U. S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 000-21153.
ALYN CORPORATION
----------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0709359
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16761 Hale Avenue, Irvine, California 92606
-------------------------------------------
(Address of principal executive offices, including zip code)
(949) 475-1525
--------------
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.001 par value; 12,401,970 shares as of June 26, 2000
<PAGE>
ALYN CORPORATION
INDEX
--------------------------------------------------------------------------------
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 3
Statements of Operations -
Three months ended March 31, 2000 (unaudited) and
March 31, 1999 (unaudited) 4
Statements of Cash Flows -
Three months ended March 31, 2000 (unaudited) and
March 31, 1999 (unaudited) 5
Notes to Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
2
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<TABLE>
<CAPTION>
ALYN CORPORATION
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
---------------- -----------------
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,225,000 $2,644,000
Accounts receivable, net 621,000 643,000
Inventories, net 1,576,000 1,515,000
Other current assets 117,000 114,000
---------------- -----------------
Total current assets 3,539,000 4,916,000
Equipment, furniture and fixtures, net 17,285,000 17,751,000
Assets held for sale, net 488,000 488,000
Other assets 819,000 766,000
Intangible assets, net 186,000 189,000
---------------- -----------------
$22,317,000 $24,110,000
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $961,000 $792,000
Accrued and other current liabilities 1,068,000 1,106,000
Short term borrowings 63,000
Current portion of capital lease obligations 36,000 47,000
Current portion of long term debt 931,000 1,227,000
---------------- -----------------
Total current liabilities 3,059,000 3,172,000
Capital lease obligations, less current portion 169,000 169,000
Long term debt
Convertible debt 2,480,000 2,412,000
Long-term debt, less current portion 4,898,000 4,898,000
---------------- -----------------
Total long term debt 7,378,000 7,310,000
Stockholders' equity:
Series A convertible preferred stock, .01 par value;
750,000 shares authorized, 300,000 and
375,000 shares issued and outstanding at
March 31, 2000 and December 31, 1999 (aggregate liquidation
value of $1,200,000) 3,000 4,000
Series C redeemable convertible preferred stock
.01 par value; 2,500,000 shares authorized, 75,000 shares issued
and outstanding at March 31, 2000 and December 31, 1999.
(aggregate liquidation value of $7,500,000) 4,552,000 4,552,000
Common stock, .001 par value, 20,000,000 shares
authorized, 12,401,970 and 12,122,403 shares issued
and outstanding at March 31, 2000 and December 31
1999. 243,000 13,000
Additional paid in capital 42,827,000 42,477,000
Warrants to purchase common stock 4,089,000 4,346,000
Accumulated deficit (40,003,000 (37,933,000)
---------------- -----------------
Total stockholders' equity 11,711,000 13,459,000
---------------- -----------------
$ 22,317,000 $ 24,110,000
================ =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
ALYN CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------------------------
Net sales $459,000 $826,000
Costs and expenses
Cost of goods sold 1,779,000 2,052,000
General and administrative expenses 641,000 570,000
Selling and marketing 308,000 281,000
Research and development 320,000 406,000
------------------------------
Total costs and expenses 3,048,000 3,309,000
------------------------------
Operating loss (2,589,000) (2,483,000)
Interest expense, net (276,000) (237,000)
Other income 1,072,000
------------------------------
Loss before provision for income taxes (1,793,000) (2,720,000)
Provision for income taxes 1,000 1,000
------------------------------
Net loss ($1,794,000) ($2,721,000)
Preferred stock dividends (78,000)
Accretion on preferred stock (268,000)
Value of beneficial conversion feature (8,000)
------------------------------
Net loss attributable to common
stockholders ($2,070,000) ($2,799,000)
==============================
Net loss per share-basic and diluted ($0.17) ($0.25)
==============================
Weighted average common shares-basic
and diluted 12,316,862 11,107,878
==============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
ALYN CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,794,000) ($2,721,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 567,000 605,000
Compensation Expenses related to stock option grants 46,000
Interest expense related to grant of warrants in
connection with convertible debt amendment 68,000 68,000
Changes in operating assets and liabilities:
Accounts receivable, net 22,000 (219,000)
Inventories, net (61,000) (148,000)
Other current assets (3,000) 151,000
Accounts payable 169,000 (16,000)
Accrued and other current liabilities (38,000) (678,000)
Other assets (53,000) (266,000)
-------------------------------
Net cash used in operating activities ($1,077,000) ($3,224,000)
-------------------------------
Cash flows used in investing activities:
Purchase of equipment, furniture and fixtures (98,000) (170,000)
Increase (decrease) in restricted cash 179,000
-------------------------------
Net cash flows (used in) provided by
investing activities (98,000) 9,000
-------------------------------
Cash flows from financing activities:
Proceeds from convertible debt 2,634,000
Proceeds from warrants 293,000
Proceeds from Series A convertible preferred stock 1,467,000
Proceeds from Series B redeemable convertible
preferred stock 1,303,000
Proceeds from short term borrowing 63,000
Repayment on capital obligations (11,000)
Repayment on long-term debt (296,000) (450,000)
-------------------------------
Total cash flows (used in ) provided by financing activities (244,000) 5,247,000
-------------------------------
Net (decrease) increase in cash and cash equivalents (1,419,000) 2,032,000
Cash and cash equivalents at beginning
of period 2,644,000 1,232,000
-------------------------------
Cash and cash equivalents at end of period $1,225,000 $3,264,000
===============================
Supplement cash flow information:
Cash paid during the period for income taxes $ 1,000 $ 1,000
===============================
Cash paid during the period for interest $ 276,000 $ 237,000
===============================
Non-cash Items:
Accretion on preferred stock $ 268,000 $10,000
===============================
Record Series A beneficial conversion feature $ 8,000
================
Record beneficial conversion feature on convertible debt $555,000
==============
Exercise of warrants $ 257,000
================
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
ALYN CORPORATION
NOTES TO (UNAUDITED) FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by Alyn
Corporation (the Company) without audit (except for balance sheet information as
of December 31, 1999) in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The accompanying financial statements do
not include certain footnotes and financial presentations normally required
under generally accepted accounting principles and, therefore, should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10K/A for the year ended December 31, 1999. The accounting
policies followed by the Company are set forth in Note 1 of the Notes to those
Financial Statements.
The results of operations for the interim period ended March 31, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2000. For further information on additional factors that may
affect future results, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under Item 2 and the Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10K/A for the year ended December 31, 1999.
2. NET LOSS PER SHARE
Basic and diluted loss per share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, 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 in the balance sheet at fair value. The Company does not
currently engage in hedging activities, but will continue to evaluate the
effects of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its
fiscal year 2001.
4. PREFERRED STOCK
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 lesser of the set conversion price of $4.00 per share or
the market price with a floor of $2.00 per share 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 $48,000 as of March 31, 2000 (increase of $8,000 during the three
months ended March 31, 2000) has been recorded as an increase in additional paid
in capital and accumulated deficit. 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 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 March 31, 2000 and December 31, 1999.
On February 4, 2000, the holders of the Series A converted 75,000 series
of Series A into 159,567 shares of common stock.
In connection with the Series A agreement, 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. These warrants were ascribed a value of
6
<PAGE>
$257,000 using the Black-Scholes Pricing Model. On January 18, 2000, the
warrants were exercised with no consideration paid to the Company and the
Company issued 120,000 shares of common stock to the holders of the warrants.
Preferred Stock 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 $207,000.
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 $2.00 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
Company. Pursuant to certain events under the agreement, the shares of Series C
may be redeemable 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.
As a result of the exercise of warrants by Series A holders at the $2.00
floor price, Series C holders were authorized 1,250,000 additional shares of
preferred stock (3,750,000 vs. 2,500,000) at $2.00 rather than $3.00 per share.
Additionally, they became entitled to an increase of 937,500 in warrants
(2,812,500 total warrants vs. 1,875,000) to reflect the lower floor price.
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 stockholders
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 2,812,500 shares of
common stock at a warrant price of $2.00 per share. The number 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 three months
ended March 31, 2000.
5. EXCHANGEABLE PROMISSORY NOTE
During March 1999, the Company issued an exchangeable promissory note for
an original principal amount of $3,000,000. The exchangeable promissory note
bears interest at 6% per annum and interest-only payments are due bi-annually
during September and March. The exchangeable promissory note is due during March
2002. The outstanding principal amount plus any accrued but unpaid interest is
exchangeable at the election of the holder of the Company's common stock. The
exchange price of the exchangeable note is equal to either (1) $3.645 per share
or (2) the average of any three closing bid prices as reported by Bloomberg for
22 trading days immediately preceding the applicable exchange date discounted by
up to 15%, at the holder's sole discretion. The actual discount is 8% through
September 6, 1999, 12% through December 5, 1999 and 15% after December 5, 1999.
In no case will the exchange price be less than $2.00 per share. The beneficial
conversion feature attached to the exchangeable promissory note, which was
valued by the Company at $555,000, was recorded as debt discount and amortized
as additional interest expense during fiscal 1999.
In connection with the issuance of the exchangeable promissory note, the
holders received warrants to purchase 135,000 shares of common stock at $3.0375
per share. The warrants terminate during March, 2004. These warrants were
ascribed a value of $216,000 using the Black Scholes Pricing Model. This amount
has been recorded as debt discount and is being amortized to interest expense
over the life of the exchangeable promissory note. During the three months ended
March 31, 2000, $18,000 of this amount has been amortized and recorded as
interest expense. All of these warrants remain outstanding as of March 31, 2000.
During October 1999, the Company issued warrants to the holders of the
exchangeable promissory note to purchase 300,000 shares of common stock at an
exercise price of $3.00 per share. The warrants terminate during October 2004.
7
<PAGE>
These warrants were ascribed a value of $482,000 using the Black Scholes Pricing
Model. This amount has been recorded as debt discount and is being amortized to
interest expense over the remaining life of the exchangeable promissory note.
During the three months ended March 31, 2000, $50,000 of this amount has been
amortized and recorded as interest expense. All of these warrants remain
outstanding as of March 31, 2000.
The exchangeable promissory note does not contain any financial covenants.
6. SEGMENT INFORMATION
Utilizing the management approach, the Company has classified its business into
four segments: extrusions, castings, nuclear and commercial in 2000 and two
segments: extrusions and castings in 1999. 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).
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
---------------------------------------------------------------
Three months ended March 31,
2000 EXTRUSIONS CASTINGS NUCLEAR COMMERCIAL TOTAL
---------- --------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales $ 105,000 $ 212,000 $ 8,000 $ 134,000 $ 459,000
Cost of Goods Sold 421,000 806,000 68,000 484,000 1,779,000
----------- ------------ ----------
Gross loss $ (316,000) $(594,000) $ (60,000) $ (350,000) $(1,320,000)
=========== ========== =========== ============ ==========
EXTRUSIONS CASTINGS TOTAL
---------- --------- ------------
1999
Net Sales $ 576,000 $ 250,000 $ 826,000
Cost of Goods Sold 1,457,000 595,000 2,052,000
---------- --------- ------------
Gross loss $ (881,000) $(345,000) $(1,226,000)
========== ========= ============
</TABLE>
7. STOCK OPTION PLANS
The following is a summary of stock option transactions under Alyn's 1996
and 1999 stock option incentive plans for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Number of Price per Share Number Exercisable Number of Options
Shares as of March 31, 2000 Available for Grant
as of March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 1,613,000 $1.00 - $14.00
Granted 98,000 $1.81 - $ 2.16
Forfeited (176,000) $2.38 - $ 8.38
-------------
Balance at March 31, 2000 1,535,000 $1.00 - $14.00 384,000 814,000
============= ======= =========
</TABLE>
During December 1999, the Company granted a consultant options to purchase
135,000 shares of the Company's common stock at $1.87 per share. As of March 31,
2000, 35,000 of these stock options were exercisable. The Company has recorded
compensation expense related to these stock options of $46,000 during the three
months ended March 31, 2000.
8. LITIGATION SETTLEMENT
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
received a net sum of approximately $1.1 million, net of legal costs.
9. SHORT TERM BORROWINGS
On March 17, 2000, the Company entered into an accounts receivable
factoring arrangement. In March, 2000, certain Accounts Receivable were factored
yielding cash from such financing of $63,000. Interest is calculated at the rate
of prime plus 3% and the factoring fee is 2% of the gross receivable. The
agreement is automatically renewable monthly and interest applies up to a
maximum of twelve calendar months from the date of factoring of the specific
receivable.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
CAUTIONARY STATEMENT
The following discussion and other sections of this Form 10-Q/A may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. These forward-looking
statements are subject to significant risks and uncertainties, including without
limitation those identified in the section of this Form 10-Q/A entitled "Factors
That May Affect Future Results and Financial Condition" and in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1999 as filed with
the Securities and Exchange Commission (the "SEC"). Such risks and uncertainties
may cause actual results to differ materially and adversely from those discussed
in such forward-looking statements. The forward-looking statements within this
Form 10-Q/A are identified by words such as "believes," "anticipates,"
"expects," "intends," "may" and other similar expressions. However, these words
are not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The Company
disclaims any obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-Q/A with the
SEC or otherwise to revise or update any oral or written forward-looking
statement that may be made from time to time by or on behalf of the Company. The
information contained in this Form 10-Q/A is not a complete description of the
Company's business or the risks associated with an investment in the Company.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this Report and in the Company's other filings with the SEC,
including its Annual Report on Form 10-K/A for the year ended December 31, 1999,
that attempt to advise interested parties of certain risks, uncertainties and
other factors that may affect the Company's business.
OVERVIEW
From the Company's inception in 1990 through the second quarter of 1998,
the Company was engaged in research, development, testing and prototype
production of advanced metal matrix composite materials, utilizing proprietary
technology primarily for the application of boron carbide in combination with
aluminum alloys, under the name Boralyn(R). In the third quarter of 1998, the
Company made the initial transition from prototype development to production.
The Company's extrusion facility was completed in late 1998 and became fully
operational in the first quarter of 1999. The Company's first major Boralyn
production order was received from Transnuclear, a customer, in the fourth
quarter of 1998 and was for use as shielding material in dry storage casks for
spent nuclear fuel rods. Shipments began in the first quarter of 1999 and
continued throughout the 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 materials,
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 in the foreseeable future.
9
<PAGE>
RESULTS OF OPERATIONS
For purposes of discussion, the results of operations for the quarter
ended March 31, 2000 are compared to the results of operations for the quarter
ended March 31, 1999.
Net sales for the first quarter of 2000 decreased 44.4% to $459,000 from
$826,000 in the first quarter of 1999. Decreases in sales resulted from the
dropoff in nuclear sales in the first quarter, 2000, versus the same period in
1999.
Cost of goods sold for the first quarter of 2000 decreased 13.3% to
$1,779,000 from $2,052,000 in the first quarter of 1999. The decrease in cost of
goods sold in the first quarter of 2000 was a result of the 44.4% decrease in
sales, primarily in the nuclear segment.
General and administrative expenses for the first quarter of 2000
increased 12.5% to $641,000 from $570,000 in the first quarter of 1999. The
increase is due to additional legal expenses, temporary labor costs and
non-employer compensation.
Selling and marketing expenses for the first quarter of 2000 increased by
9.6% to $308,000 from $281,000 in the first quarter of 1999. As the Company
expands its sales efforts in certain target industries and internationally,
selling and marketing expenses are expected to increase. The Company now markets
itself as a material manufacturer to original equipment manufacturers.
Research and development expenses for the first quarter of 2000 decreased
21.2% to $320,000 from $406,000 in the first quarter of 1999. The Company
expects to continue investing in research and development of new applications of
Boralyn(R). Base product development is already done and now requires additional
marketing and sales effort to yield results.
Interest expense, net, for the first quarter of 2000 increased to $276,000
from $237,000 in the first quarter of 1999 due to higher amounts of debt
servicing and less offset by interest income.
Other income for the first quarter of 2000 increased 100% to $1,072,000
from a minimal amount in the first quarter of 1999 due to the litigation
settlement of $1,056,000, net of expenses, against Epicor.
Provision for income taxes is the same in both the first quarter of 2000
as well as the first quarter of 1999 and represents the minimum state income tax
due.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had working capital of $480,000. It is
comprised of:
Cash and cash equivalents $1,225,000
Accounts receivable, net 621,000
Inventories, net 1,576,000
Other current assets 117,000
Accounts payable and other liabilities (2,029,000)
Other current debt (1,030,000)
The Company is maximizing its cash position through reduction of receivables and
increase of accounts payable.
During the first three months of 2000, the Company used $244,000 in cash
in financing activities, $98,000 in investing activities and $1,077,000 in
operating activities. The Company had a net decrease in cash and cash
equivalents of $1,419,000 in 2000 compared with a net cash and cash equivalents
increase of $2,032,000 in 1999. The net cash used in operating activities of
$1,077,000 was primarily comprised of a net loss of $1,794,000 reduced by
non-cash depreciation and amortization of $567,000 and an increase of $131,000
in accounts payable and other current liabilities.
10
<PAGE>
Cash of $98,000 used in investing activities related to the purchase of
equipment, furniture and fixtures.
Cash flows used in financing activities included repayment on long-term
debt of $296,000 and $11,000 of capital lease obligations partially offset by
cash provided by financing activities of $63,000 from proceeds of short-term
borrowings through factoring of accounts receivable.
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 equipment and accounts
receivable financing should satisfy the Company's anticipated capital needs for
the next 12 months. However, if the Company fails to complete its planned
equity, equipment and accounts receivable financing, inadequate capital to
finance operations may result. Also, if the Company fails to reach its planned
revenue levels, additional capital may be required. There can be so assurance
the Company will ever achieve a significant level of sales or profitability.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 March 31, 2000 with revenues of $459,000 for
the three months ended March 31, 2000 and 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 $2.1
million, $16.1 million, $12.1 million, $7.3 million and $2.3 million for the
three months ended March 31, 2000 and the years ended December 31, 1999, 1998,
1997 and 1996, respectively. There are no assurances that we will generate
sufficient revenues to achieve profitability.
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.
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<PAGE>
WE HAVE A 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. 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
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<PAGE>
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. For the first three months of
2000, those customers comprising 10% or more of our revenues are Quantum at
$196,000 or 43%, Syron with $84,000 at 18.4% and Ilmore Engineering with $55,000
at 12.1%.
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.
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<PAGE>
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 $13,133,000 for
working capital and paydown of bank debt which is broken down as follows:
Series A Convertible
Preferred Stock $1,460,000
Series B Convertible
Preferred Stock $1,380,000
Series C Convertible
Preferred Stock $7,293,000
Convertible Senior
Exchangeable Note $3,000,000
The Series A Preferred Stock is exchangeable for common stock beginning in
January 2000, with 120,000 warrants having been exchanged for shares of common
stock at the price of $1.91. On February 4, 2000, the holders of the Series A
converted 75,000 shares of Series A into 159,567 shares of common stock. Series
B Exchangeable Preferred Stock was converted in October 1999 to 626,960 shares
of common stock at $2.39.
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<PAGE>
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 a
registration statement for the holders of Series B Exchangeable Preferred Stock
("Exchangeable Preferred Stock") and the Exchangeable Note was filed 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, with a floor of $2.00 per share. 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 $7,293,000 cash,
net of expenses. In anticipation of the October 8, 1999 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. As a result of the exercise of
warrants by Series A holders at the $2.00 floor price in January, 2000, the
Series C holders were authorized 1,250,000 additional shares of preferred stock
to reflect the lower $2.00 per share price on the total of 3,750,000 shares. 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. As a result
of the exercise of warrants by Series A holders at the $2.00 floor price, the
number of warrants has increased from 1,875,000 to 2,812,500. 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
2,812,500 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.
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<PAGE>
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>
ISSUED AND PERCENT OF
CONVERSION/EXCHANGE ISSUABLE UPON FULL OUTSTANDING COMMON
TYPE OF SECURITY OR ISSUE PRICE CONVERSION STOCK
-------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Series A preferred stock $ 2.00 600,000 3.0%
Common stock issued in October 1999 to Series B
stockholders as a result of conversion of the
Series B preferred stock $ 2.3925 626,960 3.2%
Warrants issued in March 1999 to Series B
stockholders $ 3.82 65,000 0.3%
Warrants issued in October 1999 to Series B
stockholders $ 3.25 150,000 0.8%
Common stock issued in August 1999 to AMRO
International, S.A. $ 3.00 200,000 1.0%
Warrants issued in August 1999 to AMRO
International, S.A. $ 3.50 50,000 0.3%
Exchangeable note $ 2.00 1,500,000 7.7%
Related warrants issued in March 1999 $ 3.0375 135,000 0.7%
Related warrants issued in October 1999 $ 3.00 300,000 1.5%
Common stock issued in August 1999 N/A 149,213 0.8%
Common stock issued in September 1999 as
interest payment $ 2.3467 38,352 0.2%
Series C preferred stock $ 2.00 3,750,000 19.2%
Related warrants issued in October 1999 $ 2.00 2,812,500 16.4%
Total 10,377,025 53.0%
</TABLE>
We determined the valuation of the Series A warrants, which totaled
120,000 shares and which were exercised during the three months ended March 31,
2000, to be $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 2,812,500 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%.
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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.
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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.
In future periods the Company's business, financial condition and results of
operations may be affected in a material and adverse manner by many factors,
including, but not limited to, the following:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of our revenues during the first three months of
fiscal 2000 have been derived from international sources, accounting for
approximately 67% of its revenues. We regularly pursue customers in various
domestic and international locations. Such international locations include
Europe where there has been instability in several of the region's currencies.
Although we currently invoice all of our customers in U.S. Dollars, changes in
the value of the U.S. Dollar versus the local currency of such customers along
with the economic and political conditions of such foreign countries, could
adversely affect our business, financial condition and results of operations. In
addition, the weakening of an international customer's local currency and
banking market may negatively impact such customer's ability to meet all of
their obligations to us. Although we currently believe that our international
customers have the ability to meet all of their obligations to us, there can be
no assurance that they will continue to be able to meet such obligations. We
regularly monitor the credit worthiness of our international customers and make
credit decisions based on both prior sales experience with such customers as
well as current financial performance and economic conditions.
It is our current policy to not 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 March 31, 2000.
We are exposed to a material interest rate risk in the ordinary course of
business. We have examined our exposure to these risks and concluded that none
are material to fair values, cash flows or earnings.
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ALYN CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company's Preliminary Proxy for the 2000 annual meeting of
stockholders is scheduled to be filed in May, 2000. The annual meeting of
stockholders has been scheduled for July 18, 2000 for all shareholders of record
as of June 18, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is filed as part of this report:
EXHIBIT
NO. DESCRIPTION
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on April 29, 1999 describing the Company's recently
completed financing transactions and attaching the definitive documents of
the transactions.
Form 8-K filed on February 1, 2000 describing the Company's change in
certifying accountants.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALYN CORPORATION
(Registrant)
Dated June 26, 2000 By: /s/ Arne van Roon
-------------------------------------------
Arne van Roon
Chief Executive Officer and
President
Dated June 26, 2000 By: /s/ Raymond Brooks
-------------------------------------------
Raymond Brooks
Vice President, Finance and
Administration and Chief Accounting Officer
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