portion (47,000)
--------
$111,000
========
NOTE 9. DEFINED CONTRIBUTION SAVINGS AND INVESTMENT PLAN
The Company has a defined contribution savings and investment plan which
covers substantially all employees. The Plan provides for the deferral of up to
20% of an employee's qualifying compensation under Section 401(k) of the
Internal Revenue Code. Company contributions may be made to the plan at the
discretion of the Company's Board of Directors. To date, no such contributions
have been made. An employee may contribute up to 50% of the first 6% of
compensation for each plan year.
NOTE 10. SHAREHOLDERS' EQUITY
Preferred Stock Series A - On January 8, 1999, the Company sold 375,000
shares of Series A Convertible Preferred Stock (Series A) at a purchase price
per share of $4.00 resulting in net proceeds of $1,460,000. Beginning January
8, 2000, the holders of the Series A shall have the right to convert shares of
the Series A into such number of fully paid and nonassessable shares of common
stock as is obtained by the lessor of the set conversion price of $4.00 per
share or the market price defined as (I) multiplying the number of shares of
Series A so to be converted by the original purchase price ($4.00), plus a
premium on such original purchase price accruing at the rate of 6% per annum,
and (II) dividing the result by the conversion price equal to the original
purchase price, resulting in a beneficial conversion feature. The beneficial
conversion feature attached to the Series A, which was valued by the Company at
$40,000 as of December 31, 1999, has been recorded as an increase in additional
paid in capital and accumulated deficit during fiscal 1999.
All outstanding shares of Series A shall automatically convert into shares
of common stock on January 8, 2002. The holders of the Series A shall not be
entitled to vote. The holders of the shares of Series A shall not be entitled to
receive dividends except dividends at the same rate as dividends are paid with
respect to the common stock. Upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of the Series A shall be
paid an amount equal to $4.00 per share, plus an amount equal to dividends
accrued but unpaid. No dividends were declared or paid on the Series A as of
December 31, 1999.
In the event that upon January 8, 2000, the average of the closing prices
of the common stock is less than 1.45 times the closing price ($4.00 per share),
the Company shall grant to the holders of the Series A five year warrants to
purchase, at an exercise price equal to the anniversary price, such number of
common shares determined by formula, not to exceed 120,000. These warrants were
ascribed a value of $257,000 using the Black-Scholes Pricing Model. On January
8, 2000, the Company granted to the holders of the Series A warrants to purchase
120,000 shares of common stock at $1.91 per share. On January 18, 2000, the
warrants were exercised and the Company issued 120,000 shares of common stock to
the holders of the warrants.
The Company is recording accretion for the offering costs and the value
ascribed to the warrants as an increase in additional paid in capital and
accumulated deficit. Accretion for Series A was $12,000 for the year ended
December 31, 1999.
Series B - On March 15, 1999, the Company sold 1,500 shares of Series B
Exchangeable Preferred Stock (Series B) at a purchase price per share of $1,000
per share resulting in an aggregate purchase price of $1,500,000, net of
offering costs of approximately $120,000. Immediately following the issuance of
the Series B (subject to certain restrictions), the holders shall have the
option to exchange each share of Series B for an amount of shares of common
stock equal to the stated value of such shares of Series B determined by a
formula. The formula allows the holder of the preferred stock to exchange the
Series B at a price equal to the lessor of the set price or the market price, as
defined by the agreement, and therefore has a beneficial conversion feature. The
Series B are convertible at as much as a 15% discount from the market price, if
the market price is less than the set price at the date of conversion. The
beneficial conversion feature attached to the Series B, which was valued by the
Company at $320,000, was recorded as an increase to additional paid in capital
and accumulated deficit during fiscal 1999.
The holders of the shares of Series B shall be entitled to receive
cumulative dividends in the form of cash or common stock in an amount per share
of Series B outstanding for such fiscal year equal to $30. Such dividends shall
accrue daily and be payable quarterly on April 30, July 31, October 31 and
January 31 of each year. Upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of the Series A shall be
paid an amount equal to $1,000 per share, plus an amount equal to dividends
accrued but unpaid. Cash dividends totaling $24,000 were declared and paid to
the holders of the Series B during fiscal 1999.
The holders of the Series B also received warrants to purchase 65,000
shares of the Company's common stock at $3.82 per share. The warrants are
exercisable after September 15, 1999 and shall terminate September 15, 2002.
These warrants were ascribed a value of $77,000 using the Black-Scholes Pricing
Model. All of these warrants remain outstanding as of December 31, 1999.
In October 1999, the holders of the Series B converted all outstanding
Series B shares into an aggregate of 626,960 shares of the Company's common
stock. In connection with this conversion, the Company issued warrants to the
holders of the Series B to purchase an aggregate of 150,000 shares of common
stock at an exercise price of $3.25 per share. These warrants expire on
September 15, 2004. These warrants were ascribed a value of $231,000 using the
Black-Scholes Pricing Model and recorded as general and administrative expenses
during fiscal 1999. All of these warrants remain outstanding as of December 31,
1999.
The Company recorded accretion equal to the offering costs and the value
ascribed to the warrants as an increase in additional paid in capital and
accumulated deficit during the year ended December 31, 1999. Accretion for
Series B recorded during fiscal 1999 through the date of conversion was
$197,000.
Series C - On October 8, 1999, the Company sold 75,000 shares of Series C
Convertible Preferred Stock (Series C) at a purchase price per share of $100 per
share resulting in an aggregate purchase price of &7,500,000, net of offering
expenses of approximately $208,000.
In anticipation of the purchase of the Series C Preferred Stock, the
holders of the Series C Preferred Stock provided a $1,000,000 bridge loan to the
Company on September 29, 1999 in the form of a demand promissory note (the
"Note"). The bridge loan was used for general working capital to reduce
outstanding accounts payable. Under the terms of the Note, the loan was due and
payable on the earlier of (i) December 31, 1999, (ii) the closing of the Series
C Preferred Stock purchase, or (iii) an event of default. The Note was to be
interest free through October 12, 1999 and carried an increasing rate thereafter
up to a maximum of prime plus 6%. The Note was paid in full from the proceeds of
the Series C Preferred Stock issuance on October 8, 1999.
The holders of the Series C have the right to convert all or a portion of
such shares into fully paid and nonassessable shares of common stock at a
conversion price of $3.00 per share. The Company is required to redeem all of
the outstanding shares of Series C on September 30, 2004 at a price equal to
$100 per share of preferred stock plus all declared but unpaid dividends. These
Series C shares can be redeemed using common stock or cash at the option of the
holder. Subject to the terms of the Series C and provided that certain criteria
have been met under the agreement, on any date beginning October 8, 2001, the
Company has a call option to purchase any or all of the outstanding shares of
Series C at $100 per share of preferred stock plus any declared but unpaid
dividends.
In the event that the Company declares and pays dividends on its common
stock, the holders of the Series C shall be entitled to receive from the Company
a dividend or distribution for the same amount that would have been received if
the Series C were converted to common stock. In the event the Company
liquidates, dissolves or winds up; the Series C holders shall receive a
liquidation value of at least $100 per share of preferred stock. This amount may
be higher to account for declared but unpaid dividends. The Series C holders
shall vote together with the common stock as a single class. The holders of the
Series C are entitled to have 2 directors on the Board of Directors.
In connection with the sale of the Series C, the Company agreed to issue
warrants to the holders of the Series C to purchase up to 1,875,000 shares of
common stock at a warrant price of $3.00 per share. The grant of warrants is
contingent on the financial performance of the Company during fiscal 2000 as
evidenced by a signed audit report to be delivered to the holders of the Series
C by March 31, 2001. Any exercisable warrants expire on September 30, 2004.
These warrants were ascribed a value of $3,009,000 using the Black-Scholes
Pricing Model.
The Company is recording accretion for the offering costs and the value
ascribed to the warrants as an increase in additional paid in capital and
accumulated deficit Accretion for Series C was $268,000 for the year ended
December 31, 1999.
Common Stock - In August 1998, the Company completed a common stock rights
offering to its existing stockholders. The Company sold 858,000 shares of common
stock and received net proceeds of approximately $4.5 million. In connection
with this common stock rights offering, the Company's founder transferred
500,000 shares of common stock for no consideration.
During August 1999, the Company sold 200,000 shares of common stock at
$3.00 per share, resulting in net proceeds of approximately $554,000. In
connection with the issuance these shares of common stock, the holders of the
common stock received warrants to purchase 50,000 shares of the Company's common
stock at $3.50 per share. The warrants terminate during August 2004. These
warrants were ascribed a value of $74,000 using the Black-Scholes Pricing Model.
All of these warrants remain outstanding as of December 31, 1999. All of these
warrants remain outstanding as of December 31, 1999.
During August 1999, the Company issued 149,213 shares of common stock to
the holders of the exchangeable promissory note under the anti-dilution
provisions of the exchangeable note. The fair value of the common stock at the
date of issuance was $464,000. This amount has been recorded as interest expense
during fiscal 1999. During September 1999, the Company issued 38,352 shares of
common stock to the holder of the exchangeable promissory note in lieu of a
$90,000 semi-annual interest payment. The fair value of the common stock at the
date of issuance was $112,000. This amount has been recorded as interest expense
during fiscal 1999.
NOTE 11. 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 the fair
market value and vest ratably over three or four year periods with exception of
the president and CEO's options and certain non-employee director options. In
December, 1999, the Company established the 1999 Incentive Stock Option Plan
(the 1999 Plan). The 1999 Plan is intended to serve as a comprehensive equity
incentive program for the Company's officers, employees and non-employee Board
members which will encourage such individuals to remain in the Company's service
and more closely align their interests with those of the stockholders. The 1999
Plan is authorized to issue 1,500,000 options. Vesting terms are at the
discretion of the Company and are generally over a period of three years.
Pursuant to SFAS No. 123, the Company has elected to continue using the
instrinsic value method of accounting for stock-based awards granted to
employees and directors in accordance with APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its stock option plans.
Had compensation cost been determined based on the fair value at the grant
dates for awards under the stock option plans in accordance with SFAS No. 123,
net loss would have been increased by $2,352,000 ($0.19 per share) in 1999,
$1,577,000 ($0.15 per share) in 1998 and $773,000 ($0.07 per share) in 1997. 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 1999: historical dividend yield of 0.0%; an expected
life of 5 years; historical volatility of 56% and a risk free rate of return of
6%, for 1998: historical dividend yield of 0.0%; an expected life of 5 years;
historical volatility of 56.31% and a risk free rate of return of 5.5%, for
1997: historical dividend yield of 0.0%; an expected life of 5 years; and a
historical volatility of 56.92% and a risk free rate of return of 6.28%.
<PAGE>
The following table summarizes the Company's fixed stock option plan as of
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 929,000 $9.35 525,000 $11.72 383,000 $13.50
Granted 1,335,000 3.27 544,000 7.47 261,000 9.41
Forfeited (651,000) 7.85 (140,000) 10.95 (119,000) 13.16
Outstanding at end of year 1,613,000 $5.78 929,000 $9.35 525,000 $11.72
========== ========== ==========
Options exercisable at year end 547,000 $9.50 319,000 139,000
========== ========== ==========
Weighted-average fair value of
options granted during the year $1.76 $4.02 $5.44
========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICE AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
-------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 to 4.00 1,229,000 9.45 $3.25 173,000 $3.15
$4.01 to 6.00 14,000 8.94 5.26 14,000 5.16
$6.01 to 6.00 197,000 8.30 8.90 187,000 7.91
$6.01 to 9.00 35,000 7.89 8.72 35,000 8.55
$9.00 to 10.00 5,000 7.50 9.75 5,000 9.67
$11.00 to 13.00 23,000 7.50 11.16 23,000 11.25
$13.00 to 14.00 110,000 6.75 13.50 110,000 13.50
---------- ----------
$1.00 to 14.00 1,613,000 9.05 $5.78 547,000 $9.50
========== ==========
</TABLE>
NOTE 12. COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments required under non-cancelable operating
leases are as follows: $827,000 in 2000, $853,000 in 2001, $880,000 in 2002,
$908,000 in 2003, $937,000 in 2004 and $2,955,000 thereafter.
Rent expense totaled $1,282,000 in 1999, $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.
NOTE 13.
ALYN CORPORATION
SEGMENTS REPORT
BUSINESS SEGMENTS
---------------------------------------------
EXTRUSIONS CASTINGS TOTAL
---------- ---------- ----------
1999
Net Sales $2,055,000 $193,000 $2,248,000
Cost of Goods Sold 7,252,000 682,000 7,934,000
---------- ---------- ----------
Gross Profit (loss) ($5,197,000) ($489,000) ($5,686,000)
========== ========== ==========
EXTRUSIONS CASTINGS TOTAL
---------- -------- -----
1998
Net Sales $224,000 $1,042,000 $1,266,000
Cost of Goods Sold 956,000 4,446,000 5,402,000
---------- ---------- ----------
Gross Profit (loss) ($732,000) ($3,404,000) ($4,136,000)
========== ========== ==========
EXTRUSIONS CASTINGS TOTAL
---------- ---------- ----------
1997
Net Sales $91,000 $273,000 $364,000
Cost of Goods Sold 81,000 242,000 323,000
---------- ---------- ----------
Gross Profit (loss) $10,000 $31,000 $41,000
========== ========== ==========
The Company has broken down its business into segments. The Company does not
allocate specific assets to these segments. Segment information reported
includes net sales, cost of goods sold, which includes full production overhead,
and gross profit (loss).
NOTE 14. SUBSEQUENT EVENTS
On March 24, 2000, the Company entered into an agreement with Epicor
Software Corporation to settle a lawsuit. Epicor Software Corporation
agreed to pay Alyn Corporation approximately $1.8 million, of which
Alyn Corporation shall receive a net sum of approximately $1.1 million,
net of legal costs.
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts........................ $ 85,000 $ 196,000 $ (10,000) $ 271,000
Allowance for excess and obsolete inventory............ $ - $ 38,000 $ - $ 38,000
Year ended December 31, 1998:
Allowance for doubtful accounts........................ $ 25,000 $ 61,000 $ (1,000) $ 85,000
Year ended December 31, 1997:
Allowance for doubtful accounts........................ $ 4,000 $ 21,000 $ - $ 25,000
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
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.
4.3** Certificate of Designations of Series A Convertible
Preferred Stock filed on January 8, 1999.
4.4** Warrant to Purchase Shares of Common Stock of Alyn
Corporation dated January 8, 1999 by and between Alyn
and Seaside Partners, L.P.
4.5** 6% Senior Exchangeable Promissory Note due March
10, 2002 issued by Alyn to Talisman Capital
Opportunity Fund Ltd.
4.6** Registration Rights Agreement dated March 10, 1999
by and between Alyn and Talisman Capital
Opportunity Fund Ltd.
4.7** Warrant Agreement dated March 10, 1999 by and
between Alyn and Talisman Capital Opportunity Fund
Ltd.
4.8** Certificate of Designations, Preferences and Rights
of Series B Exchangeable Preferred Stock filed
March 18, 1999.
4.9** Registration Rights Agreement dated March 15, 1999
issued by and between Alyn and each of the Series B
Investors listed therein.
4.10** Certificate of Designations of Series C Convertible
Preferred Stock filed on October 4, 1999.
4.11** Registration Rights Agreement dated October 5, 1999
between Alyn and Fleming US Discovery Fund III,
L.P. and Fleming US Discovery Fund III, L.P.
4.12** Warrant to Purchase Common Stock of Alyn
Corporation dated October 8, 1999 by and between
Alyn Corporation and Fleming U.S. Discovery
Offshore Fund III, L.P.
4.13** Warrant to Purchase Common Stock of Alyn Corporation
dated October 8, 1999 by and between Alyn Corporation
and Fleming US Discovery Offshore Fund III, L.P.
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 17221 Von Karman Avenue, Irvine,
California.
10.8** Series A Convertible Preferred Stock Purchase Agreement
dated January 8, 1999 by and between Alyn and Seaside
Partners, L.P.
10.9** Loan Agreement dated March 10, 1999 by and between
Alyn and Talisman Capital Opportunity Fund Ltd.
10.10** Series B Exchangeable Preferred Stock and Warrant
Purchase Agreement dated March 15, 1999 by and between
Alyn and each of the Investors listed therein.
10.11** Stock and Warrant Purchase Agreement dated September 29,
1999 by and between Alyn and Fleming US Discovery Fund
III, L.P.
10.12** Stock and Warrant Purchase Agreement dated September 29,
1999 by and between Alyn and Fleming US Discovery
Offshore Fund III, L.P.
23.1 Independent Accountants consent. To be filed as an
amendment hereto
23.2 Independent Auditors' Consent.
27.1 Financial Data Schedule for the year ended December
31, 1999.
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 on Form S-1 (File no. 333-09143) and any amendments
thereto.
** Incorporated by reference to the Registrant's Registration Statement
on Form S-3 (File no. 333-94829) and any amendments thereto.
*** Incorporated by reference to the Registrant's Current Report on Form
8-K, dated August 13, 1997.
+ Incorporated by reference to the Registrant's Form 10K, dated March
25, 1997.
Exhibit 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
To be filed as an amendment hereto.
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-38821 on Form S-8 and No. 333-77639 and No. 333-94829 on Form S-3 of Alyn
Corporation of our report dated February 28, 2000, except for Notes 6 and 14 as
to which the date is March 30, 2000, (which report expresses an unqualfied
opinion and includes an explanatory paragraph relating to substantial doubt
about the Company's ability to continue as a going concern), appearing in this
Annual Report on Form 10-K of Alyn Corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001015298
<NAME> Alyn Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,644
<SECURITIES> 0
<RECEIVABLES> 914
<ALLOWANCES> 271
<INVENTORY> 1,515
<CURRENT-ASSETS> 4,916
<PP&E> 22,761
<DEPRECIATION> 5,010
<TOTAL-ASSETS> 24,110
<CURRENT-LIABILITIES> 3,172
<BONDS> 0
4,552
4
<COMMON> 13
<OTHER-SE> 8,890
<TOTAL-LIABILITY-AND-EQUITY> 24,110
<SALES> 2,248
<TOTAL-REVENUES> 2,248
<CGS> 7,934
<TOTAL-COSTS> 15,101
<OTHER-EXPENSES> (517)
<LOSS-PROVISION> (12,853)
<INTEREST-EXPENSE> 2,077
<INCOME-PRETAX> (15,447)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (15,448)
<DISCONTINUED> 0
<EXTRAORDINARY> (861)
<CHANGES> 0
<NET-INCOME> (16,309)
<EPS-BASIC> 1.43
<EPS-DILUTED> 1.43
</TABLE>
