<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM 10-SB12G-A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
-----------
PHOTRAN CORPORATION
(Name of small business issuer in its charter)
MINNESOTA 3231 41-1697628
(STATE OR OTHER JURIS- (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DICTION OF INCORPORATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OR ORGANIZATION)
21875 GRENADA AVENUE
LAKEVILLE, MINNESOTA 55044
TELEPHONE: (612) 469-4880
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
- ------------------------------ ----------------------------------
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
--------------------------------
(Title of Class)
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS.
Incorporated by reference to material captioned "Prospectus Summary" and
"Business" in the Prospectus constituting a part of Amendment No. 2 to the
Registrant's Registration Statement on Form SB-2 filed with the Commission
May 24, 1996 (Registration No. 333-02700C) ("Amendment No. 2 to the Registrant's
Registration Statement").
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Incorporated by reference to material captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Prospectus
constituting a part of Amendment No. 2 to the Registrant's Registration
Statement.
ITEM 3. DESCRIPTION OF PROPERTY.
Incorporated by reference to material captioned "Business-Facilities" in
the Prospectus constituting a part of Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to material captioned "Principal Shareholders" in
the Prospectus constituting a part of Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
Name Age Position
- ------------------------- --- ------------------------------------------------
David E. Stevenson (3) 46 President, Chief Executive Officer, and Chairman
Paul T. Fink 40 Chief Financial Officer, Treasurer, Director
Kathleen V. Stevenson (2) 46 Secretary, Director
Robert S. Clarke (1)(3) 52 Director
Steven King (1)(2) 50 Director
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(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.
The Board of Directors is divided into three classes, and directors serve
for staggered three-year terms. Kathleen V. Stevenson serves in a class with a
term expiring in 1997; Robert S. Clarke and Steven King serve in a class with a
term expiring in 1998; and David E. Stevenson and Paul T. Fink serve in a class
with a term expiring in 1999. Officers serve at the discretion of the Board.
David E. Stevenson and Kathleen V. Stevenson are husband and wife.
- 2 -
<PAGE>
DAVID E. STEVENSON, the founder of the Company, has been employed by and
served as a director and officer of the Company since its inception in May 1991.
From 1988 to 1991, Mr. Stevenson was employed as president and CEO of Viratec
Thin Films, Inc. and Viratec Tru Vue Inc. of Faribault, Minnesota. From 1984 to
1988, Mr. Stevenson was executive vice president and chief operating officer of
Viracon, Inc. of Owatonna, Minnesota. From 1983 to 1984, he was director of
corporate development for Apogee Enterprises, Inc., of Minneapolis, Minnesota.
Mr. Stevenson holds a Bachelor of Science degree in Engineering from the
University of Michigan and is also a Certified Public Accountant.
PAUL T. FINK has been employed by the Company since January 1995. Mr. Fink
joined the Company as Controller, was named Chief Financial Officer in
February 1996 and was elected as a director in March 1996. Prior to joining the
Company, Mr. Fink was employed as the Chief Financial Officer of Vomela
Specialty Company, St. Paul, Minnesota, from 1989 to 1994 and Com-Tal Machine
and Engineering, Vadnais Heights, Minnesota, from 1984 to 1989. Mr. Fink was
employed by McGladrey & Pullen, Certified Public Accountants, as an auditor from
1980 to 1984. Mr. Fink holds a Bachelor of Science degree in Accounting from the
University of Minnesota, a Masters of Business Administration degree in
Financial Management from the University of St. Thomas, and is also a Certified
Public Accountant.
KATHLEEN V. STEVENSON has been a director and officer of the Company since
November 1991 and is a part-time employee of the Company responsible for human
resource matters. Ms. Stevenson has owned and operated a tableware and linen
mail order company in Wayzata, Minnesota since 1984. Previously she has been
employed in various financial management and staff positions with Norwest Bank,
Minneapolis, Minnesota, Michigan Bank, Detroit, Michigan, and City National
Bank, Detroit, Michigan. Ms. Stevenson holds a Bachelor of Science degree in
Accounting from Michigan State University.
ROBERT S. CLARKE has been a director of the Company since March 1993. Since
1981 Mr. Clarke has been the President of Alpen, Inc., Boulder, Colorado, a
leading manufacturer of architectural insulating glass. Since 1991 Mr. Clarke
has also been President, Chairman and a director of Vac-Tec Systems, Inc., a
public company involved in the manufacture of high performance windows utilizing
suspended vacuum coated films.
STEVEN KING has been a director of the Company since May 1993. Since 1986
Mr. King has been Chairman and CEO of Landscape Structures, Inc., of Delano,
Minnesota, a company which creates and manufactures innovative play structures
promoting early childhood development. Mr. King is also a registered architect.
KEY PERSONNEL
DR. ALEX ERSHOV has been employed by the Company as Chief Process Scientist
since May 1995. Dr. Ershov is a research and development scientist with a
background in the development of innovative thin film deposition processes. He
is primarily responsible for the development of the Company's high rate
microwave atomic oxygen deposition process. Dr. Ershov holds a Ph.D. in Physics
from the General Physics Institute of Moscow.
JAMES GRIESER has been employed by the Company as Manager of Thin Film
Process Engineering since December 1995. Mr. Grieser has 15 years of process
research and development experience in vacuum deposited thin film coatings. He
has developed several unique thin film materials for use in aerospace and
military applications. He holds a B.S. degree in Physics from Elmhurst College.
- 3 -
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ITEM 6. EXECUTIVE COMPENSATION.
Incorporated by reference to material captioned "Management-Executive
Compensation" in the Prospectus constituting a part of Amendment No. 2 to the
Registrant's Registration Statement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to material captioned "Certain Transactions" in
the Prospectus constituting a part of Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 8. LEGAL PROCEEDINGS.
None.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Incorporated by reference to material captioned "Risk Factors",
"Description of Capital Stock", and "Shares Eligible for Future Sale" in the
Prospectus constituting a part of Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Incorporated by reference to material captioned "Recent Sales of
Unregistered Securities" in Part II to Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 11. DESCRIPTION OF SECURITIES.
Incorporated by reference to material captioned "Description of Capital
Stock" in the Prospectus constituting a part of Amendment No. 2 to the
Registrant's Registration Statement.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Incorporated by reference to material captioned "Management-Indemnification
and Waiver of Director Liability" in the Prospectus constituting a part of
Amendment No. 2 to the Registrant's Registration Statement and to material
captioned "Indemnification of Directors and Officers" in Part II of Amendment
No. 2 to the Registrant's Registration Statement.
ITEM 13. FINANCIAL STATEMENTS.
Incorporated by reference to material captioned "Financial Statements" in
the Prospectus constituting a part of Amendment No. 2 to the Registrant's
Registration Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 4 -
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) LIST OF FINANCIAL STATEMENTS.
Incorporated by reference to material captioned "Index to Financial
Statements" in the Prospectus constituting a part of Amendment No. 2 to the
Registrant's Registration Statement.
(b) EXHIBITS.
The following exhibits are incorporated by reference to the exhibits
furnished with the Registrant's Registration Statement on Form SB-2 originally
filed with the Commission on March 22, 1996 (Registration No. 333-02700C):
EXHIBIT
NO. DESCRIPTION
--- -----------
1.1 Underwriting Agreement, including Representative's Warrant.
1.2 Agreement Among Underwriters.
1.3 Selected Dealers Agreement.
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996.
3.2 Amended and Restated By-Laws of Photran Corporation, effective
December 23, 1992, as amended through February 3, 1996.
4.1 Second Amended and Restated Articles of Incorporation and Amended and
Restated By-Laws of Photran Corporation as amended. (See Exhibits 3.1
and 3.2 above.)
4.2 Specimen of Common Stock Certificate (to be filed by Amendment).
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18, 1992,
for the purchase of 1,700 shares, issued to Christopher T. Vanyo. An
identical Warrant For Purchase of Shares of Common Stock was granted to
one other individual for the purchase of 1,600 shares.
4.4 Common Stock Purchase Warrant, dated January 5, 1993, for the purchase
of 29,500 shares, issued to R. J. Steichen & Company. Identical Common
Stock Purchase Warrants in the amounts of 149,964 shares, 35,000 shares
and 105,254 shares were granted to R. J. Steichen & Company on
February 19, 1993, February 19, 1993, and March 17, 1993,
respectively.
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of 20,000
shares and 60,000 shares were granted to a total of eleven individuals
on August 8, 1993 and September 23, 1993, respectively.
4.6 Common Stock Purchase Warrant, dated September 23, 1993, for the
purchase of 48,500 shares, issued to R. J. Steichen & Company. An
identical Common Stock Purchase Warrant in the amount of 11,500
shares was granted to R. J. Steichen & Company on September 24, 1993.
4.7 Form of Promissory Note. Identical Notes totaling $600,000 in principal
amount were executed by Photran Corporation in favor of ten individuals
on September 23, 1993.
- 5 -
<PAGE>
EXHIBIT
NO. DESCRIPTION
--- -----------
4.8 Common Stock Purchase Warrant, dated January 7, 1994, for the purchase
of 140,115 shares, issued to R. J. Steichen & Company. Identical
Common Stock Purchase Warrants in the amounts of 11,730 shares and
36,635 shares were granted to R. J. Steichen & Company on January 31,
1994 and February 18, 1994, respectively.
4.9 Stock Purchase Warrant for 75,000 shares of Common Stock, dated May 1,
1995, granted to Steven King.
4.10 Promissory Note, dated May 1, 1995, executed by Photran Corporation in
favor of Steven King.
4.11 Promissory Note, dated May 26, 1995, executed by Photran Corporation in
favor of Bank of America National Trust and Savings Association, dated
May 26, 1995.
4.12 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a total
of 28 individuals on October 15, 1995 to purchase a total of 400,000
shares.
4.13 Form of Secured Promissory Note. Identical Notes were executed by
Photran Corporation in favor of 28 individuals on October 15, 1995 for a
total principal amount of $4,000,000.
4.14 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated
October 31, 1995, granted to John G. Kinnard and Company, Incorporated.
5.1 Opinion of Henson & Efron, P.A. (to be filed by Amendment).
10.1 Contract Agreement for the Joint Venture of Shenzhen Fortune Conductive
Glass Company, Ltd., between Photran Corporation and Shenzhen Wabo
(Group) Company, Limited.
10.2 License Agreement between Photran Corporation and Applied Elastromerics
dated May 30, 1991, as amended.
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries, Inc.
and Photran Corporation dated July 1991.
10.4 Photran Corporation 1992 Stock Option Plan.
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a total
of 76,250 shares.
10.6 Employment Agreement between David E. Stevenson and Photran Corporation
dated January 1, 1993.
10.7 Form of Bridge Loan Agreement. Identical Loan agreements were entered
into between Photran Corporation and ten individuals on September 23,
1993 for a total principal amount of $600,000.
10.8 Working Capital Guarantee Program Borrower Agreement between Photran
Corporation and Bank of America National Trust and Savings Association,
dated September 1, 1994.
10.9 Loan Agreement, dated May 1, 1995, between Photran Corporation and
Steven King.
10.10 Eximbank-Guaranteed Line of Credit Agreement between Photran Corporation
and Bank of America National Trust and Savings Association dated May 26,
1995, as amended.
- 6 -
<PAGE>
EXHIBIT
NO. DESCRIPTION
--- -----------
10.11 Guaranty of indebtedness dated May 26, 1995, executed by David E.
Stevenson in favor of Bank of America National Trust and Savings
Association.
10.12 Irrevocable Letter of Credit issued by China Merchants Bank at the
request of Shenzhen WABO Group Co. Ltd. for the benefit of Photran
Corporation.
10.13 Distribution Agreement between Photran Corporation and Yorkwell Company
Limited dated September 6, 1994.
10.14 Form of Subscription and Loan Agreement. Identical Subscriptions and
Loan agreements were entered into with 28 individuals on October 25 or
31, 1995 for a total principal amount of $4,000,000.
10.15 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995.
10.16 Amended and Restated Bridge Loan Agreement between Steven King and
Photran Corporation dated March 15, 1996.
11.1 Statement re Computation of Per Share Earnings.
23.1 Consent of Henson & Efron, P.A. (included in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP (to be filed by Amendment).
25.1 Powers of Attorney.
(c) ADDITIONAL EXHIBITS FILED PURSUANT TO RULE 240.12b-23(a)(3).
EXHIBIT
NO. DESCRIPTION
--- -----------
C-1 Amendment No. 2 to Registrant's Registration Statement on Form SB-2
filed May 24, 1996 (Registration No. 333-02700C), without exhibits.
- 7 -
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOTRAN CORPORATION
Dated: May 23, 1996 By: /s/ David E. Stevenson
-------------------------
David E. Stevenson
Its President
- 8 -
<PAGE>
INDEX TO ADDITIONAL EXHIBITS
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--- ----------- --------
C-1 Amendment No. 2 to Registrant's Registration Statement
on Form SB-2 filed May 24, 1996 (Registration No.
333-02700C). . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996
REGISTRATION NO. 333-02700C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
CHICAGO, ILLINOIS 60661
------------------------------
AMENDMENT NO 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHOTRAN CORPORATION
(Name of small business issuer in its charter)
MINNESOTA 3231 41-1697628
(STATE OR OTHER JURIS- (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DICTION OF INCORPORATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OR ORGANIZATION)
21875 GRENADA AVENUE
LAKEVILLE, MINNESOTA 55044
TELEPHONE: (612) 469-4880
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DAVID E. STEVENSON, PRESIDENT
PHOTRAN CORPORATION
21875 GRENADA AVENUE
LAKEVILLE, MINNESOTA 55044
TELEPHONE: (612) 469-4880
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
Jeffrey N. Saunders, Esq. D. William Kaufman, Esq.
Henson & Efron, P.A. Oppenheimer Wolff & Donnelly
1200 Title Insurance Building Suite 3400
400 Second Avenue South 45 South Seventh Street
Minneapolis, MN 55401 Minneapolis, MN 55402
Telephone: (612) 339-2500 Telephone: (612) 344-9300
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / / ______________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, No par value............ 2,300,000 shares
(2) $9.00 $20,700,000 $7,137.93
Representative's warrant (3).......... 160,000 warrants $.0003 $50 $.02
Common Stock underlying
Representative's warrant............. 160,000 shares $10.80 $1,728,000 $595.86
TOTAL................................. $22,428,050 $7,733.81
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes a maximum of 300,000 shares which may be purchased by the
Underwriters to cover over-allotment, if any.
(3) To be sold to the Representative at the closing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PHOTRAN CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND DESCRIPTION CAPTION OF LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Front of Registration Statement; Outside Front Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover; Outside Back Cover; Available
Information
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover; Risk Factors; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover; Underwriting
9. Legal Proceedings.................................... None
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management; Principal Shareholders
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Shareholders
12. Description of Securities............................ Description of Capital Stock
13. Interest of Named Experts and Counsel................ Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Management; Underwriting
15. Organization Within Last 5 Years..................... Prospectus Summary; Business
16. Description of Business.............................. Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Prospectus Summary; Business
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. Risk Factors; Executive Compensation; Description of
Capital Stock; Shares Eligible for Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Prospectus Summary; Capitalization; Selected
Financial Data; Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure................. None
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 24, 1996
PROSPECTUS
2,000,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Shares") are being
sold by Photran Corporation ("Photran" or the "Company"). Prior to this Offering
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $8.00
and $9.00 per Share. See "Underwriting" for the factors considered in
determining the initial public offering price. Application has been made to have
the Common Stock approved for trading on the Nasdaq National Market under the
symbol "PTRN."
------------------------
THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON
PAGE 5 AND "DILUTION" ON PAGE 11.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) The Company has agreed to pay to John G. Kinnard and Company, Incorporated,
as representative of the several Underwriters (the "Representative") its
accountable expenses in connection with this Offering in an amount not to
exceed $50,000, of which $10,000 has been paid. The Company has also agreed
to sell to the Representative, for a nominal purchase price, a five-year
warrant to purchase up to 160,000 shares of Common Stock, exercisable at
120% of the Price to Public. In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000
(including the Representative's accountable expenses referenced in note 1
above). See "Underwriting."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters subject to prior
sale, to withdrawal, cancellation or modification of the offer without notice,
to delivery to and acceptance by the Underwriters and to certain other
conditions. It is expected that delivery of the Shares will be made on or about
, 1996 in Minneapolis, Minnesota.
------------------------
JOHN G. KINNARD AND COMPANY, INCORPORATED
------------
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF COMMON STOCK AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN
(I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION (300,000
SHARES) OR THE CURRENTLY OUTSTANDING OPTIONS AND WARRANTS (AN AGGREGATE OF
1,039,850 SHARES), AND (II) GIVES EFFECT TO A 1-FOR-2 REVERSE SPLIT OF THE
COMMON STOCK TO BECOME EFFECTIVE IMMEDIATELY PRIOR TO THE EFFECTIVENESS OF THIS
OFFERING. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
THE COMPANY
Photran Corporation ("Photran" or the "Company") develops, manufactures and
markets innovative high performance optical and electrically conductive thin
film coated products. The Company has developed a unique, proprietary process
technology known as FUZION-TM- planar magnetron sputtering. This process is used
to apply microscopically thin layers of metal, metal oxide, nitride, boride,
carbide, floride and diamond-like coatings to a wide variety of substrate
materials. These thin film coatings provide essential optical, electrical or
durability properties to a substrate material such as glass, metal or plastic.
The Company believes its FUZION process represents a fundamental
breakthrough in thin film coating technology. The Company's FUZION process is
capable of producing "ultra-high" grade thin film coatings, as defined in U.S.
government standards. Most high quality thin film coatings are applied in a low
volume batch type process. The FUZION process is a continuous "in-line"
production system which permits the Company to coat larger sized substrates
while achieving a higher level of productivity and quality than that of
competing technologies of which the Company is aware. Based on its knowledge of
the technologies employed by its competition, the Company believes it can
produce thin film coatings at production rates that are several times faster
than the rates achievable by competing technologies. See "Business --
Technology."
The Company's strategy is to leverage the competitive cost, quality and
feature advantages which it believes the FUZION process provides to secure a
strong market position in the manufacture and sale of the following products:
ITO COATED GLASS PRODUCTS. The Company is currently engaged in commercial
production of its PCO-Registered Trademark- brand of indium tin oxide
("ITO") optically transparent, electrically conductive glass. ITO coated
glass is used in all types of flat panel displays such as lap top computer
screens, digital watches and calculators.
ANTI-REFLECTION PRODUCTS. The Company has commenced pilot production of
several products which incorporate a patented anti-reflection ("A/R") thin
film coating for eliminating glare and absorbing ultraviolet ("UV") light.
In the second quarter of 1996, when the Company completes the installation
of its second coating line, it expects to begin full scale production of the
first product in its ZeroRay-TM- line of glare and radiation filters for
computer monitors and televisions. The same technology will be used in the
Company's UVAR-TM- low reflection, UV light blocking and scratch resistant
eyeglass lenses, and in its A/R coated PolarClear-TM- polarizing film for
flat panel displays such as those found in lap top computers. Both of these
products are scheduled to be introduced in the third quarter of 1996. After
the installation of a third FUZION coating production line in the second
half of 1996, which will be capable of handling even larger sized
substrates, the Company intends to begin production of ArtGlas-TM-, its
anti-reflection, UV light blocking picture framing glass.
ENHANCED REFLECTION MIRRORS. The Company commenced shipments of enhanced
reflection mirror ("ERM") products on a limited basis in the first quarter
of 1996. The Company intends to begin commercial production of its standard
PMAX-Registered Trademark- brand front surface mirrors in the second half of
1996. ERMs are used in projection televisions, document and bar code
scanners, photocopiers, overhead projectors and other specialty
applications.
Photran was incorporated under the laws of the State of Minnesota in May
1991. The Company's principal executive offices are located at 21875 Grenada
Avenue, Lakeville, Minnesota 55044, and its telephone number is (612) 469-4880.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 2,000,000 Shares
Common Stock outstanding after this 4,837,323 Shares
Offering....................................
Use of proceeds.............................. Repayment of debt, acquisition of additional
equipment and capital improvements, market-
ing and sales, product development and work-
ing capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PTRN
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------- ----------------------------
1994 1995 1995 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 914,736 $ 3,362,818 $ 217,595 $ 1,137,950
Cost of sales......................................... 1,016,628 2,048,522 96,933 676,782
Gross profit (loss)................................... (101,892) 1,314,296 120,662 461,168
Operating expenses.................................... 1,240,903 977,853 198,370 321,301
Operating income (loss)............................... (1,342,795) 336,443 (77,708) 139,867
Interest expense, net................................. (62,240) (286,430) (17,323) (60,838)
Net income (loss)..................................... $ (1,405,035) $ 50,013 $ (95,031) $ 79,029
Net income (loss) per common and common equivalent
share (1)(2)......................................... $ (.47) $ .02 $ (.03) $ .02
Weighted average common and common equivalent shares
outstanding (1)(2)................................... 3,015,640 3,334,114 3,334,114 3,334,114
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, ------------------------------
1995 ACTUAL AS ADJUSTED(3)
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................... $ (3,216,717) $ (4,420,587) $ 10,734,413
Total assets...................................................... 14,192,655 14,437,923 24,210,933
Current liabilities............................................... 10,195,516 10,834,220 5,584,220
Long-term debt, net of current maturities......................... 762,783 290,318 290,318
Accumulated deficit............................................... (3,436,861) (3,357,832) (3,489,822)
Shareholders' equity.............................................. 3,234,356 3,313,385 18,336,395
</TABLE>
- ------------------------
(1) Gives effect to a 1-for-2 reverse split of the Common Stock to become
effective immediately prior to the effectiveness of this Offering.
(2) See Note 2 to Financial Statements for an explanation of the determination
of weighted average common and common equivalent shares outstanding.
(3) As adjusted to reflect the sale of the Shares offered hereby, assuming an
initial Price to Public of $8.50 per Share, and the application of the net
proceeds therefrom, including the repayment of $4 million of principal of
Bridge Notes and approximately $250,000 of accrued interest thereon, the
repayment of a $1 million loan from a director and the write-off of deferred
financing costs of $131,990 incurred in connection with the issuance of the
Bridge Notes. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain
Transactions."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL PURCHASERS IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
LIMITED HISTORY OF OPERATIONS; ACCUMULATED DEFICIT
From its inception on May 3, 1991 through June 1995, the Company was
primarily engaged in the development of process and product technology,
modifying coating equipment acquired by the Company, designing and building
additional equipment, product development and limited commercial production. As
part of its development efforts, the Company began pilot production of ITO
coated glass in the second half of 1993; in the second half of 1994 the Company
made a strategic decision to shut down manufacturing operations to rebuild
portions of its equipment. In July 1995 the Company resumed manufacturing
operations and began to scale up its production activities. The Company,
therefore, has a limited operating history which makes it difficult for
investors to evaluate the ability of the Company to expand the manufacturing and
marketing of its products sufficiently to maintain or increase profitability.
The Company also faces all of the risks inherent in the start-up and operation
of any new business. Although the Company had net income of $50,013 in 1995 and
$79,029 for the first three months of 1996, there can be no assurance that
operating losses will not occur in future periods. As of March 31, 1996, the
Company had incurred an accumulated deficit of $3,357,832.
DEPENDENCE ON INITIAL PRODUCT; NEED FOR ADDITIONAL EQUIPMENT
To date, more than 90% of the Company's sales have been twisted nematic
("TN") grade ITO coated glass, and its revenues, therefore, are currently
dependent upon the sale of a single product that is subject to strong price
competition. The Company's future performance depends, in part, on its ability
to increase its capacity and efficiencies in the production of ITO coated glass
and other products. The Company is working to develop additional products, new
technologies and new manufacturing equipment. A significant portion of the
proceeds from this Offering will be used to fund these activities, and the
Company's future success will depend in part upon its success with these
development efforts. See "Use of Proceeds." Specifically, the Company is in the
process of installing additional equipment on its existing production line,
which will give it the capacity to manufacture new products, and to increase
production efficiencies and product quality. The Company is also currently
installing a second production line which it expects to be operational during
the second quarter of 1996. A third production line is expected to be installed
in the second half of 1996. The success of the Company is dependent on the
completion of these improvements and installations which will enable it to
produce additional products in sufficient quantities and at acceptable quality
levels on an efficient basis. Failure to do so will have a material adverse
effect on the Company. No assurance can be given that the Company's timetable
for these development plans will be achieved, that sufficient development
resources will be available, or that development efforts will be successful.
During installation and pilot production of its existing production line,
the Company experienced several operational and technical difficulties. There
can be no assurance that it will not experience similar problems with its second
and third production lines. See "Business -- Manufacturing."
DEPENDENCE ON MAJOR CUSTOMERS
For the year ended December 31, 1995, sales to two customers accounted for
approximately 57% and 28%, respectively, of the Company's revenues. For the
first three months of 1996 sales to the Company's largest customer accounted for
71% of total revenues; sales to the second largest customer were not material.
The Company has not yet established a broad customer base and does not have
long-term contracts with any of its customers, including its two largest
customers. As production levels increase and new products are introduced, the
Company will continue its efforts to expand its product offerings and customer
base to reduce its reliance on any one customer for a significant portion of its
gross revenues. There can be no assurance, however, that current order levels
from its largest customers will continue or that intense competition will not
adversely affect the Company's expansion plans. See "Business -- Sales and
Distribution" and "Business -- Customers."
5
<PAGE>
MARKET ACCEPTANCE AND LIMITED MARKETING CAPABILITIES
The Company has not yet shipped significant quantities of products in any of
the markets in which it intends to compete. It has not, therefore, established a
significant market presence in any of these markets.
The commercial success of the Company's various products will depend on
their acceptance by the end users of such products. The Company currently has
limited sales and marketing capabilities, and relies heavily on the efforts of
its senior management and, to a lesser extent, on the efforts of independent
sales representatives. Although the Company has arrangements with distributors
and agents in the European and Pacific Rim markets, there can be no assurance
that they will successfully market the Company's existing or future products.
The Company has hired a sales manager to oversee the introduction of its ZeroRay
products and is currently pursuing the further development of a sales and
marketing staff. There can be no assurance that this effort will result in a
successful sales and marketing program. Failure of any of the Company's product
categories to achieve market acceptance could have a material adverse effect on
the Company's business, financial condition and results of operations. During
1996 the Company intends to focus its market development efforts, in part, on
the super twisted nematic ("STN") segment of the ITO coated glass market. It
does not intend, however, to abandon its current emphasis on production of
twisted nematic ("TN") grade ITO coated glass unless market demand for STN grade
coated glass products warrants a reduction in focus on the TN grade segment of
the market. The Company believes, therefore, that its continuing results of
operations do not depend materially on the commercial acceptance of its STN
grade ITO coated glass. See "Business -- Products and Markets" and "Business --
Sales and Distribution."
RAPID TECHNOLOGICAL CHANGE
The technology for manufacturing vacuum deposited thin film coatings on
various substrates has been characterized by rapid change, which could
ultimately result in partial or total obsolescence of the Company's present
manufacturing equipment, processes and products within time frames not presently
anticipated by the Company. As a result, the Company may be forced to respond to
these changes by enhancing or altering its manufacturing equipment, processes
and products at substantial costs in terms of both capital expenditure
requirements and loss of revenue. The Company's future success will depend on
its ability to keep pace with advancing technology. Many competitors have
significantly greater research and development capabilities, and financial and
managerial resources than the Company and may be able to respond to
technological change more effectively than the Company. There can be no
assurance, therefore, that the Company will be able to adequately respond to
such technological change should it occur.
NEED FOR ADDITIONAL CAPITAL; GOING CONCERN UNCERTAINTY
The Company had a working capital deficit of $3,216,717 at December 31,
1995, and $4,420,587 at March 31, 1996. Negative cash flows from operations were
$3,239,173 for the year ended December 31, 1995, and $70,768 for the quarter
ended March 31, 1996. The Company estimates that approximately $5,250,000 of the
net proceeds from the Shares offered hereby will be used to repay certain
outstanding debt, and $3,755,000 will be used for working capital and general
corporate purposes. The remaining proceeds are expected to be used to finance
the acquisition and construction of manufacturing equipment and other capital
improvements, marketing efforts and product development. See "Use of Proceeds."
Depending on the amount, if any, of cash generated from operations, the Company
may require additional debt or equity financing to pursue the development of new
products and markets after the proceeds of this Offering have been expended. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance that
additional financing will be available, or be available on terms acceptable to
the Company.
The Company has financed the construction of certain equipment it will sell
to a Chinese joint venture, of which it is a partner, through a $2 million
transaction-specific line of credit which is secured by substantially all of the
assets of the Company and expires on May 31, 1996. This line of
6
<PAGE>
credit is repayable from the proceeds of the sale of the equipment, which the
Company expects to occur prior to the expiration of the line of credit. The
Company plans to seek an extension of the line of credit if the equipment sale
has not been completed prior to May 31, 1996. Although the lender has been
willing to grant similar extensions in the past, there can be no assurance that
it will be willing to grant additional extensions.
The report of the independent auditors on the Company's Financial Statements
contains an explanatory paragraph concerning the Company's ability to continue
as a going concern. See Note 1 to the Company's Financial Statements for a
description of the factors related to going concern issues and management's
plans regarding operating losses and liquidity. The Company believes that upon
the successful completion of this Offering, it will have the cash resources to
meet its current obligations.
COMPETITION
There is substantial price competition in the market for TN grade ITO coated
glass, which has been the Company's predominant source of revenue to date.
Approximately half of the world's TN grade ITO glass coating manufacturing
capacity is located in Japan. The Company is also aware of several non-Japanese
companies that manufacture or plan to manufacture ITO coated glass. There are
several domestic and foreign manufacturers of anti-reflection coatings and
enhanced reflection mirror products. Some of the Company's present and potential
competitors in the ITO coated glass, anti-reflection coating and enhanced
reflection mirror markets have substantially greater financial resources,
business experience, and product development, marketing and support capabilities
than those of the Company. There can be no assurance that the Company will be
able to compete successfully with existing or future competitors. See "Business
- -- Competition."
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company's success depends, and will continue to depend, in part, on its
ability to maintain patent protection for its manufacturing processes, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. The validity and breadth of claims covered in the
Company's five issued U.S. patents and six U.S. patent applications involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that the Company's pending applications will result in
patents being issued, or, if issued, that such patents or the Company's current
patents will provide a competitive advantage, or that competitors of the Company
will not design around any patents issued to the Company. Furthermore, there can
be no assurance that the Company's confidentiality and noncompete agreements,
invention assignments and other safeguards will protect its proprietary
information and know-how or provide adequate remedies for the Company in the
event of unauthorized use or disclosure of such information. Litigation, which
could result in substantial costs to and diversion of effort by the Company, may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others or to determine the ownership, scope or
validity of the proprietary rights of the Company and others. Other than the
prior art review done in connection with the Company's patent applications, the
Company has not undertaken any independent investigation regarding potential
infringement of its current or proposed products on the property rights of
others. See "Business -- Intellectual Property."
DEPENDENCE ON SINGLE SOURCE SUPPLIERS
The majority of the products which the Company has produced to date have
required a glass substrate. The Company currently purchases its glass substrate
from Glaverbel, S.A. of Belgium. The Company does not have a long term contract
with this supplier. The Company believes, however, that acceptable alternative
sources are currently available. In the event the Company must seek alternative
sources for key raw materials, there can be no assurance that such materials
will be available for purchase from alternative suppliers, or that such
materials will be available on terms and at prices acceptable to the Company.
Any interruption in the supply of these materials could have a material
7
<PAGE>
adverse effect on the Company's ability to manufacture its products until a new
source of supply is located and, therefore, could have a material adverse effect
on its business, results of operations and financial condition. See "Business --
Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on a limited number of key management and
technical personnel, particularly its President and Chief Executive Officer,
David E. Stevenson. The Company has an employment agreement with Mr. Stevenson
and maintains key man life insurance on Mr. Stevenson in the amount of $1.5
million, which has been assigned as collateral for the $1.5 million loan
obtained from a director of the Company in 1995. This insurance will be
maintained after the loan has been repaid. Nevertheless, the loss of Mr.
Stevenson's services would severely limit the ability of the Company to conduct
and expand its business. The Company's future success will also depend, in part,
on its ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. The loss of key personnel, or inability to hire or retain qualified
personnel, could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management."
INTERNATIONAL SALES; INTERNATIONAL JOINT VENTURE
Almost all of the Company's sales to date have been to customers in Asia.
The Company expects that international sales will continue to account for a
significant portion of the Company's business. The Company's sales are
denominated in U.S. dollars and, therefore, the Company is not subject to
foreign currency exchange risk. This practice is expected to continue. The
Company's international sales may, however, be adversely affected by changes in
demand resulting from fluctuations in currency exchange rates and local economic
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company is a 40% partner in a joint venture located in the People's
Republic of China. The amount of distributions and earnings, if any, which the
Company may realize from the joint venture are subject to all of the risks
inherent in the start up and operation of any new business. The interest of the
Company in the joint venture is also subject to the risk of nationalization of
the joint venture's assets by the Chinese government. The Company has not
assigned a value to its interest in the joint venture on its balance sheet and,
therefore, nationalization would not have a material adverse impact on the
Company's financial condition. See "Business -- China Joint Venture."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained after this Offering. The initial
public offering price for the Shares has been determined by negotiation between
the Company and the Representative and may bear no relationship to the market
price of the Shares subsequent to this Offering. See "Underwriting." Following
this Offering, the market price for the Common Stock may be highly volatile
depending on various factors, including the general economy, stock market
conditions, announcements by the Company and its competitors, and fluctuations
in the Company's operating results.
ABSENCE OF DIVIDENDS ON COMMON STOCK
No dividends have been paid on the Common Stock. The Company does not
anticipate the payment of cash dividends on its Common Stock in the foreseeable
future. In addition, the Company is prohibited from paying dividends under the
provisions of a credit agreement. See "Dividend Policy."
DILUTION
The shares of Common Stock currently outstanding were purchased at prices
substantially below the Price to Public. Therefore, at the assumed offering
price of $8.50 per Share, investors in this Offering will incur immediate
substantial dilution of $4.71 in the net tangible book value per Share after
this Offering. See "Dilution."
8
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; OUTSTANDING WARRANTS
Following completion of this Offering, 4,837,323 shares of Common Stock will
be issued and outstanding, including the 2,000,000 Shares offered hereby, which
will be tradeable without restriction, and 2,837,323 shares, which may be sold
subject to the restrictions of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). Each of the directors and executive officers of
the Company has agreed to refrain from selling his or her shares (a total of
451,362 shares) without the prior written consent of the Representative for one
year after the date of this Prospectus. In addition, the holders of 1,616,870
shares have agreed to a 270-day restriction on the sale of their stock without
the prior written consent of the Representative. In the aggregate, 72.89% of the
total shares outstanding prior to this Offering will be subject to selling
restrictions for a minimum of 270 days. Sales of a substantial number of shares
of Common Stock of the Company in the public market subsequent to this Offering,
or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock. See "Shares Eligible for Future
Sale."
As of December 31, 1995, the Company had outstanding warrants to purchase a
total of 913,600 shares of Common Stock. The holders of the warrants may be
expected to exercise their warrants at a time when the Company would, in all
likelihood, be able to obtain equity capital by a new offering of its securities
on terms more favorable to the Company than the terms of the warrants. This may
have the effect of depriving the Company of opportunities to sell additional
equity securities on favorable terms. See "Description of Capital Stock --
Warrants."
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS; MINNESOTA CORPORATE LAW
CONSIDERATIONS
As a Minnesota corporation, the Company is subject to certain antitakeover
provisions of the Minnesota Business Corporation Act. These provisions could
have the effect of discouraging potential takeover attempts and of delaying,
deferring or preventing a change in control of the Company or making removal of
management more difficult. See "Description of Capital Stock -- Minnesota
Antitakeover Law."
The Company's Second Amended and Restated Articles of Incorporation may only
be amended by resolution adopted by the affirmative vote of not less than 60% of
the shares entitled to vote, provided the amendment does not receive the
negative vote of more than 25% of the shares entitled to vote. This provision
could have the effect of discouraging an unsolicited takeover of the Company.
The Company's Second Amended and Restated Articles of Incorporation provide,
as permitted by Minnesota law, that its directors shall have no personal
monetary liability for certain breaches of their fiduciary duties. This
provision may discourage shareholders from bringing suit against directors for
breach of fiduciary duties and reduce the likelihood of derivative litigation.
See "Management -- Indemnification and Waiver of Director Liability."
Furthermore, under Minnesota law a board of directors has the power to
establish classes and series of securities and to fix the relative rights and
preferences of any such class or series. Pursuant to the Company's Second
Amended and Restated Articles of Incorporation, the Board of Directors of the
Company has the authority to issue up to 6,000,000 undesignated shares without
further shareholder approval. Issuance of undesignated shares, if any, could
result in a dilution of the voting power of Common Stock, adversely affect
holders of Common Stock in the event of liquidation of the Company, or delay or
prevent a change in control of the Company. See "Description of Capital Stock --
Undesignated Shares."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered hereby
at an assumed initial public offering price of $8.50 per Share are estimated to
be approximately $15,155,000 ($17,488,250 if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company currently
intends to apply these proceeds approximately as follows:
<TABLE>
<S> <C>
Repayment of Bridge Notes..................................... $ 4,000,000
Payment of interest on Bridge Notes........................... 250,000
Repayment of loan from director............................... 1,000,000
Additional equipment and capital improvements................. 4,300,000
Marketing and sales........................................... 1,350,000
Product development........................................... 500,000
Working capital and general corporate purposes................ 3,755,000
-----------
Total..................................................... $15,155,000
-----------
-----------
</TABLE>
REPAYMENT OF DEBT
The Company plans to use approximately $4 million of the net proceeds to
repay Bridge Notes. The Bridge Notes were issued in October 1995, bear interest
at the rate of 11.75% and are due on the closing of this Offering. The Company
will pay accrued interest of approximately $250,000 to the Bridge Note holders
at the closing of this Offering. In addition, the Company will repay a loan
received from a director during 1995 in the original amount of $1.5 million,
which bears interest at the prime rate plus 3.75%. The outstanding principal
balance at March 31, 1996 was $1,166,667. Due to scheduled principal payments to
be made by the Company between March 31, 1996 and the date of this Offering, the
balance of the note to the director is anticipated to be $1 million at the
effective date of this Offering. While the note matures on May 10, 1997, the
Company intends to prepay this obligation because of its high coupon rate. There
is no penalty for prepayment. See "Certain Transactions."
ADDITIONAL EQUIPMENT AND CAPITAL IMPROVEMENTS
The Company intends to use approximately $4.3 million of the net proceeds to
construct additional manufacturing equipment, including completion of a second
coating line and installation of a third coating line, and improve existing
equipment in order to manufacture additional products and product line
extensions. Such equipment will include, but not be limited to, cleaning and
material handling equipment to increase the efficiency and quality of production
lines. A portion of this amount will also be used for clean room and facility
improvements intended to increase operational efficiencies. See "Business --
Manufacturing."
MARKETING AND SALES
The Company plans to use approximately $1,350,000 of the net proceeds for
product marketing. The anticipated expenditures will be used for developing a
marketing and sales staff, attending trade shows and other product promotion
activities. See "Business -- Sales and Distribution."
PRODUCT DEVELOPMENT
The Company plans to use approximately $500,000 of the net proceeds to
enhance existing products, and to develop new products for existing and
developing markets. See "Business -- Research and Development."
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES
The Company plans to use the portion of the proceeds designated for working
capital and general corporate purposes to accommodate increased inventory and
receivables and to add approximately six people for warehousing, distribution
and administrative support.
Pending utilization of the net proceeds of this Offering, the Company plans
to invest such net proceeds in short term investments, including certificates of
deposit and interest bearing bank accounts.
10
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any earnings for use in the operation
and expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company is prohibited from
paying dividends under the provisions of a credit agreement. See Note 4 to
Financial Statements.
DILUTION
The following gives effect to the issuance of the Shares offered hereby at
an assumed Price to Public of $8.50 per Share, but does not give effect to any
exercise of outstanding options or warrants to purchase an aggregate of
1,039,850 shares of Common Stock at an average exercise price of $4.46 per
share. The net tangible book value of the Company's Common Stock at March 31,
1996 was $3,043,399 or $1.07 per share. "Net tangible book value" represents the
tangible assets less total liabilities of the Company, and "net tangible book
value per share" was determined by dividing the net tangible book value of the
Company by the number of shares of Common Stock outstanding on March 31, 1996.
The number of shares of Common Stock outstanding at March 31, 1996 reflects a
1-for-2 reverse split of Common Stock to become effective immediately prior to
the effectiveness of this Offering. See "Capitalization." "Net tangible book
value dilution per Share" represents the difference between the Price to Public
per Share and the net tangible book value per share after this Offering. Without
taking into account any changes in the Company's net tangible book value per
share after March 31, 1996, other than to give effect to the sale of the Shares
offered hereby (net of underwriting commissions, estimated offering expenses of
$400,000 and the write-off of deferred financing costs of $131,990), the net
tangible book value of the Company at March 31, 1996 would have been $18,309,910
or $3.79 per share. This represents an immediate increase in net tangible book
value to the existing shareholders of $2.72 per share and an immediate dilution
to purchasers of the Shares of $4.71 per Share, as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Assumed Price to Public per Share.................................. $ 8.50
Net tangible book value per share at
March 31, 1996.................................................. $ 1.07
Increase per share attributable to Offering...................... 2.72
---------
Net tangible book value per share after Offering................... 3.79
---------
Net tangible book value dilution per Share to new investors........ $ 4.71
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, the difference between
the number of shares of Common Stock purchased from the Company by existing
shareholders and by new investors in this Offering, the total consideration paid
to the Company and the average price paid per share. The table assumes that no
Shares are purchased in this Offering by existing shareholders. To the extent
existing shareholders purchase in this Offering, their percentage ownership,
total consideration and average consideration per share will be greater than is
shown.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ --------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......................... 2,837,323 58.6% $ 7,572,095 30.8% $ 2.67
New investors.................................. 2,000,000 41.4% $ 17,000,000 69.2% $ 8.50
----------- ----- -------------- -----
Total...................................... 4,837,323 100.0% $ 24,572,095 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to reflect the sale by the Company of the Shares
offered hereby at an assumed Price to Public of $8.50 per Share and the
application of the net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL (1) AS ADJUSTED
-------------- --------------
<S> <C> <C>
Short-term debt:
Bridge Notes.................................................................... $ 4,000,000 $ 0
Loan from director, current..................................................... 1,000,000 0
Lines of credit................................................................. 2,191,480 2,191,480
Current maturities of long-term obligations..................................... 290,864 290,864
-------------- --------------
Total short-term debt......................................................... $ 7,482,344 $ 2,482,344
-------------- --------------
-------------- --------------
Long-term debt, less current portion.............................................. $ 290,318 $ 290,318
Shareholders' equity:
Common Stock, no par value, 24,000,000 shares authorized; 2,837,323 shares
issued and outstanding; 4,837,323 shares issued and outstanding, as
adjusted (1)(2)................................................................ 6,671,217 21,826,217
Accumulated deficit (3)......................................................... (3,357,832) (3,489,822)
-------------- --------------
Total shareholders' equity.................................................... 3,313,385 18,336,395
-------------- --------------
Total capitalization........................................................ $ 3,603,703 $ 18,626,713
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) After giving effect to a 1-for-2 reverse stock split which is to become
effective immediately prior to the effectiveness of this Offering.
(2) Does not include: (i) 20,000 shares reserved for issuance at $2.00 per share
upon the exercise of outstanding warrants which expire in August 1997; (ii)
49,250 shares reserved for issuance at $2.00 per share upon the exercise of
outstanding warrants which expire in November 1997; (iii) 145,109 shares
reserved for issuance at $2.00 per share upon the exercise of outstanding
warrants which expire in March 1998; (iv) 90,000 shares reserved for
issuance at $2.00 per share upon the exercise of outstanding warrants which
expire in September 1998; (v) 23,444 shares reserved for issuance at $4.00
per share upon the exercise of outstanding warrants which expire in November
1998; (vi) 44,519 shares reserved for issuance at $4.00 per share upon the
exercise of outstanding warrants which expire in December 1998; (vii) 23,028
shares reserved for issuance at $4.00 per share upon the exercise of
outstanding warrants which expire in January 1999; (viii) 3,250 shares
reserved for issuance at $4.00 per share upon the exercise of outstanding
warrants which expire in February 1999; (ix) 400,000 shares reserved for
issuance at 75% of the Price to Public upon the exercise of outstanding
warrants which expire in October 2000; (x) 40,000 shares reserved for
issuance at the Price to Public upon the exercise of outstanding warrants to
the Representative which expire in October 2000; (xi) 75,000 shares reserved
for issuance at $4.00 per share upon the exercise of outstanding warrants
which expire in May 2003 (xii) 625,000 shares reserved for issuance upon the
exercise of options issued and to be issued under the Company's 1992 Stock
Option Plan; (xiii) 50,000 shares reserved for issuance at $4.00 per share
upon the exercise of options granted to outside directors, of which 30,000
are currently exercisable; (xiv) 160,000 shares reserved for issuance upon
the exercise of warrants to be issued to the Representative in connection
with this Offering; or (xv) the option granted to the Underwriters to
purchase an additional 300,000 shares to cover over-allotments, if any. See
"Management -- Executive Compensation," "Certain Transactions," "Principal
Shareholders" and "Underwriting."
(3) As adjusted, reflects the write-off of deferred financing costs of $131,990
incurred in connection with the issuance of the Bridge Notes.
12
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994 and
1995 and the balance sheet data at December 31, 1994 and 1995 are derived from
and are qualified by reference to, and should be read in conjunction with the
more detailed audited Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. The auditors' report contains an
explanatory paragraph referring to substantial doubt as to the Company's ability
to continue as a going concern. The information set forth below should be read
in conjunction with the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which follows this section.
The statement of operations data for the three months ended March 31, 1995 and
1996, and the balance sheet data at March 31, 1996 are derived from the
unaudited financial statements of the Company included elsewhere in this
Prospectus, which statements reflect, in the opinion of management of the
Company, all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair statement of the financial data for such periods. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results which may be expected for the entire year
ending December 31, 1996, or for any other interim period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
----------------------------- --------------------------
1994 1995 1995 1996
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 914,736 $ 3,362,818 $ 217,595 $ 1,137,950
Cost of sales....................................... 1,016,628 2,048,522 96,933 676,782
-------------- ------------- ----------- -------------
Gross profit (loss)............................... (101,892) 1,314,296 120,662 461,168
-------------- ------------- ----------- -------------
Operating expenses:
Process and product development................... 647,639 353,636 72,451 84,657
General and administrative........................ 418,938 462,686 97,893 164,479
Selling and marketing............................. 174,326 161,531 28,026 72,165
-------------- ------------- ----------- -------------
Total operating expenses........................ 1,240,903 977,853 198,370 321,301
-------------- ------------- ----------- -------------
Operating income (loss)............................. (1,342,795) 336,443 (77,708) 139,867
Interest expense, net............................... (62,240) (286,430) (17,323) (60,838)
-------------- ------------- ----------- -------------
Net income (loss)................................... $ (1,405,035) $ 50,013 $ (95,031) $ 79,029
-------------- ------------- ----------- -------------
-------------- ------------- ----------- -------------
Net income (loss) per common and common equivalent
share (1)(2)....................................... $ (.47) $ .02 $ (.03) $ .02
-------------- ------------- ----------- -------------
-------------- ------------- ----------- -------------
Weighted average common and common equivalent shares
outstanding (1)(2)................................. 3,015,640 3,334,114 3,334,114 3,334,114
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................................. $ 1,307,508 $ 6,978,799 $ 6,413,633
Current liabilities............................................ 2,447,494 10,195,516 10,834,220
Working capital (deficit)...................................... (1,139,986) (3,216,717) (4,420,587)
Total assets................................................... 6,149,863 14,192,655 14,437,923
Long-term debt................................................. 528,076 762,783 290,318
Accumulated deficit............................................ (3,486,874) (3,436,861) (3,357,832)
Shareholders' equity........................................... 3,174,293 3,234,356 3,313,385
</TABLE>
- ------------------------
(1) Reflects a 1-for-2 reverse stock split of Common Stock to become effective
immediately prior to the effectiveness of this Offering.
(2) See Note 2 to Financial Statements for determination of weighted average
common and common equivalent shares outstanding.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has developed a proprietary technology for applying vacuum
deposited thin film coatings onto substrates such as glass, plastic and metal.
These thin film coatings consist of microscopically thin layers of metal and
metal oxide materials which alter the optical, electrical or durability
properties of the substrate material. The Company's technology has application
to many products, including transparent electrically conductive metal oxide
coatings used in liquid crystal, electroluminescent and gas plasma displays;
glare reducing and radiation blocking filters for use with computer monitors and
television screens; low reflection and fade protection picture framing glass;
low reflection and ultraviolet light blocking coatings for eyeglass lenses; and
ultra-high reflectivity mirrors for use in photocopiers, facsimile machines and
bar code scanners. The Company's proprietary process is known as FUZION planar
magnetron sputtering. Management believes this process is more efficient and
less costly than the more widely used chemical vapor deposition and evaporation
type coating processes for applying thin film coatings. The Company's FUZION
process is capable of producing "ultra-high" grade thin film coatings, as
defined in U.S. government standards. Most high quality thin film coatings are
applied in a low volume batch type process. The FUZION process is a continuous
"in-line" production system which permits the Company to coat larger sized
substrates while achieving a higher level of productivity and quality than that
of competing technologies of which the Company is aware. Based on its knowledge
of the technologies employed by its competition, the Company believes it can
produce thin film coatings at production rates that are several times faster
than the rates achievable by competing technologies.
From incorporation in May 1991 to June 1995, the Company's primary business
consisted of developing process and product technology, modifying coating
equipment acquired by the Company to utilize the FUZION technology, designing
and building additional equipment to maximize production efficiencies and
product development. During the second half of 1993 through June 1994, the
Company engaged in limited production of TN grade ITO coated glass.
In July 1994, management decided that it was necessary to redesign and
rebuild its first FUZION coating line (which the Company refers to as "P-1") to
achieve higher productivity, reduce lost production due to unscheduled
maintenance, improve product quality and expand product capability. As a result,
the Company suspended production operations and undertook a complete rebuild and
upgrade of its P-1 FUZION coating line.
Manufacturing operations were restarted in July 1995. During the remainder
of 1995 the Company scaled up its production operations while continuing to
upgrade the capacity and capability of the P-1 line. Beginning in January 1996
the Company commenced further upgrades of its P-1 line and facilities in order
to make them suitable for production of higher margin super-twisted nematic
("STN") grade ITO coated glass, anti-reflection and enhanced reflection mirror
products. Due to limited production and extensive redesign of manufacturing
equipment and facilities in 1994 and 1995 operating results of 1995 are not
comparable to 1994, and results for fiscal 1994 and 1995 are not indicative of
the results to be expected in future periods.
In August 1994, the Company entered into a joint venture with a Chinese
company for the production of TN grade ITO coated glass in Shenzhen, China. The
Company will sell to the joint venture a coating system and technology limited
to the production of TN grade ITO coated glass. Under the terms of the joint
venture agreement, the Company will be paid a net purchase price of $5,487,000
in cash for the equipment and will also receive a 40% equity interest in the
joint venture. The joint venture is expected to commence operations by the end
of 1996. The Company is not required to provide future capital support to the
joint venture; however, it has guaranteed $400,000 of the purchase price of the
joint venture's building. Management is not currently able to predict the
14
<PAGE>
amount of future distributions or earnings, if any, the Company will receive
from the joint venture. The Company is not relying on any material distributions
or earnings from the joint venture in the foreseeable future. See "Business --
China Joint Venture."
The Company is not contractually obligated to shift production of TN grade
ITO coated glass products to the joint venture. Management expects that U.S.
production of TN grade ITO coated glass for use in Asia will gradually be
shifted to Asia over the next several years. As a result of this expected shift
management intends to devote an increasing level of its efforts to serving the
STN grade ITO coated glass, anti-reflection and enhanced reflection mirror
product needs of its existing and future customers. There can be no assurance,
however, that the Company will be successful in these efforts.
The Company's Financial Statements have been prepared assuming that the
Company will continue as a going concern. The report of the independent auditors
on the Company's Financial Statements contains an explanatory paragraph
concerning the Company's ability to continue as a going concern. See Note 1 to
the Company's Financial Statements for a description of the factors related to
going concern issues and management's plans regarding operating losses and
liquidity. Management believes that upon the successful completion of this
Offering, the Company will have the cash resources to meet its current
obligations.
Except for the historical information contained herein, the matters
discussed in this Prospectus are forward looking statements which involve risks
and uncertainties, including but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed herein.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994
REVENUES. Revenues for the year ended December 31, 1995, were $3,362,818
compared to $914,736 for 1994, an increase of 268%. The revenue from both years
was generated almost entirely by sales of TN grade ITO coated glass.
Substantially all of the increase in 1995 was attributable to increased sales
volume. Management suspended production operations in July 1994 in order to
redesign the Company's equipment and facility to improve production efficiencies
and capabilities, and to allow the Company to produce higher margin STN grade
ITO coated glass, anti-reflection and enhanced reflection mirror products.
Therefore, there were no significant sales in the second half of 1994. The
Company resumed production of TN grade ITO coated glass in July 1995 to take
advantage of the increased market demand for this product and to generate
revenues to fund continuing improvements to production equipment and facilities.
Production during 1995 was limited to allow for the simultaneous modification
and upgrades to the equipment. These improvements, which will enable the Company
to produce both TN and STN grades of ITO coated glass on its existing
manufacturing line, will be substantially completed in the first half of 1996,
and, therefore, management expects growth in revenue from the sale of TN and STN
grade ITO coated glass. Due to limited production in 1995, sales were made to a
small number of customers who purchased all of the Company's production output;
additional sales and customers were not pursued during this period because of
limited production capacity.
During 1995 sales of ITO coated glass to the Company's two largest customers
accounted for 57% and 28% of total revenue, respectively. During 1994, one of
these customers accounted for 26% of total revenue and a third customer
accounted for 32% of total revenue.
The Company has begun installing a second production line that will be
dedicated to the production of anti-reflection and enhanced reflection mirror
products. This line is scheduled to be operational in the second quarter of
1996. The amount of revenue which will be realized from the sale of
anti-reflection and enhanced reflection mirror products is difficult to predict
as the Company has not begun selling commercial quantities of these products,
and because unforeseen production problems may delay the Company's ability to
manufacture these products.
15
<PAGE>
GROSS PROFIT (LOSS). Gross profit was $1,314,296 in 1995 compared to a
gross loss of $101,892 in 1994. The increase in gross profit was due primarily
to the revenue increases discussed above. In addition, gross profit as a
percentage of sales increased to 39%, compared to a gross loss in 1994. Costs
and margins for TN grade ITO coated glass are heavily influenced by substrate
costs and production cycle time. To date, the Company's substrate costs have
been related predominantly to a special grade of glass used in TN grade ITO
coated glass. The price of this substrate material is expected to remain stable
for the foreseeable future due to newly added industry capacity. Equipment
improvements to be completed in 1996 are expected to significantly improve the
Company's production cycle time and capacity. Management believes that this
change, coupled with the introduction of anti-reflection products which
incorporate lower cost substrates, and the introduction of higher margin STN
grade ITO coated glass products, should provide for continued improvement in the
Company's gross profit.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to
$353,636 in 1995 from $445,480 in 1994. Research and development expenses do not
include equipment design and engineering costs. The decrease in research and
development expenses was due primarily to the transfer of certain personnel from
research and development to operations during 1995. The Company's research staff
consists of four Ph.D. research scientists in the fields of physics and
inorganic chemistry. The Company is committed to continuing research to advance
its technology and develop new products and uses for its technology and expects
that future research and development expenses, on a dollar basis, will be
comparable to 1995 levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $462,686 in 1995 from $418,938 in 1994. This increase was due
primarily to the addition of personnel associated with the administrative
requirements of managing the Company's expanded operations. As a percentage of
revenue, general and administrative expenses decreased to 14% in 1995 from 46%
in 1994 as revenues increased. The Company expects general and administrative
expenses to increase in 1996, but expects that these expenses will decrease as a
percentage of revenue.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
slightly to $161,531 in 1995 from $174,326 in 1994. The 1994 expenses consisted
primarily of commissions, consulting fees and travel related to the sales of the
Company's ITO coated glass products and establishment of the Chinese joint
venture. Commission expense in 1995 was negligible because most of the Company's
sales were direct. Selling expenses in 1995 consisted primarily of trade show
related expenses and other promotional costs incurred to introduce the Company's
products. The Company is planning to add selling and marketing personnel in
1996, and to increase selling and marketing expenditures to promote its
products. As sales increase in future periods, selling agent commissions are
expected to increase.
NET INTEREST EXPENSE. The Company had net interest expense of $286,430 in
1995 versus net interest expense of $62,240 in 1994. The increase in 1995 was
attributable to a $1.5 million loan, obtained from a director of the Company,
which bears interest at the prime rate plus 3.75%; a $500,000 Export Import Bank
of the United States ("EXIM") guaranteed export line of credit which bears
interest at the prime rate plus 1%; and $4 million of bridge financing which
bears interest at 11.75% per annum. The Company has also financed certain
capital asset acquisitions through capital lease obligations and has expensed a
portion of these lease payments as interest expense. In 1994 interest expense
related primarily to an SBA loan that was retired in 1995, and capital lease
obligations. The Company intends to retire the majority of its outstanding debt
with a portion of the net proceeds of this Offering; net interest expense in
1996, therefore, is expected to be less than in 1995.
NET INCOME (LOSS). The Company reported net income of $50,013 in 1995
compared to a net loss of $1,405,035 in 1994. This improvement was due to
increased revenue from sales of ITO coated glass.
FOR THE THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995
REVENUES. Revenues for the first three months of 1996 were $1,137,950
compared to $217,595 for the first three months of 1995, an increase of 423%.
The increase in revenues between periods was due primarily to the the suspension
of production operations in 1994. In the first three months of
16
<PAGE>
1995, sales consisted of ITO coated glass the Company had held in inventory
prior to the suspension of production operations. Production operations were
resumed in July 1995 on a limited basis to allow for the simultaneous production
of TN grade ITO coated glass and the continuing upgrade of equipment and
facilities.
These limited operations continued through the first three months of 1996.
During the first three months of 1996, the Company commenced sample runs of its
STN grade ITO coated glass, enhanced reflection mirrors and other coated
products for prospective customers. These sample runs did not result in revenues
for the Company. Several customers have completed their tests on these samples
and have placed orders for these products. Management expects continued growth
in revenues in 1996 from the sale of TN grade ITO coated glass and added
revenues from the sale of STN grade ITO coated glass and other coated products.
GROSS PROFIT (LOSS). The gross profit for the first three months of 1996
was $461,168 compared to $120,662 in the first three months of 1995, an increase
of 282%. The increase in gross profit was due primarily to the revenue increases
discussed above. Gross profit as a percentage of revenues decreased from the
first three months of 1995 compared to the first three months of 1996. Sales in
the first three months of 1995 were of coated glass that had been devalued due
to uncertainty regarding its salability. In the first three months of 1996 gross
profit was positively impacted by improvements in the utilization of coating
source target material used to produce ITO coated glass products. This benefit
was partially offset by the costs associated with commencement of sample runs
for which the Company received no revenues. Management believes that equipment
improvements to be completed in 1996 will significantly improve production cycle
times, thereby decreasing production costs and improving gross profits. In
addition, the introduction of higher margin STN grade ITO coated glass products,
enhanced reflection mirrors, and anti-reflection products should provide for
improvement in the Company's gross profit.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
three months of 1996 were $84,657 compared to $72,451 for the first three months
of 1995, an increase of 17%. The increase is due primarily to the addition of a
Ph.D. level research scientist during the third quarter of 1995. The Company is
continuing research efforts to advance its technology and to develop new
products. Management expects that research and development expenses for the
remaining quarters of 1996 will be comparable to the first three months of 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the first three months of 1996 were $164,479 compared to $97,893 in 1995.
This increase was due primarily to the addition of personnel associated with the
administrative requirements of managing the Company's expanded operations. This
represents a decrease, as a percentage of sales, from 45% in 1995 to 14% in
1996. The Company expects general and administrative expenses to increase in
1996 as operations expand; however as a percentage of revenues, general and
administrative expenses are expected to decrease.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the
first three months of 1996 were $72,165 compared to $28,026 for the first three
months of 1995. The increase was due to trade show expenses and other
promotional costs incurred to introduce the Company's new products. This
represents a decrease, as a percentage of sales, from 13% in 1995 to 6% in 1996.
The Company is planning to add sales and marketing personnel and to increase
promotional expenditures as it introduces new products. In addition, commission
expenses are expected to increase as sales increase.
NET INTEREST EXPENSE. Net interest expense for the first three months of
1996 was $60,838 compared to $17,323 for the first three months of 1995. The
increase is attributable to the addition of credit facilities which were not in
place during the first three months of 1995.
NET INCOME (LOSS). The Company reported net income of $79,029 for the first
three months of 1996 compared to a net loss of $95,031 for the first three
months of 1995. This improvement was due to the increased revenue from the sales
of TN grade ITO coated glass.
17
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), a change in ownership of greater than 50% of the Company
within a three year period results in an annual limitation on the Company's
ability to utilize its net operating loss ("NOL") carryforwards which accrued
during the tax periods prior to the change in ownership. As of December 31,
1995, the Company had an NOL carryforward of approximately $4 million which
expires in 2006 through 2009. Due to certain ownership changes which occurred
during the year ended December 31, 1993, the NOL carryforwards of $700,000
incurred through February 1993, which can be utilized by the Company on an
annual basis, are limited to approximately $50,000. The annual limitation may be
increased for any built-in gains recognized within five years of the date of the
ownership change. Utilization of the approximately $3.3 million of NOL
carryforwards incurred after February 1993 is not currently limited under
Section 382 of the Code and is not expected to be limited as a result of this
Offering. However, the Company's ability to use its NOL carryforwards may be
further limited by subsequent issuances of common stock.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND OPERATING ACTIVITIES. The Company had negative working
capital of $3,216,717 at December 31, 1995 and $4,420,587 at March 31, 1996,
both of which included Bridge Notes of $4 million and a loan from a director of
$1,416,667 ($1,166,667 at March 31, 1996) which the Company intends to repay
from the net proceeds of this Offering.
The Company increased its investment in inventory from $352,380 to
$1,420,048, and its accounts receivable from $171,740 to $808,549 from December
31, 1994 to December 31, 1995 due to the increase in sales and production from
1994 to 1995. Accounts receivable decreased to $648,446 at March 31, 1996.
Inventory decreased from $1,420,048 at December 31, 1995 to $1,218,895 at March
31, 1996 as a result of the Company allowing inventory which had been built up
in late 1995 to decrease to a level more appropiate for its production
requirements. Management anticipates the Company's investment in inventory and
accounts receivable will increase during 1996 as production and sales increase.
Substantially all sales to date were to customers located in Asian countries.
The Company's sales are denominated in U.S. dollars. The Company currently
requires letters of credit to support substantially all sales. The Company's
investment in accounts receivable may increase as the Company expects to extend
standard U.S. credit terms to domestic customers. The Company's investment in
accounts receivable and inventory decreased during 1994 due to the suspension of
production in that year.
During 1995 and the first three months of 1996, the Company used cash of
$2,607,031 and $989,782, respectively, to fund work in process for the sale of
equipment to the Chinese joint venture. Cash provided by operating activities in
1994 included the receipt of a down payment of $1,535,000 from the Company's
Chinese joint venture partner. Management anticipates that the Company will
complete its sale of equipment to the joint venture during 1996. The Company
will receive approximately $3,300,000 upon shipment of the coating system and
$600,000 during the latter half of 1996 if the equipment meets all final
acceptance tests at the joint venture site. The related line of credit
borrowings, which are due May 31, 1996, will be repaid from these proceeds. The
Company has guaranteed $400,000 of the purchase price of a building which the
joint venture is obligated to pay in the second and third years of its
operation.
INVESTING ACTIVITIES. The Company used cash of $1,983,422 and $2,474,835
for property and equipment additions in 1994 and 1995, respectively. The
internal costs associated with the construction or improvement of manufacturing
lines which have been capitalized in 1994 and 1995 were $1,039,407 and
$1,007,793, respectively. The costs capitalized consisted primarily of direct
labor and supplies used in construction. The Company used cash of $697,201 and
$877,916 for property and equipment additions during the first three months of
1995 and 1996, respectively. The internal costs associated with the construction
or improvement of manufacturing equipment and facilities which have been
capitalized in the first three months of 1995 and 1996 were $438,930 and
$161,000,
18
<PAGE>
respectively. The Company anticipates that capital expenditures for the
remainder of 1996 will be approximately $3.2 million, which will be used to
purchase and install additional manufacturing equipment. These 1996 capital
expenditures will be funded entirely from the net proceeds of this Offering. The
Company is not obligated to, nor does it expect to, provide any financial
resources to its Chinese joint venture for the manufacture, sales or marketing
of TN grade ITO coated glass in 1996 or future periods.
FINANCING ACTIVITIES. The initial funding of the Company was obtained
through the sale of Common Stock which resulted in net proceeds to the Company
of $875,070. In early 1993, the Company sold additional shares of Common Stock
which resulted in net proceeds to the Company of $2,507,392. These proceeds were
used to finance the acquisition of fixed assets and to fund the Company's
research and development efforts. In late 1993 and early 1994, the Company sold
additional shares of Common Stock which resulted in net proceeds to the Company
of $3,233,705. These proceeds were used to finance equipment additions and
improvements, fund continuing research and development, pilot production and
working capital.
During 1995, the Company secured a $1.5 million loan from a director of the
Company. The note is subject to periodic payments of principal and accrued
interest at 3.75% over prime, and is payable in full by May 10, 1997. This loan
is secured by substantially all equipment and intellectual property of the
Company. The Company intends to retire the outstanding balance of this debt with
a portion of the net proceeds of this Offering.
In May 1995, the Company obtained a $2 million transaction-specific line of
credit through its bank, guaranteed by the EXIM. This note bears interest at 1%
over prime and is secured by equipment held for sale and all current assets of
the Company. The loan agreement prohibits the payment of dividends, repurchase
of Common Stock, and requires the lender's written consent to incur additional
debt. The loan agreement also requires the Company to maintain profitability for
each quarterly accounting period commencing July 1, 1995, maintain a tangible
net worth (as defined in the agreement) of $2.8 million, and maintain a ratio of
total nonsubordinated liabilities to tangible net worth of 2.1:1. Subordinated
debt of $4 million is added to total shareholders' equity to calculate tangible
net worth for purposes of the loan agreement. As of December 31, 1995 and March
31, 1996, the Company was in compliance with all terms of the loan agreement.
The balance outstanding at December 31, 1995 was $1,916,480 ($1,966,480 at March
31, 1996). This note matures on May 31, 1996. The note will be repaid from the
proceeds of the equipment sale to the Chinese joint venture. If the sale of the
equipment is not completed prior to the maturity date of the note, the Company
intends to seek extension of the maturity.
In September 1995, the EXIM guarantee was extended to a $500,000 working
capital line of credit which is available to finance products for export. This
note is subject to the same terms, conditions, and security as the
transaction-specific note and will expire on May 31, 1996. The Company currently
plans to seek renewal of this line of credit with similar terms and conditions.
There can be no assurance, however, that the Company will be successful in
obtaining such renewal. Upon completion of this Offering, the Company does not
believe there would be a material adverse impact on its financial condition or
results of operations as a result of a nonrenewal of this line of credit.
In October 1995, the Company issued $4 million of Bridge Notes. The Bridge
Notes bear interest at 11.75% per annum, with interest and principal due the
earlier of October 15, 1996 or the closing of this Offering. The Bridge Notes
are secured by substantially all of the Company's assets, subject to the
security interests of the director who made the loan described above and the
Company's bank lender.
Management expects the net proceeds of this Offering (after repayment of the
Bridge Notes and the loan from a director) together with anticipated operating
revenues will be sufficient to fund the Company's capital expenditure,
marketing, product development and working capital requirements for at least 24
months. In the event this Offering is not completed, the Company will be
required to seek other sources of debt or equity financing to meet its capital
requirements. There can be no
19
<PAGE>
assurance that additional financing will be available or be available on terms
acceptable to the Company. Management expects that, in the future, cash in
excess of current requirements will be invested in investment grade interest
bearing securities.
Inflation is not expected to have a material impact on the Company's results
of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions of SFAS 123 to such
arrangements. SFAS 123 is required to be adopted for reporting purposes by the
Company in fiscal 1996. The Company is currently evaluating whether or not it
will change to the recognition provisions of SFAS 123 and has not yet performed
the required calculations. The fair value recognition and measurement provisions
of SFAS 123 for stock-based arrangements with nonemployees is not expected to
have a significant impact on the Company as such transactions were accounted for
on the fair value basis during fiscal 1995 and 1994.
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BUSINESS
GENERAL
Photran Corporation ("Photran" or the "Company") develops, manufactures and
markets innovative high performance optical and electrically conductive thin
film coated products. The Company has developed a unique, proprietary process
technology known as FUZION planar magnetron sputtering. This process is used to
apply microscopically thin layers of metal, metal oxide, nitride, boride,
carbide, floride and diamond-like coatings to a wide variety of substrate
materials. These thin film coatings provide essential optical, electrical or
durability properties to a substrate material such as glass, metal or plastic.
The Company believes its FUZION process represents a fundamental
breakthrough in thin film coating technology. The Company's FUZION process is
capable of producing "ultra-high" grade thin film coatings, as defined in U.S.
government standards. Most high quality thin film coatings are applied in a low
volume batch type process. The FUZION process is a continuous "in-line"
production system which permits the Company to coat larger sized substrates
while achieving a higher level of productivity and quality than that of
competing technologies of which the Company is aware. Based on its knowledge of
the technologies employed by its competition, the Company believes it can
produce thin film coatings at production rates that are several times faster
than the rates achievable by competing technologies.
The Company began commercial scale production on its first FUZION coating
line in July 1995. The Company's first product was its PCO brand of indium tin
oxide ("ITO") coated glass. ITO coated glass consists of a high quality sheet of
thin glass, which the Company coats with a transparent electrically conductive
ITO coating. ITO coated glass is a principal component of flat panel displays.
These displays are used in watches, calculators, lap top computers and consumer
electronics devices. The Company believes it has a strong technology position in
the manufacture of ITO coated glass for the twisted nematic ("TN") segment of
the flat panel display market. To further its market position and to attempt to
secure higher margins, the Company has recently introduced a new ITO coated
glass product for the high resolution super-twisted nematic ("STN") segment of
this market.
In the second quarter of 1996, the Company is scheduled to commence
commercial production on its second FUZION coating line. This line will be used
to produce the Company's ZeroRay glare and radiation control filters for use
with computer monitors and televisions, as well as other anti-reflection
products and enhanced reflection mirrors. Additionally, during the second half
of 1996 the Company intends to install a third FUZION coating line for the
production of ArtGlas, an anti-reflection, ultraviolet light blocking picture
framing glass.
TECHNOLOGY
The Company's core manufacturing technology is based on a vacuum coating
process known as planar magnetron sputtering. This process is used to apply
microscopic thicknesses of thin film coatings onto a variety of substrate
materials. The coating process occurs in a specially designed vacuum chamber.
The source material for the coating is normally a metal plate referred to as the
"target," which is mounted on a device called a "magnetron sputtering cathode."
The cathode and target assembly become the negative terminal in an electrical
circuit. A specially designed regulated power supply energizes the cathode and
target providing a source of electrons. A small volume of argon gas is
introduced into the vacuum chamber near the cathode. Electrons emitted from the
cathode collide with these argon atoms causing the argon atoms to become
positively charged or "ionized." The negative charge on the target provides a
strong electrical attraction for the argon gas ions causing them to strike the
target with very high velocity. The kinetic energy which they transfer to the
target surface results in an atom of the target material being "sputtered" off
the surface. The sputtered atom travels at a very high speed toward the
substrate material which is passing through the vacuum coating chamber. The
sputtered atom strikes the substrate surface with sufficient force to form a
strongly bonded coating. This bonding is superior to that achieved by chemical
vapor deposition and evaporation type coating processes.
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The Company has developed what it believes to be significant enhancements to
the basic planar magnetron sputtering process. The patented FUZION technology
increases the production rate of a basic planar magnetron system by increasing
the sputtering rate of the target (i.e., the rate at which the material is
removed from the target) and thus the rate at which the material is deposited on
the substrate. "Ultra-high" grade thin film coatings, which form the functional
element of a wide variety of products, have traditionally been applied using
batch chemical vapor deposition and evaporation type coating processes. The
FUZION technology applies high quality coatings with excellent adhesion and
durability in a continuous in-line system.
The Company believes that the FUZION process provides lower costs of
manufacturing and equal or superior product quality compared to alternative
technologies. The major cost components of all of the Company's products (in
order of magnitude) are depreciation of production equipment, facilities costs,
direct and indirect labor, general factory overhead, substrate cost and target
material cost. Of these product cost components, all but substrate cost are
significantly impacted by the throughput of the coating line. The Company
believes that the production rates of its FUZION process, as operating in its
existing line, range from two to ten times faster than rates known to have been
achieved by its competitors. This belief is based upon a comparison of the
FUZION production rates with published production rates of the best available
commercial equipment. The Company further believes, based on its knowledge of
the industry, that most competitors are operating equipment which has even lower
production rates than those of the best available commercial equipment.
In addition to lower manufacturing costs due to higher production rates, the
Company believes the FUZION process provides equal or superior product quality
compared to competing processes. The Company bases this belief on the fact that
the FUZION technology also includes the Company's QTROL-Registered Trademark-
closed loop automated process control system. The QTROL System combines
commercially available process measurement devices with proprietary electronics,
optics and computer software to provide real time measurement and control of all
critical process parameters. The best available commercial coating equipment
does not provide such process control hardware and software. The Company
believes that it is essential to have such systems to achieve both high quality
and high manufacturing yields.
STRATEGY
The Company's strategy is to leverage the competitive cost, quality and
performance advantages, which it believes the FUZION process provides, to secure
a strong market position in the manufacture and sale of optical and electrically
conductive thin film products.
To achieve this strategy the Company is implementing the following plans:
- Focusing market development resources on high volume applications for
optical and electrically conductive thin film products where the Company's
FUZION process and product technologies provide significant competitive
advantages.
- Continuously improving product and manufacturing technologies to build and
maintain competitive advantages.
- Maintaining highly disciplined cost controls to insure that the Company
achieves competitive cost advantages.
PRODUCTS AND MARKETS
Photran is targeting markets for optical and electrically conductive thin
film products where its FUZION process can provide the Company with a
competitive advantage. The Company strives to develop and manufacture products
incorporating innovative or enhanced features which address current product
shortcomings or the needs of newly developing markets.
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The following is a summary of the initial products the Company will supply
and the general markets which these products serve:
<TABLE>
<CAPTION>
PRODUCT/DESCRIPTION MARKET
- ---------------------------------------- --------------------------------------
<S> <C>
ITO PRODUCTS
PCO AND LCM transparent electrically All types of flat panel displays and
conductive glass sheets resistive and capacitive touch screens
ANTI-REFLECTION PRODUCTS
ZERORAY glass panels with A/R and New and aftermarket computer monitors,
radiation control coatings lap top displays and televisions
UVAR plastic eyeglass lenses with Prescription and nonprescription
glare reduction, enhanced night eyeglass lenses
vision, ultraviolet light blocking
and abrasion resistant properties
POLARCLEAR polarizing filters with All liquid crystal displays
glare reduction, contrast enhancement
and ultraviolet light blocking
coatings
ARTGLAS glare reduction and Glass for framing artwork,
ultraviolet light blocking picture photographs, and display cases
framing glass
ENHANCED REFLECTION MIRROR PRODUCTS
PMAX Ultra-high grade optical mirrors Projection televisions, photocopiers,
laser and bar code scanners, overhead
projectors and other specialty mirror
applications
</TABLE>
ITO PRODUCTS AND MARKETS
To date, the Company's principal product has been its PCO brand TN grade ITO
coated glass. In April 1996 the Company commenced shipments of its LCM brand
coated glass for STN grade LCDs.
PCO BRAND TN GRADE AND LCM BRAND STN GRADE ITO COATED GLASS. The first
product the Company introduced was its PCO brand TN grade ITO coated glass which
is the primary material used to construct many types of flat panel displays. The
most common type of flat panel display is the TN grade liquid crystal display
("LCD"), which is used in watches, calculators, electronic games and most types
of inexpensive consumer electronics devices. These displays, which incorporate
TN grade ITO coated glass, are produced in very high volume by an estimated 200
display manufacturing companies located in Japan and other Asian countries.
The Company entered the TN grade ITO coated glass market because it provided
a high volume, high growth market which could be accessed rapidly with limited
marketing expenditures. It also provided an ideal high volume product for
proving and refining the Company's FUZION process. The Company believes that
when it introduced this product it was the first ITO coated glass produced in a
single step process from powdered metal oxide ITO target material. To the best
of the Company's knowledge, existing products were produced in a two or three
step process or in a batch or semi-batch process. Based on internal comparison
testing of competing products, the Company believes its PCO coated glass product
provides the highest light transmission and electrical conductivity, for a
specified film thickness, of any commercially available TN grade ITO coated
glass product.
TN grade ITO coated glass is a product with profit margins which reflect the
price competitive market for this item. During 1996 the Company will focus on
the market development of its higher margin LCM brand ITO coated glass for STN
grade LCDs and reduce its emphasis on TN grade ITO coated glass as market
conditions warrant. It does not intend, however, to abandon its current emphasis
on production of twisted nematic ("TN") grade ITO coated glass unless market
demand for
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STN grade coated glass products warrants a reduction in focus on the TN grade
segment of the market. The Company believes, therefore, that its continuing
results of operations do not depend materially on the commercial acceptance of
its STN grade ITO coated glass.
The Company believes its LCM brand ITO coated glass provides the first
commercially available ITO coated glass which eliminates virtually all of the
internal light reflection in a LCD. This is achieved by the use of a multi-layer
thin film coating which provides an "index of refraction match" between the
glass substrate and liquid crystal fluid inside the LCD. The use of LCM brand
ITO coated glass results in a significant improvement in the brightness and
contrast of LCDs.
To insure a long term opportunity in the ITO coated glass market, the
Company believes it will need to penetrate the market for STN grade ITO coated
glass. The Company believes that the features described above give LCM the
potential to become a preferred material in the market for STN grade ITO coated
glass. According to industry sources, approximately 29.3 million square feet of
STN grade ITO coated glass was produced in 1995.
Based on a report published by Stanford Resources, Inc., a market research
firm specializing in the electronic display industry, the worldwide market for
the ITO coated glass used to manufacture all types of LCDs is expected to be
approximately $268 million by the year 2000. A report from the same service
indicates that by the year 2002 the market for flat panel displays, of which ITO
coated glass is a major component, is forecast to be more than $23 billion
annually. The projected compound annual growth rate for the LCD segment of the
flat panel display market is estimated to be 21% for the period from 1991 to
2000 by Semiconductor International, a trade publication. This rapid growth in
the market for finished displays drives a corresponding increase in demand for
ITO coated glass.
In 1994 the Clinton Administration launched the U.S. Display Consortium with
$1 billion of federal funding to foster U.S. production of next generation flat
panel displays. The Company believes it is well positioned to take advantage of
the potential growth in the U.S. flat panel display industry.
TOUCH SCREEN PANELS. The Company also coats flat and bent glass panels with
ITO and antimony tin oxide materials. These coated glass panels are the
principal material component in all resistive and capacitive type touch screens.
Resistive and capacitive type touch screens account for the majority of the
touch screen market.
A/R PRODUCTS AND MARKETS
Anti-reflection ("A/R") coatings consist of microscopically thin layers of
metal and metal oxide materials that utilize the principle of light wave
interference to reduce the reflectivity of the surface of a glass or plastic
substrate. As generally used in the industry, the term "ultra low reflection"
means that normal surface reflection is reduced by at least 99.5%. The Company
has developed and produced limited quantities of the four A/R products described
below on its P-1 FUZION coating line, all of which meet the ultra low reflection
criteria.
The Company plans to begin commercial production of these products in the
second half of 1996. Although these products have been produced in sample
quantities on the P-1 FUZION coating line, it is not feasible, due to capacity
limitations, to produce them on a commercial scale on this equipment. Therefore,
three of the Company's A/R products are dependent upon the successful start up
of a second FUZION coating line (which the Company refers to as "P-2") and one
is dependent upon the start-up of a third FUZION coating line. The P-2 equipment
is being installed and is scheduled for start-up late in the second quarter of
1996. The third FUZION coating line is scheduled for start-up in the second half
of 1996.
ZERORAY GLARE AND RADIATION CONTROL FILTERS. ZeroRay filters are flat or
bent glass panels, sized to fit in front of a computer monitor, television or
lap top computer display, which have an ultra low reflection coating on one side
and a patented optical gel adhesive, Gelglas-Registered Trademark-, on the
opposite side. The Gelglas adhesive provides the first low cost, easy to use
method for attaching a glare filter panel directly to the display screen.
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<PAGE>
The Company believes that its ZeroRay filters are the first product to
provide an ultra low reflection filter with high efficiency radiation control,
improved color fidelity and contrast with no loss of screen brightness. All
other glare and radiation control products of which the Company is aware
diminish screen brightness by 43% to 70%. In addition, the Company believes that
its ZeroRay filters are the only products which attenuate low level X-Ray
emissions from CRT type displays. The Company anticipates the retail price for
its ZeroRay product will be comparable to other high quality filters which
currently retail for $75 to $125.
According to the December 1994 issue of Information Display, in 1994 more
than 40 million computer monitors and more than 125 million television sets were
sold. Based on its internal market analysis, the Company estimates that in 1995
the worldwide market for glare filter panels was approximately 3 million units
with a market value of $90 million. Current filter products are sold primarily
for aftermarket installation by end users. Although some new monitors are being
supplied with either a chemically etched surface, which reduces screen
resolution and contrast, or a low quality spray-on A/R coating, most new
monitors, televisions and flat panel displays do not have any radiation filter
or A/R coating. The Company believes that its ZeroRay filters will provide
substantial cost and performance benefits for both new and existing displays.
UVAR EYEGLASS LENSES. UVAR lenses are plastic prescription eyeglass lenses,
which the Company will purchase from lens manufacturers and coat with its
ultraviolet ("UV") light blocking and
A/R coating. A/R coatings reduce the unattractive glare from the front surface
of eyeglass lenses and contribute to improved night vision. The Company believes
its UVAR lenses will be the first eyeglass lenses to combine a high durability
scratch resistant A/R coating with full ultraviolet light blocking properties.
More than 80 million pair of prescription eyeglass lenses were sold in the
U.S. in 1995, according to a leading supplier of such lenses. A report published
in the U.S. Optical Industry Handbook '95 estimates U.S. market share for A/R
coated lenses to be 5% of all lenses sold. By comparison, the report estimates
the European and Asian A/R coated lens market shares to be approximately 50% to
80%. The high cost of batch processes currently used to apply A/R coatings to
eyeglass lenses, along with durability and cleaning problems, have limited the
market acceptance for A/R coatings in the U.S. The Company's FUZION coating
process creates an opportunity to overcome these product limitations with lenses
that are highly durable, easily cleaned and low cost.
POLARCLEAR POLARIZING FILM. The Company's PolarClear product consists of a
sheet of plastic polarizing film, which is available from several sources in the
U.S. and Asia, to which the Company will apply a proprietary A/R coating. The
Company does not currently purchase this material and does not have any
agreements with any suppliers of the material. Every LCD display utilizes a
plastic polarizing film on the front of the display. The Company believes its
PolarClear product will be the only product which substantially eliminates glare
and blocks UV light. The Company also believes that the UV light blocking
feature, combined with the high durability of its A/R coating, will provide a
competitive advantage. According to a report by Stanford Resources the annual
market for polarizers is projected to be $420 million by the year 2000.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas picture framing glass consists of a
high quality sheet of clear glass which the Company will coat with an A/R and UV
light blocking coating. The Company believes its ArtGlas product will be the
only picture framing glass available that combines an ultra low reflection
surface and UV light blocking properties. UV light is present at very damaging
levels in sunlight and most fluorescent light. It is the primary cause of
irreversible fading in paintings, prints and photographs.
According to the Professional Picture Framers Association, the annual market
for picture framing is approximately $4 billion. Historically, picture framing
glass has accounted for approximately 8% of the total framing cost. The Company
estimates that between 10% and 12% of the glass currently used for picture
framing is a chemically etched "non glare" type of glass. This product reduces
glare by creating a matte texture for the picture or artwork. Although it
reduces glare, etched glass also
25
<PAGE>
reduces the image clarity and color fidelity. The Company is aware of two A/R
coated picture framing glass products produced by a chemical dip process. These
products provide no UV light blocking and have less effective optical and A/R
properties than ArtGlas.
The Company plans to sell ArtGlas for approximately the same price as
existing chemically dipped glass. The Company believes that the price and
performance qualities of ArtGlas will provide the Company with competitive
advantages in the picture framing glass market.
The Company's current production systems cannot accommodate the large sheets
of glass required to produce ArtGlas. The Company intends to use a portion of
the proceeds of this Offering to build a third FUZION coating system capable of
coating 40" X 60" sheets of ArtGlas. This line is scheduled for start-up in the
second half of 1996.
ENHANCED REFLECTION MIRROR ("ERM") PRODUCTS AND MARKETS
ERMs are glass or plastic sheets coated with highly reflective mirror
coatings on the surface closest to the point of use (front surface). The Company
commenced shipments of ERM products on a limited basis in the first quarter of
1996. The Company intends to begin commercial production of its standard PMAX
brand front surface mirrors in the second half of 1996 following the
installation of its second production line. The Company is currently producing a
specialized version of its PMAX mirror on its existing production equipment and
intends to shift production of this product to its second line when it is fully
operational.
PMAX ENHANCED REFLECTION MIRRORS. PMAX front surface mirrors consist of a
polished glass sheet coated with an ultra high reflection mirror coating on the
front surface. Front surface mirrors are used in all photocopiers, laser and bar
code scanners, projection televisions, overhead projectors and many other types
of specialty mirror applications Using the FUZION process, the Company believes
it can produce front surface mirrors with higher reflection and better
durability than those of any known competitor.
SALES AND DISTRIBUTION
The Company's sales and distribution method varies for each of its products
and product categories. To date, the Company's sales efforts have been conducted
largely by senior management. The Company recently hired a director of sales and
marketing for its ZeroRay products and intends to add personnel in similar
positions for its other products as required.
ITO PRODUCTS
ITO products are sold to manufacturers of flat panel displays. These
displays are used in such products as watches, calculators and lap top
computers. The Company sells its ITO coated glass and touch screen products
directly and through independent sales agents in the U.S., Asia and Europe. This
method of distribution has provided a low cost, effective method of serving
these markets.
The Company has granted an exclusive distributorship for the territory of
Hong Kong and Shenzhen, China. The distributor receives a commission on a per
unit basis for ITO coated glass sold, and is required to achieve certain
quarterly minimum sales requirements in order to maintain its exclusivity. The
Company has informal distribution arrangements with several European and Asian
sales agents and is in the process of formalizing these arrangements. These
sales agents are paid a sales commission that is comparable to that of the
distributor.
A/R PRODUCTS
ZERORAY GLARE AND RADIATION CONTROL FILTERS. The Company is in the process
of establishing U.S., European and Asian distribution arrangements for its
ZeroRay products. ZeroRay products will be sold to computer monitor
manufacturers and distributors ("OEMs"), value added resellers ("VARs") and
computer retailers. Initial sales efforts are focused on the VAR distribution
channel. To reach the VARs, the Company is in the process of establishing a
nationwide network of independent sales representatives. This network will be
supported by the ZERORAY EXPRESS sales and technical support staff. The ZERORAY
EXPRESS staff will provide order processing and technical support for
26
<PAGE>
ZeroRay products. Sales and marketing of ZeroRay products to OEM accounts will
be handled on a direct basis. The Company has not secured, but is pursuing,
additional aftermarket channels of distribution for ZeroRay products such as
catalog sales and manufacturers and distributors of computer accessories.
UVAR EYEGLASS LENSES. The Company intends to sell UVAR coated eyeglass
lenses directly to established lens distributors and wholesale lens
laboratories.
POLARCLEAR POLARIZING FILM. PolarClear A/R and UV light blocking polarizing
films will be distributed through the Company's existing ITO coated glass
selling agents. This product is used by the same customers who purchase the
Company's ITO coated glass products.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas will be sold on a wholesale basis to
the approximately 200 local and regional picture framing material distributors
in the U.S. Although the Company does not have any agreements with such
distributors, it believes it can effectively access these distributors with a
relatively small direct sales force.
ENHANCED REFLECTION MIRROR PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. To reach the markets for ERMs, the
Company will utilize factory based sales personnel to call on manufacturers of
photocopiers, laser and bar code scanners, overhead projectors, projection
televisions and specialty mirrors.
COMPETITION
The Company has not yet shipped significant quantities of products in any of
the markets in which it intends to compete. It has not, therefore, established a
significant market presence in any of these markets.
ITO PRODUCTS
TN GRADE AND STN GRADE ITO COATED GLASS. Approximately half of the world's
production capacity for TN grade ITO coated glass is located in Japan. Most of
the production capacity in Japan is utilized by Japanese LCD manufacturers. The
principal suppliers of ITO coated glass for the LCD industry outside of Japan
are Applied Films Corporation of Boulder, Colorado; Samsung Corning of Seoul,
South Korea and Merck Balzars of Liechtenstein. These ITO suppliers have
substantial financial, technical, manufacturing and marketing resources, are
well established and will provide formidable competition to the Company for the
foreseeable future. The Japanese ITO coating manufacturers are not active in
supplying markets outside of Japan. However, to the extent the Company attempts
to develop business in Japan they will provide direct competition. Although the
Company believes that it possesses superior technology to many of its
competitors, there can be no guarantee it will be able to secure a profitable
short or long-term market position for its ITO coated glass products.
Because of the strong competition in the TN grade ITO coated glass market,
the Company is planning to focus on the higher quality, higher margin STN grade
segment of the ITO coated glass market. The Company believes that only three
Japanese ITO producers and Samsung Corning are able to supply significant
quantities of STN grade ITO coated glass. The Company estimates that until
recently, approximately 90% of the demand for STN grade ITO coated glass was in
Japan. However, beginning in the fourth quarter of 1995, several new STN grade
LCD production lines have commenced production in Taiwan, Singapore, Korea and
Hong Kong. The Company believes that the non-Japanese markets for STN grade ITO
coated glass will be easier to penetrate than the Japanese market. The Company,
therefore, intends to target the non-Japanese markets for STN grade LCD
manufacturing and has made a strategic decision to refrain from entering the
Japanese market because formidable competition and captive markets would make
such penetration difficult and costly. Although the Company does not have
contracts with the LCD manufacturers outside of Japan, it believes that its
FUZION process, combined with its LCM brand ITO coated glass product will allow
it to compete effectively for this business on the basis of price, product
performance and quality.
TOUCH SCREEN PANELS. The only existing supplier of ITO and antimony tin
oxide coated panels for the touch screen market that the Company is aware of is
the Display Products Division of Donnelly
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<PAGE>
Corporation in Holland, Michigan. Donnelly has fully integrated production
facilities for glass bending and thin film coating. Although the Company
believes it can effectively compete in this market on the basis of price,
product performance and quality, there can be no assurance that it will be able
to do so.
A/R PRODUCTS
ZERORAY GLARE AND RADIATION CONTROL FILTERS. The largest providers of glare
filters for computer and other display monitors are Optical Coating Laboratory,
Inc. ("OCLI") of Santa Rosa, California, 3M Corporation of St. Paul, Minnesota
and Fellowes, Inc. of Itasca, Illinois. OCLI, which the Company believes is the
dominant manufacturer of glare filters, manufactures glare filter panels for
both OEMs and the aftermarket from A/R coated glass which it produces on its own
proprietary thin film coating machines. The Company believes the other leading
producers of aftermarket glare filters purchase the A/R glass from third party
manufacturers, including Viratec Thin Films, Inc. ("Viratec") of Faribault,
Minnesota and OCLI, and assemble the material into a plastic frame. These
independent "framers" market the assembled products under their own brand name
through office supply distributors and other distribution channels. The Company
believes that only Viratec has a manufacturing technology which may approach the
cost efficiency of the FUZION process. All of the Company's principal glare
filter competitors have substantial manufacturing, technology, marketing and
financial resources. The remaining companies supplying products to these markets
rely on small scale batch processing equipment and will not likely provide
direct competition for the Company. The Company believes that ZeroRay's product
features and competitive cost will allow it to compete in this market, but it
cannot guarantee that it will achieve success against its well established
competition.
UVAR EYEGLASS LENSES. At the present time there are approximately twenty
companies in the U.S. supplying eyeglass lenses with A/R coatings or providing a
contract coating service to lens manufacturers or ophthalmic wholesale
distributors. The principal U.S. and international manufacturers of eyeglass
lenses all have some level of in-house A/R coating capability. In addition, the
Asahi-Pentex Company of Japan and Merck Balzars operate large scale contract
coating facilities in the U.S., Europe and Asia. The Company believes it has the
only production technology suitable for high volume continuous in-line
production of A/R coated lenses. In addition, the Company believes it can
compete on the basis of providing the only A/R coated lenses with UV light
blocking properties and a high level of abrasion resistance. However, the
combination of fully integrated manufacturing and distribution capabilities of
the large U.S. and international eyeglass lens manufacturers and the substantial
financial, technical, manufacturing and marketing resources of the existing
contract coating service companies will provide the Company with strong
competition. As a result, there can be no assurance that the Company will be
successful in penetrating the A/R eyeglass lens market.
POLARCLEAR POLARIZING FILTERS. The market for A/R coated polarizing plastic
sheets has developed rapidly in the last two years. Currently OCLI and Nitto
Denko of Japan account for the majority of the market for A/R coated polarizing
material. There are five other principal suppliers of polarizing material
worldwide. Three are in Japan and two are in the U.S. Each of these companies
have substantial manufacturing, technical, marketing and financial resources.
Although the Company believes it has a lower cost manufacturing process and a
product with superior attributes, there can be no assurance that it will be able
to compete effectively in this market.
ARTGLAS PICTURE FRAMING GLASS. There are two companies that the Company is
aware of that currently supply low reflection picture framing glass. Denton
Vacuum, Inc. of Cherry Hill, New Jersey, and Schott Glas Werks of Mainz,
Germany, sell anti-reflection picture glass for the framing market that is
manufactured by a chemical dip process. The Company believes that neither
product provides UV light blocking and estimates that both have 25 to 50% more
reflected glare than the Company's ArtGlas product.
The Company plans to sell ArtGlas for approximately the same price as
existing chemically dipped glass. The Company believes that the price and
performance qualities of ArtGlas will provide the Company with competitive
advantages in the picture framing market. There can be no assurance, however,
that the Company will be able to compete effectively in this market.
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ERM PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. The market for enhanced reflection
optical mirrors is currently being served by OCLI, Viratec and Opton, Inc. of
Norfolk, Virginia. These three companies are believed to supply more than 90% of
the worldwide demand for ERMs. All three companies have large manufacturing
facilities for the production of ERMs. In addition, OCLI and Opton have fully
integrated manufacturing facilities in the U.S., Europe and Asia for cutting and
edge grinding of these products to meet end user specifications. The Company
believes it can produce ERMs with higher reflection and better durability than
its competitors. However, it faces formidable, well established competition and
there can be no assurance that the Company will be able to compete effectively
in this market.
MANUFACTURING
The Company has assembled a team of engineers and scientists who have
developed the process technology and commercial scale production equipment for
manufacturing thin film coatings and supporting production activities. Having
developed its own proprietary processes, know-how and equipment, the Company
possesses what it believes is a wide range of skills and knowledge in advanced
thin film coating technologies.
The Company currently operates a single in-line coating machine which it has
designated "P-1." The P-1 line is housed in a high quality environmentally
controlled clean room. It is being used primarily to produce ITO coated glass.
The P-1 system is capable of producing ITO coated glass at cycle times which the
Company believes are significantly faster than those of its competitors. The
Company encountered operational and technical difficulties in connection with
the initial start-up of production on its P-1 line in 1994. These problems
related primarily to the line's material handling and conveyor systems and their
ability to withstand the high temperatures required for the production of ITO
coated glass. During an extended rebuild of the P-1 line during 1994 and 1995
these problems were corrected and have not recurred.
The Company is in the process of constructing a second FUZION coating line
which has been designated "P-2," and which will be housed in a separate clean
room located in the Company's main facility. Housing each production line in a
separate clean room will enable the Company to implement equipment upgrades and
perform maintenance on one line without disrupting the operation of the other
line. The P-2 line will be used primarily for the production of A/R and ERM
products. Both the P-1 and P-2 lines can produce each of the Company's ITO, A/R
and ERM products, thus enabling the Company to produce its full range of
products should one of the lines be shut down for an extended period.
The principal raw materials used in the Company's manufacturing processes
are the substrates (glass, metal and plastic) which are coated with thin films
and the targets which are the source material for the thin film coatings. The
majority of the products which the Company has produced to date have required a
glass substrate. The glass used for ITO coated glass is a special grade of thin
soda lime glass. This material is available from five suppliers worldwide. The
Company currently purchases its glass substrate from Glaverbel, S.A. of Belgium,
although it does not have a long term supply agreement with this supplier. Other
suppliers are located in the U.K. and Japan. The Company believes that it can
obtain comparable quality material from other suppliers should its current
source be disrupted.
The bent glass panels to be used for ZeroRay filters are currently available
from two domestic suppliers. Raw materials for other products and the FUZION
target materials are widely available from a variety of sources.
Inventories are periodically reviewed for obsolescence. To date, the Company
has not experienced any material write downs due to inventory obsolescence.
29
<PAGE>
RESEARCH AND DEVELOPMENT
The goal of the Company's research and development activities is to develop
products which consistently exceed market standards in terms of features,
performance and cost. To achieve this goal the Company employs nine design
specialists, three process engineers, an electronics engineer, and four Ph.D.
research scientists with backgrounds in thin film deposition processes, plasma
physics and inorganic chemistry. This team focuses on both product and process
technology research and development and is currently working on the development
of several enhanced versions of existing products as well as innovative new
products which utilize the FUZION process technology. The Company occasionally
outsources specific research and development projects. Amounts expended on these
projects are not material to research and development spending as a whole.
In fiscal 1995 and 1994, the Company spent $353,636 and $445,480,
respectively, on product and technology research and development. The Company
expects in the foreseeable future to spend, on a dollar basis, amounts
comparable to 1995.
INTELLECTUAL PROPERTY
The Company's success depends and will continue to depend, in part, on its
ability to preserve its trade secrets, to operate without infringing on the
proprietary rights of third parties, and to maintain patent protection for
certain products and processes. The Company's policy is to attempt to protect
its technology by, among other things, filing patent applications for technology
that it considers important to the development of its business. The Company has
five issued U.S. patents, six U.S. patent applications which have been filed and
16 U.S. patent applications which have been prepared and are in the process of
being finalized for filing. The validity and breadth of claims covered in the
Company's patents and patent applications involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that the Company's pending applications will result in patents being issued or,
if issued, that such patents, or the Company's existing patents, will provide a
competitive advantage, or that competitors of the Company will not design around
any patents issued to the Company. Other than the prior art review done in
connection with the Company's patent applications, the Company has not
undertaken any independent investigation regarding potential infringement of its
current or proposed products on the property rights of others.
The Company has also acquired rights to use a patented material in the
manufacture of its ZeroRay products pursuant to an exclusive license granted by
the holders of the patent for the material. The license requires a minimum
annual royalty payment of $80,000 in the first year of ZeroRay production to
maintain the exclusive license. If the minimum payment is not made, the license
can be converted to a non-exclusive license. If the license is converted to a
non-exclusive license, the Company may face increased competition with respect
to its ZeroRay products. The Company is obligated to pay a royalty of 6% in the
first year of ZeroRay production on the net sales price of the product. The
royalty rate increases to 7% in the second year. Royalties in excess of $100,000
in any year will be based on a rate of 5%. This license expires on May 30, 1996.
The Company is currently negotiating a five-year extension. In the event the
Company is not successful in obtaining an extension or the license is converted
to a non-exclusive license, the Company does not expect to be materially
adversely affected.
CUSTOMERS
During 1995 sales of ITO coated glass to the Company's two largest customers
accounted for 57% and 28% of total revenue, respectively. These customers have
placed purchase orders with the Company that are effective through June 1996.
For the first three months of 1996 sales to the Company's largest customer
accounted for 71% of total revenues; sales to the second largest customer were
not material. The Company's largest customer is located in Taiwan and is the
largest LCD manufacturer outside of Japan. The Company does not have any long
term contractual commitments from its customers. The Company sold its PCO brand
of ITO coated glass to a limited number of customers in 1995 and the first
quarter of 1996, primarily due to production capacity limitations. The Company
expects to increase the capacity of its P-1 FUZION coating line by the end of
the second quarter of 1996, and anticipates that it will be able to expand its
ITO product customer base when this increased capacity is available.
30
<PAGE>
The Company plans to further expand its customer base in the near term
through new product offerings. Based on current sales to and orders from its
largest customer, the Company expects that customer to continue to account for
approximately 35% of its sales revenues in 1996.
Customers for the Company's ITO coated glass products are predominantly
located in Asia. The Company anticipates that the initial customers for its A/R
and ERM products will be located predominantly in the U.S.
CHINA JOINT VENTURE
The Company has entered into a joint venture agreement with the Shenzhen
WABO Group Company, Limited ("WABO"), of Shenzhen, China. The agreement is
governed by the laws of the People's Republic of China. WABO is a publicly owned
company traded on the Shenzhen, China stock exchange. The joint venture company,
known as the Shenzhen Fortune Conductive Glass Company, Ltd. ("Fortune"), was
created to produce TN grade ITO coated glass for the Asian market. The joint
venture has a term of 15 years from the date it received its business permit
from the Chinese government, which occurred in November 1994. The term of the
joint venture may be extended upon agreement of the partners and approval by the
Chinese government. Upon expiration of the joint venture its assets will be
liquidated in accordance with Chinese law. When it is operational, the Company
believes the joint venture will be the largest TN grade ITO coated glass
manufacturing facility in the world. A substantial portion of the worldwide
demand for TN grade ITO coated glass is from LCD manufacturers located in or
near Shenzhen, China.
The Company has agreed to sell to Fortune an ITO glass coating system and
technology limited to the production of TN grade ITO coated glass for the gross
purchase price of $10,145,000. The Company has also agreed to provide a royalty
free license to Fortune for the use of certain of the Company's proprietary
technology for the production of TN grade ITO coated glass. The Company is
obligated to provide 40% of the $11,645,000 total capitalization of the joint
venture. This 40% contribution,totaling $4,658,000, has been deducted from the
gross purchase price of the coating system. This will result in the Company
receiving a net purchase price of $5,487,000 for the equipment sold to the joint
venture. The Company is not relying on any material earnings or distributions
from Fortune and, therefore, will record the net purchase price of $5,487,000 as
an equipment sale and will not record its capital contribution as an asset.
Fortune is currently obligated to make a payment of approximately $1,000,000
as the balance of the purchase price for a building constructed for it by WABO.
Fifty percent of this amount is due within twelve months of acceptance of the
building, with the balance due within twenty four months of such acceptance. The
Company's only financial obligation to the joint venture is its guarantee in the
amount of $400,000 related to a payment due by Fortune for the purchase of the
building used by the joint venture.
The $5,487,000 net purchase price being paid by Fortune to the Company is
secured by a letter of credit, confirmed by Chemical Bank, New York. Payment of
the final $600,000 of this amount is contingent upon the equipment operating
within certain specifications for ten days at twenty hours per day upon assembly
at Fortune's facility. In addition, the letter of credit stipulates that the
equipment must be shipped on or before June 30, 1996. The Company expects to
comply with this requirement. The equipment was originally scheduled to be
shipped by November 6, 1995. Due to a delay by WABO in delivering the letter of
credit and the Company's inability to obtain working capital financing on a
timely basis, the project was delayed for several months. The project schedule
has been extended by mutual agreement between the parties. WABO failed to
deliver an extension of the letter of credit on a timely basis, which further
delayed the project and prevented the Company from shipping the equipment by
April 15, 1996. The Company is subject to certain contractual penalties for
failure to ship by April 15. These penalties require the Company to refund
Fortune's advance of approximately $1.5 million, which amount has been recorded
as a current liability of the Company. A return of this advance would not have a
material adverse effect on the Company's financial condition or results of
operations. WABO has orally agreed to waive these penalties provided the
equipment is shipped no later than June 30, 1996. The Company expects to receive
written confirmation of this
31
<PAGE>
waiver before the end of June 1996 and expects to ship the equipment by the end
of June. Any penalties which the Company may incur cannot be withheld from the
confirmed letter of credit amounts. However, payment of the final $600,000 of
the purchase price will not occur until certification is received from Fortune
after the equipment is shipped. The Company will not ship the equipment until a
written waiver of penalties is received. In the event the Company does not ship
the equipment, it intends use the equipment to manufacture ArtGlas picture
framing glass. The Company does not expect, therefore, that failure to ship the
equipment will have a material adverse impact on its financial condition or
results of operations.
Due to the shipping costs and customer lead time requirements associated
with TN grade ITO coated glass produced in the U.S., as well as the intensity of
price competition in this market, the Company expects that the majority of TN
grade ITO coated glass for use in Asia will eventually be produced in Asia. This
shift is expected to occur over several years. Therefore, over the next twelve
months, the Company expects that its production of TN grade ITO coated glass at
its U.S. facility will gradually decrease and be shifted to the joint venture.
The Company is obligated to use commercially reasonable efforts to develop
markets for the joint venture's products outside of China. The compensation
which the Company will receive for these efforts will be determined by Fortune's
Board of Directors; the Company does not anticipate that it will expend material
sums in connection with such efforts. The Company plans to shift the capacity
used for TN grade ITO coated glass to the production of higher margin STN grade
ITO coated glass. Other than the purchase price it will receive for the FUZION
coating equipment, the Company is not relying on any material amount of
distributions or earnings from the joint venture in the foreseeable future.
GOVERNMENT REGULATION
The Company's business is not subject to any material governmental
regulations, nor are any governmental approvals required for the operations of
the Company as currently conducted or anticipated to be conducted in the
foreseeable future. Costs and effects of environmental compliance are also not
material to the Company's business.
EMPLOYEES
As of March 31, 1996, the Company had 79 full-time employees and 2 part-time
employees. Of these full-time employees, 13 are in research and development and
engineering, 26 are in manufacturing and production, 34 are in machining,
machine assembly and facilities maintenance, and 6 are in management or
administrative positions. None of the Company's employees are covered by a
collective bargaining agreement, and management considers its relations with its
employees to be good.
FACILITIES
The Company leases its main office and manufacturing facility located at
21875 Grenada Avenue, Lakeville, Minnesota, 55044. This 23,000 square foot
facility consists of 16,000 square feet of manufacturing space (including
approximately 10,000 square feet of high quality environmentally controlled
clean room area). The remaining 7,000 square feet is used for administrative,
engineering, R&D and sales offices. The Company also leases a nearby 47,000
square foot building located at 21725 Hanover Avenue, Lakeville, Minnesota
55044. The Company intends to use this facility for its machine shop, glass
bending operations, shipping and receiving, equipment manufacturing operations
and future manufacturing lines. The Company has options to purchase both of
these buildings. The Company believes these facilities are in good condition and
are adequate for the foreseeable future. The Company carries insurance covering
the full replacement value of these properties. For discussion concerning the
lease obligations, see Note 6 to Financial Statements.
The Company also owns the majority of its manufacturing equipment as well as
equipment used in its research and development activities. Some of the Company's
machine shop and office equipment is subject to operating and capital leases,
none of which are material to the Company's business. All of the Company's
personal property, whether owned or leased, is in good condition and adequate
for the foreseeable future.
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<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------------
<S> <C> <C>
David E. Stevenson (3) 46 President, Chief Executive Officer, and Chairman
Paul T. Fink 40 Chief Financial Officer, Treasurer, Director
Kathleen V. Stevenson (2) 46 Secretary, Director
Robert S. Clarke (1)(3) 52 Director
Steven King (1)(2) 50 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.
The Board of Directors is divided into three classes, and directors serve
for staggered three-year terms. Kathleen V. Stevenson serves in a class with a
term expiring in 1997; Robert S. Clarke and Steven King serve in a class with a
term expiring in 1998; and David E. Stevenson and Paul T. Fink serve in a class
with a term expiring in 1999. Officers serve at the discretion of the Board.
David E. Stevenson and Kathleen V. Stevenson are husband and wife.
Subsequent to this Offering, management anticipates that the Board of
Directors will add at least one additional outside director, depending on the
availability of a candidate with appropriate skills, background and willingness
to serve on the Board. No such candidate has currently been identified.
DAVID E. STEVENSON, the founder of the Company, has been employed by and
served as a director and officer of the Company since its inception in May 1991.
From 1988 to 1991, Mr. Stevenson was employed as president and CEO of Viratec
Thin Films, Inc. and Viratec Tru Vue Inc. of Faribault, Minnesota. From 1984 to
1988, Mr. Stevenson was executive vice president and chief operating officer of
Viracon, Inc. of Owatonna, Minnesota. From 1983 to 1984, he was director of
corporate development for Apogee Enterprises, Inc., of Minneapolis, Minnesota.
Mr. Stevenson holds a Bachelor of Science degree from the University of Michigan
and is also a Certified Public Accountant.
PAUL T. FINK has been employed by the Company since January 1995. Mr. Fink
joined the Company as Controller, was named Chief Financial Officer in February
1996 and was elected as a director in March 1996. Prior to joining the Company,
Mr. Fink was employed as the Chief Financial Officer of Vomela Specialty
Company, St. Paul, Minnesota, from 1989 to 1994 and Com-Tal Machine and
Engineering, Vadnais Heights, Minnesota, from 1984 to 1989. Mr. Fink was
employed by McGladrey & Pullen, Certified Public Accountants, as an auditor from
1980 to 1984. Mr. Fink holds a Bachelor of Science degree in Accounting from the
University of Minnesota, a Masters of Business Administration degree in
Financial Management from the University of St. Thomas, and is also a Certified
Public Accountant.
KATHLEEN V. STEVENSON has been a director and officer of the Company since
November 1991 and is a part-time employee of the Company responsible for human
resource matters. Ms. Stevenson has owned and operated a tableware and linen
mail order company in Wayzata, Minnesota since 1984. Previously she has been
employed in various financial management and staff positions with Norwest Bank,
Minneapolis, Minnesota, Michigan Bank, Detroit, Michigan, and City National
Bank, Detroit, Michigan. Ms. Stevenson holds a Bachelor of Science degree in
Accounting from Michigan State University.
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<PAGE>
ROBERT S. CLARKE has been a director of the Company since March 1993. Since
1981 Mr. Clarke has been the President of Alpen, Inc., Boulder, Colorado, a
leading manufacturer of architectural insulating glass. Since 1991 Mr. Clarke
has also been President, Chairman and a director of Vac-Tec Systems, Inc., a
public company involved in the manufacture of high performance windows utilizing
suspended vacuum coated films.
STEVEN KING has been a director of the Company since May 1993. Since 1986
Mr. King has been Chairman and CEO of Landscape Structures, Inc., of Delano,
Minnesota, a company which creates and manufactures innovative play structures
promoting early childhood development. Mr. King is also a registered architect.
KEY PERSONNEL
DR. ALEX ERSHOV has been employed by the Company as Chief Process Scientist
since May 1995. Dr. Ershov is a research and development scientist with a
background in the development of innovative thin film deposition processes. He
is primarily responsible for the development of the Company's high rate
microwave atomic oxygen deposition process. Dr. Ershov holds a Ph.D. in Physics
from the General Physics Institute of Moscow.
JAMES GRIESER has been employed by the Company as Manager of Thin Film
Process Engineering since December 1995. Mr. Grieser has 15 years of process
research and development experience in vacuum deposited thin film coatings. He
has developed several unique thin film materials for use in aerospace and
military applications. He holds a B.S. degree in Physics from Elmhurst College.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer. No employee of the Company received salary and bonus in
excess of $100,000 for the covered periods:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY OPTIONS (1)
- ---------------------------------------------------------------- ------------- ------------- --------------------
<S> <C> <C> <C>
David E. Stevenson ............................................. 1995 $ 81,560 25,000(2)
Chief Executive Officer and Chairman 1994 79,220 --
1993 60,000 --
</TABLE>
- ------------------------
(1) Number of shares of Common Stock subject to options granted during the year
indicated.
(2) Options to purchase 25,000 shares were granted to Mr. Stevenson as part of
his 1995 compensation as an officer and employee of the Company.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. All directors
are reimbursed for their travel expenses incurred in attending Board meetings.
On March 1, 1995 the Board of Directors granted currently exercisable
options to purchase 5,000 shares of Common Stock at $4.00 per share to each of
three outside members of the Board of Directors (for options to purchase an
aggregate of 15,000 shares of Common Stock) as compensation for prior service to
the Company. On the same date, the Board of Directors also granted options to
purchase 15,000 shares of Common Stock at $4.00 per share to each of three
outside members of the Board of Directors (for options to purchase an aggregate
of 45,000 shares of Common Stock) as compensation for each outside director's
then current three-year term. These 45,000 options vest ratably over a
three-year period commencing March 15, 1996. All options expire ten years after
the date of grant.
34
<PAGE>
Options for 10,000 shares expired in March 1996 upon the resignation of one of
the outside directors. This director, who is a sitting judge, resigned due to an
ethical conflict of interest relating to a judge serving on the board of a
public company.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with David E.
Stevenson, its Chief Executive Officer, for a four year term ending December 31,
1997. The agreement provides for a maximum base compensation of $120,000 per
year if certain financial performance goals, as set by the Company's Board of
Directors, are met. The maximum base compensation may be reset through mutual
agreement of Mr. Stevenson and the Board of Directors. The agreement also
provides for the issuance of options, at the discretion of the Board of
Directors, for the purchase of the Company's Common Stock, and an option for Mr.
Stevenson to require the Company to repurchase his shares if the Company
terminates his employment without cause. As of December 31, 1995, 25,000 options
had been issued to Mr. Stevenson pursuant to this agreement. The agreement also
provides for an annual incentive bonus in the event the Company has earnings
before taxes in excess of 30% of shareholders' equity at the last day of the
fiscal year. To date, Mr. Stevenson has not been eligible to receive an annual
incentive bonus. Under the agreement the Company has the right to terminate Mr.
Stevenson's employment with three months notice and would generally be required
to pay two years' base salary and incentive compensation as severance
compensation. Mr. Stevenson is required by the agreement to maintain
confidentiality of all Company trade secrets and upon termination is prohibited
from participating in a competing venture for a period of two years.
STOCK OPTIONS
On December 15, 1992 the Board of Directors and shareholders of the Company
adopted the 1992 Stock Option Plan (the "Plan") in order to provide for the
granting of stock purchase options to employees and officers of the Company. The
Plan permits the granting of incentive stock options meeting the requirements of
Section 422A of the Internal Revenue Code of 1986, as amended, and also
nonqualified stock options which do not meet the requirements of such section.
As amended by the Board of Directors and approved by the shareholders, the
Company has reserved 625,000 shares of its Common Stock for issuance upon the
exercise of options granted under the Plan. As of the date of this Prospectus,
the Company has outstanding options to purchase an aggregate of 76,250 shares
under the Plan.
OPTIONS GRANTED FOR THE YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information for the year ended
December 31, 1995 as to options granted to the Chief Executive Officer:
OPTION GRANTS IN FISCAL YEAR 1995
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) DATE
- --------------------------------------------------- ---------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
David E. Stevenson................................. 25,000(1) 51.5% $ 4.00 7/19/2000
</TABLE>
- ------------------------
(1) All options are currently exercisable.
35
<PAGE>
AGGREGATE OPTION VALUES AT DECEMBER 31, 1995
The following table sets forth certain information at December 31, 1995 as
to options held by the Chief Executive Officer:
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
OPTIONS AT 12/31/95 AT 12/31/95
------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
David E. Stevenson..................................... 25,000 -- $ 112,500(1) --
</TABLE>
- ------------------------
(1) The value of exercisable options is equal to the difference between the
assumed Price to Public of $8.50 per Share and the option exercise price per
share multiplied by the number of shares subject to options.
INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY
The Minnesota Business Corporation Act provides that officers and directors
of the Company have the right to indemnification from the Company for liability
arising out of certain actions. Such indemnification may be available for
liabilities arising in connection with this Offering. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to such indemnification
provisions, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company has adopted in its Second Amended and Restated Articles of
Incorporation a provision which limits personal liability for breach of the
fiduciary duty of its directors, to the extent provided by Chapter 302A of the
Minnesota Business Corporation Act. Such provision eliminates the personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws, and
liability for acts occurring prior to the date such provision was added.
CERTAIN TRANSACTIONS
LOANS FROM DIRECTOR
Steven King, a director of the Company, made a loan to the Company in the
original principal amount of $1.5 million on May 1, 1995 for working capital and
general corporate purposes. The note issued in connection with the loan bears
interest from the date of issue at an annual rate of 3.75% in excess of the
"Reference Rate" announced from time to time by First Bank National Association,
and is secured by substantially all equipment and intellectual property of the
Company. The note is subject to periodic payments of principal and accrued
interest, and is payable in full, if not sooner paid, on May 10, 1997. The note
may be prepaid at any time without penalty.
In connection with this loan, warrants to purchase up to 75,000 shares of
Common Stock were issued to Mr. King. The warrants are exercisable at any time
after April 30, 1996, and expire on May 1, 2003. The exercise price of these
warrants is $4.00 per share. The warrants provide for the automatic adjustment
of the number of shares issuable upon exercise of the warrants, and of the
exercise price, in certain events, including stock dividends, stock splits,
reorganizations, reclassifications, and the merger, consolidation or sale of all
or substantially all of the assets of the Company. The warrants also contain
registration rights which are substantially similar to the rights granted the
holders of the Bridge Warrants described below. See "Description of Capital
Stock -- Warrants."
36
<PAGE>
Mr. King also made an unsecured loan to the Company in the original
principal amount of $200,000 on August 8, 1993 for working capital and general
corporate purposes. The notes issued in connection with the loan bear interest
from the date of issue at an annual rate of 10%. The notes mature, and are
payable in full, on January 5, 1997, but may be prepaid at any time without
penalty. Principal and interest outstanding under the notes may be converted, at
Mr. King's option, into shares of the Company's Common Stock at the conversion
rate of $2.00 per share.
In connection with this loan, a warrant to purchase 20,000 shares of Common
Stock were issued to Mr. King. The warrant is currently exercisable and expires
on August 8, 1997. The exercise price of the warrant is $2.00 per share. This
warrant is subject to the same terms as the warrants described above.
GUARANTY
David E. Stevenson, the Company's Chief Executive Officer, has
unconditionally guaranteed all indebtedness of the Company to its principal bank
lender. This guaranty is unlimited.
BRIDGE FINANCING
In October 1995, the Company obtained bridge financing (the "Bridge
Financing") which consisted of the issuance of Bridge Notes in an aggregate
principal amount of $4 million (the "Bridge Notes") and warrants to purchasers
of the Bridge Notes to purchase 400,000 shares of the Company's Common Stock,
and a warrant to the Representative as selling agent to purchase 40,000 shares
of the Company's Common Stock (collectively, the "Bridge Warrants"). The Bridge
Financing was used for the acquisition of capital equipment and construction of
facility improvements. The Bridge Notes bear interest from the date of issue at
a rate of 11.75% per annum, payable at maturity. The Bridge Notes are payable in
full on the earlier of October 15, 1996, or the closing date of this Offering.
The Bridge Notes are secured by substantially all of the assets of the
Company, subject to the prior security interests of Steven King and the
Company's bank lender. Accordingly, holders of the Bridge Notes would have a
claim to such assets in the event of the dissolution or liquidation of the
Company.
The Bridge Warrants issued to purchasers of the Bridge Notes entitle the
holders thereof to purchase one share of Common Stock after one year from the
date of issuance, and expire on October 15, 2000. The exercise price of the
Bridge Warrants issued to the purchasers of the Bridge Notes will be equal to
75% of the Price to Public. The Bridge Warrants issued to the Representative are
exercisable after one year from the date of issuance, expire October 31, 2000,
and are exercisable at a price equal to the Price to Public.
The Bridge Warrants provide for the automatic adjustment of the number of
shares issuable upon exercise of the Warrants, and of the exercise price, in
certain events including stock dividends, stock splits, reorganizations,
reclassifications, and the merger, consolidation or sale of all or substantially
all of the assets of the Company.
The Bridge Warrants grant certain registration rights with respect to the
stock issuable upon exercise of the Bridge Warrants (the "Warrant Stock") in the
event the Company proposes to register any shares of its Common Stock under the
Securities Act. These registration rights are not applicable under certain
circumstances, including this Offering.
In addition, the holders of more than 50% of the Warrant Stock that has been
or can be issued upon exercise of the Bridge Warrants have the right to require
the Company to file a registration statement on Form S-3 for the Warrant Stock,
provided the Company is then eligible to file on such form.
37
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this Prospectus, and as
adjusted to reflect the sale of the Shares offered hereby, certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer, and (iv) all executive officers and directors of the Company
as a group. The following information assumes that the named individuals will
not be purchasing any Shares in this Offering.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT PERCENT
NAME AND ADDRESS OWNED (1) BEFORE OFFERING AFTER OFFERING
- -------------------------------- ------------ --------------- --------------
<S> <C> <C> <C>
DIRECTORS AND OFFICERS (2):
David E. Stevenson (3).......... 350,042 12.23% 7.84%
Paul T. Fink (4)................ 10,000 * *
Kathleen V. Stevenson (5)....... 5,000 * *
Robert S. Clarke (6)............ 10,000 * *
Steven King (7)................. 331,319 10.89% 7.14%
All executive officers and
directors as a group
(5 persons) (8)................ 706,361 22.84% 15.05%
</TABLE>
- ------------------------
* Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of the effective date of this
Prospectus, or within 60 days of such date, are treated as outstanding when
determining the percent of the class owned by such individual and when
determining the percent owned by the group. For purposes of calculating the
percent of class owned after this Offering, it was assumed that the
officers, directors and principal shareholders will not be purchasing Shares
in this Offering. Unless otherwise indicated, each person named or included
in the group has sole voting and investment power with respect to the shares
of Common Stock set forth opposite the shareholder's name.
(2) The address of each director and officer of the Company is 21875 Grenada
Avenue, Lakeville, Minnesota 55044.
(3) Includes 25,000 shares of Common Stock issuable pursuant to currently
exercisable options.
(4) Represents 10,000 shares of Common Stock issuable pursuant to currently
exercisable options.
(5) Represents 5,000 shares of Common Stock issuable pursuant to currently
exercisable options.
(6) Represents 10,000 shares of Common Stock issuable pursuant to currently
exercisable options.
(7) Includes (i) 10,000 shares of Common Stock issuable pursuant to currently
exercisable options, (ii) 95,000 shares of Common Stock issuable pursuant to
currently exercisable warrants, and (iii) 100,000 shares issuable upon
conversion of outstanding promissory notes.
(8) Includes 255,000 shares issuable pursuant to currently exercisable options
and warrants, and upon conversion of outstanding promissory notes.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 24,000,000 shares of Common Stock. The
holders of Common Stock are entitled to one vote per share on all matters to be
voted on by shareholders, including the election of directors. As of March 1,
1996, there were 2,837,323 shares of Common Stock outstanding held by 312
holders of record, exclusive of warrants and options to acquire shares of Common
Stock.
38
<PAGE>
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors in its discretion
from funds legally available therefore. The Company is currently prohibited from
paying dividends under the provisions of a credit agreement. Upon liquidation or
dissolution of the Company, the holders of Common Stock are entitled to receive
pro-rata, all assets remaining available for distribution to shareholders. The
shares of Common Stock have no cumulative voting, preemptive, subscription,
redemption or conversion rights. The outstanding Common Stock, and the Shares
offered by the Company in this Offering, will be, when issued and paid for,
fully paid and nonassessable shares of Common Stock of the Company.
The Company's Second Amended and Restated Articles of Incorporation may only
be amended by resolution adopted by the affirmative vote of not less than 60% of
the shares entitled to vote, provided the amendment does not receive the
negative vote of more than 25% of the shares entitled to vote. This provision
could have the effect of discouraging an unsolicited takeover of the Company.
UNDESIGNATED SHARES
The Board of Directors has the authority to issue up to 6,000,000
undesignated shares in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued undesignated
shares and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
shareholders. The Board of Directors, without shareholder approval, has the
power to issue undesignated shares with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. The issuance
of undesignated shares may have the effect of delaying, deferring or preventing
a change in control of the Company by way of a merger, sale or exchange of
assets or a similar transaction. The Company has no present plans to issue any
undesignated shares.
WARRANTS
As of December 31, 1995, the Company had outstanding warrants to purchase a
total of 913,600 shares of Common Stock. Of these, warrants to purchase 304,359
shares are exercisable at $2.00 per share and expire between August 1997 and
September 1998; warrants to purchase 169,241 shares are exercisable at $4.00 per
share and expire between November 1998 and May 2003; warrants to purchase
400,000 shares are exercisable at 75% of the Price to Public per share and
expire in October 2000; and warrants to purchase 40,000 shares are exercisable
at the Price to Public per share and expire in October 2000.
The outstanding warrants do not confer any voting or dividend rights or any
other rights as a shareholder of the Company until the warrants have been duly
exercised and payment of the purchase price has been made. The warrants have not
been registered under the Securities Act or any applicable state securities
laws. Neither the warrants nor the Common Stock issued upon the exercise of the
warrants may be transferred until a registration statement filed under the
Securities Act has become effective with regard thereto or until the Company
receives an opinion of counsel satisfactory to the Company and its counsel to
the effect that such registration is not required.
The warrants do provide certain "piggyback" and demand registration rights
to the warrant holders. If, at any time during the periods the warrants are
exercisable, the Company proposes to register any shares of its Common Stock for
sale under the Securities Act, the Company is required to give notice to the
holders of any warrants or warrant stock and allow such holders to request the
registration of their warrant stock by the Company. This obligation of the
Company is subject, however, to numerous exceptions, including the Company's
initial public offering. Holders of more than 50% of each series of warrant
stock issued or issuable upon the exercise of the warrants may also demand that
the Company register the warrant stock if the Company is then eligible to file a
registration statement on Form S-3 (i.e., its Common Stock is registered
pursuant to Section 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"), and has been subject to the requirements of Section 12 or
15(d) of the Exchange Act for at least twelve months, and has filed all material
required to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act for
at least twelve months).
39
<PAGE>
The holders of the warrants may be expected to exercise their warrants at a
time when the Company would, in all likelihood, be able to obtain equity capital
by a new offering of its securities on terms more favorable to the Company than
the terms of the warrants. This may have the effect of depriving the Company of
opportunities to sell additional equity securities on favorable terms.
MINNESOTA ANTITAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
The Company is also governed by the provisions of Section 302A.675 of the
Minnesota Business Corporation Act which, in general, provides that an offeror
may not acquire shares of a public Minnesota corporation within two years
following the last purchase of shares pursuant to a takeover offer (including
purchase, merger, and other transactions), unless the selling shareholder is
given, at the time of the acquisition, a reasonable opportunity to dispose of
the shares to the offeror upon substantially equivalent terms as those provided
in the earlier takeover offer, unless the acquisition is approved in a
prescribed manner.
TRANSFER AGENT
American Stock Transfer and Trust Company is the Transfer Agent and
Registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,837,323 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option). In addition, the Company will have (i) 625,000 shares
reserved for issuance upon the exercise of options issued or to be issued under
the Company's 1992 Stock Option Plan, (ii) 50,000 shares reserved for issuance
upon the exercise of options granted to outside directors and (iii) 913,600
shares reserved for issuance upon the exercise of outstanding warrants. Of these
shares, the 1,600,000 Shares sold in this Offering will be freely tradeable,
without restriction, under the Securities Act by persons other than "affiliates"
of the Company (as defined under the Securities Act). The remaining 2,837,323
shares of Common Stock (the "Restricted Shares"), held by 312 holders of record,
were acquired in transactions exempt from registration under the Securities Act
and may not be resold unless they are registered or sold pursuant to an
applicable exemption from registration, such as Rule 144 under the Securities
Act.
Holders of restricted securities must comply with the requirements of Rule
144 in order to sell their shares in the open market. In general, under Rule 144
as currently in effect, a person who has beneficially owned restricted
securities for at least two years, including any person who may be deemed an
"affiliate" of the Company (as defined under the Securities Act), would be
entitled, subject to certain conditions, to sell within any three-month period a
number of shares which does not exceed the greater of (i) one percent of the
Company's then outstanding shares of Common Stock (approximately 44,373 shares
immediately after this Offering, assuming no exercise of outstanding stock
40
<PAGE>
options and warrants) or (ii) the average weekly trading volume of the Common
Stock in the over-the-counter market during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of public information about
the Company. Persons who are not affiliates of the Company at any time during
the 90 days preceding a sale and who have beneficially owned restricted shares
for at least three years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements listed above.
Upon effectiveness of this Offering 403,679 of the Restricted Shares will be
eligible for sale in the public market in compliance with Rule 144(k) under the
Act. Beginning 90 days after the date of this Prospectus, 365,412 of the
Restricted Shares will be eligible for sale in the public market in compliance
with Rule 144 under the Act if the conditions of that rule have been met. In
addition, 1,616,870 of the Restricted Shares held by existing shareholders of
the Company are subject to lock-up agreements which prohibit their sale or other
disposition for 270 days from the date of this Prospectus without the prior
written consent of the Representative; and 451,362 of the Restricted Shares held
by officers and directors of the Company are subject to lock-up agreements that
prohibit their sale or other disposition for one year from the date of this
Prospectus without the prior written consent of the Representative.
<TABLE>
<CAPTION>
SHARES
DAYS AFTER ELIGIBLE
DATE OF FOR
THIS PROSPECTUS FUTURE SALE COMMENT
---------------- ----------- ----------------------------------------------
<S> <C> <C>
Upon Effectiveness.............. 2,000,000 Freely tradable, shares sold in this Offering.
Upon Effectiveness.............. 403,679 Rule 144(k) (shares not subject to 270-day
Lockup).
90 Days......................... 365,412 Rule 144 and Rule 701 (outstanding shares not
subject to 270-day Lockup).
270 Days........................ 1,616,870 Lockup released. Outstanding shares salable
under Rule 144, 144(k) and Rule 701.
365 Days........................ 451,362 Lockup released. Outstanding shares salable
under Rule 144, 144(k) and Rule 701.
</TABLE>
Prior to this Offering, there has been no market for the Common Stock of the
Company, and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock of the Company in the public market could adversely
affect prevailing market prices and impair the Company's ability to raise
capital at that time through the sale of its equity securities.
41
<PAGE>
UNDERWRITING
The Underwriters named below, for which John G. Kinnard and Company,
Incorporated is acting as representative (the "Representative"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement with
the Company to purchase from the Company the 1,600,000 Shares offered hereby.
The number of Shares that each Underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
John G. Kinnard and Company, Incorporated............................................
Total............................................................................ 2,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the Shares offered hereby, if any are purchased.
The obligation of the Underwriters to purchase the Shares is several and not
joint meaning that, subject to the terms of the Underwriting Agreement, each
Underwriter is obligated to purchase only the number of Shares set forth
opposite its name.
The Underwriters propose to offer the Shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the initial public offering,
the Price to Public, concession and reallowance may be changed by the
Representative.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 300,000
Shares at the Price to Public, less the Underwriting Discount shown on the cover
page of this Prospectus. The Underwriters may exercise such option only for the
purpose of covering any over-allotments in the sale of the Shares offered
hereby.
The Company has agreed to reimburse the Representative for accountable
expenses which are incurred by the Representative in connection with the
Offering. Such accountable expenses, which will include legal fees and
disbursements of counsel to the Representative, may not exceed $50,000, of which
$10,000 has been paid.
The Company has agreed to sell to the Representative, for nominal
consideration, a warrant to purchase up to 160,000 shares of Common Stock (the
"Representative's Warrant"). The Representative's Warrant may be exercised in
whole or in part commencing twelve months after the date of this Prospectus and
for a period of four years thereafter, at an exercise price equal to 120% of the
Price to Public. During the term of the Representative's Warrant, it may not be
transferred, sold, assigned or hypothecated except to officers and employees who
are shareholders of the Representative. The Representative's Warrant contains
anti-dilution provisions providing for appropriate adjustments on the occurrence
of certain events, and contains customary demand and participatory registration
rights. Any profits realized by the Representative upon the sale of such warrant
or the securities issuable upon exercise thereof may be deemed to constitute
additional underwriting compensation.
42
<PAGE>
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriters and their controlling persons against civil
liabilities in connection with the Offering, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.
In connection with the Bridge Financing, the Representative received a
commission of $200,000 and a warrant to purchase up to 40,000 shares of the
Company's Common Stock at an exercise price per share equal to the Price to
Public.
Prior to this Offering, there has been no public trading market for the
Common Stock. The initial public offering price of the Shares has been
determined by negotiations between the Company and the Representative. Among the
factors considered in such negotiations were the prevailing market conditions,
estimates of the business potential of the Company, the results of operations of
the Company in recent periods and other factors deemed to be relevant.
The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and the Representative's Warrant and does not purport to
be a complete statement of their terms and conditions. The Underwriting
Agreement and the Representative's Warrant have been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Henson & Efron, P.A., 1200 Title Insurance
Building, 400 Second Avenue South, Minneapolis, Minnesota 55401, and for the
Underwriters by Oppenheimer Wolff & Donnelly, Suite 3400, 45 South Seventh
Street, Minneapolis, Minnesota 55402.
EXPERTS
The Financial Statements of the Company as of December 31, 1995 and 1994,
and for each of the years then ended, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report includes an explanatory paragraph
referring to substantial doubt as to the Company's ability to continue as a
going concern), and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Shares offered hereby. For further information with respect
to the Company and the Shares, reference is made to such Registration Statement
and exhibits filed as a part thereof. Statements contained in this Prospectus as
to the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved. The Registration
Statement and exhibits may be inspected without charge, and copied at prescribed
rates, at the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048, and Chicago Regional Office, Citicorp Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661.
43
<PAGE>
The Company intends to distribute to its shareholders annual reports
containing audited financial statements and interim reports containing unaudited
financial statements. The Company will provide without charge to each person to
whom a copy of this Prospectus is delivered, upon oral or written request of
such person, a copy of any or all documents which are incorporated by reference
in this Prospectus, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference). Written requests for such copies
should be directed to Kathleen V. Stevenson, Corporate Secretary, Photran
Corporation, 21875 Grenada Avenue, Lakeville, Minnesota 55044. Telephone
requests may be directed to the Company at (612) 469-4880.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(unaudited).............................................................. F-3
Statements of Operations for the Years ended December 31, 1994 and 1995
and the three months ended March 31, 1995 and 1996 (unaudited)........... F-4
Statements of Shareholders' Equity for the Years ended December 31, 1994
and 1995 and the three months ended March 31, 1996 (unaudited)........... F-5
Statements of Cash Flows for the Years ended December 31, 1994 and 1995
and the three months ended March 31, 1995 and 1996 (unaudited)........... F-6
Notes to Financial Statements for the Years ended December 31, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)...... F-7
</TABLE>
F-1
<PAGE>
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS GIVE EFFECT TO THE
COMPLETION OF THE ONE FOR TWO REVERSE STOCK SPLIT OF THE COMPANY'S OUTSTANDING
COMMON STOCK WHICH WILL TAKE PLACE ON THE EFFECTIVE DATE OF THE OFFERING. THE
FOLLOWING REPORT IS IN THE FORM WHICH WILL BE FURNISHED BY DELOITTE & TOUCHE LLP
UPON THE COMPLETION OF THE REVERSE STOCK SPLIT OF THE COMPANY'S OUTSTANDING
COMMON STOCK DESCRIBED IN NOTE 7 TO THE FINANCIAL STATEMENTS AND ASSUMING THAT
FROM MARCH 15, 1996 TO THE DATE OF SUCH COMPLETION NO OTHER MATERIAL EVENTS HAVE
OCCURRED THAT WOULD AFFECT THE ACCOMPANYING FINANCIAL STATEMENTS OR REQUIRED
DISCLOSURE THEREIN.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Photran Corporation
Lakeville, Minnesota
We have audited the accompanying balance sheets of Photran Corporation (the
Company) as of December 31, 1994 and 1995 and the related statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Photran Corporation as of December 31, 1994
and 1995 and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's accumulated losses of $3,436,861 since
incorporation, negative cash flows from operating activities of $3,239,173 in
fiscal 1995 and negative working capital of $3,216,717 at December 31, 1995
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are described in Note 1.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Minneapolis, Minnesota
March 15, 1996
F-2
<PAGE>
PHOTRAN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1994 1995
------------- -------------- MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 173,160 $ 1,532,361 $ 299,018
Accounts receivable............................................. 171,740 808,549 648,446
Inventory....................................................... 352,380 1,420,048 1,218,895
Equipment held for sale (Note 8)................................ 596,283 3,203,314 4,193,096
Prepaid expenses................................................ 13,945 14,527 54,178
------------- -------------- --------------
Total current assets.......................................... 1,307,508 6,978,799 6,413,633
PROPERTY AND EQUIPMENT, net (Note 3).............................. 4,815,870 6,995,381 7,754,304
DEFERRED FINANCING COSTS (Note 2)................................. 191,990 131,990
DEFERRED OFFERING COSTS (Note 2).................................. 111,511
OTHER ASSETS (Note 2)............................................. 26,485 26,485 26,485
------------- -------------- --------------
$ 6,149,863 $ 14,192,655 $ 14,437,923
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bridge financing (Note 4)....................................... $ 4,000,000 $ 4,000,000
Line of credit (Note 4)......................................... 1,916,480 1,966,480
Line of credit (Note 4)......................................... 225,000 225,000
Current portion of other long-term debt, notes payable, and
capital lease obligations (Note 4)............................. $ 122,164 1,041,547 1,290,864
Accounts payable................................................ 645,040 1,195,833 1,422,527
Accrued expenses................................................ 124,855 261,221 373,914
Customer advances (Note 8)...................................... 1,555,435 1,555,435 1,555,435
------------- -------------- --------------
Total current liabilities..................................... 2,447,494 10,195,516 10,834,220
LONG-TERM DEBT (Note 4)........................................... 528,076 762,783 290,318
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Notes 4 and 7):
Undesignated stock, no par value, 6,000,000 shares authorized,
no shares issued...............................................
Common stock, no par value, 24,000,000 shares authorized,
2,834,823, 2,837,323 and 2,837,323 shares issued and
outstanding, respectively...................................... 6,661,167 6,671,217 6,671,217
Accumulated deficit............................................. (3,486,874) (3,436,861) (3,357,832)
------------- -------------- --------------
Total shareholders' equity.................................... 3,174,293 3,234,356 3,313,385
------------- -------------- --------------
$ 6,149,863 $ 14,192,655 $ 14,437,923
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED MARCH 31,
----------------------- ----------------------
1994 1995 1995 1996
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES (Note 2)........................................... $ 914,736 $3,362,818 $ 217,595 $1,137,950
COST OF SALES............................................... 1,016,628 2,048,522 96,933 676,782
----------- ---------- ---------- ----------
Gross (loss) profit..................................... (101,892) 1,314,296 120,662 461,168
OPERATING EXPENSES:
Process and product development........................... 647,639 353,636 72,451 84,657
General and administrative................................ 418,938 462,686 97,893 164,479
Selling and marketing..................................... 174,326 161,531 28,026 72,165
----------- ---------- ---------- ----------
Total operating expenses................................ 1,240,903 977,853 198,370 321,301
----------- ---------- ---------- ----------
(LOSS) INCOME FROM OPERATIONS............................... (1,342,795) 336,443 (77,708) 139,867
INTEREST EXPENSE, net....................................... (62,240) (286,430) (17,323) (60,838)
----------- ---------- ---------- ----------
NET (LOSS) INCOME........................................... $(1,405,035) $ 50,013 $ (95,031) $ 79,029
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
NET (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(Note 2)................................................... $ (0.47) $ 0.02 $ (0.03) $ 0.02
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 2)................................ 3,015,640 3,334,114 3,334,114 3,334,114
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ACCUMULATED TOTAL
SHARES AMOUNT DEFICIT EQUITY
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993............................... 2,571,998 $ 5,747,486 $ (2,081,839) $ 3,665,647
Common stock issued -- January-March 1994, net of
offering costs of $137,618.............................. 262,825 913,681 913,681
Net loss................................................. (1,405,035) (1,405,035)
----------- ------------- -------------- --------------
BALANCE AT DECEMBER 31, 1994............................... 2,834,823 6,661,167 (3,486,874) 3,174,293
Common stock issued upon exercise of options -- July
1995.................................................... 2,500 10,050 10,050
Net income............................................... 50,013 50,013
----------- ------------- -------------- --------------
BALANCE AT DECEMBER 31, 1995............................... 2,837,323 6,671,217 (3,436,861) 3,234,356
Net income (unaudited)................................... 79,029 79,029
----------- ------------- -------------- --------------
BALANCE AT MARCH 31, 1996 (UNAUDITED)...................... 2,837,323 $ 6,671,217 $ (3,357,832) $ 3,313,385
----------- ------------- -------------- --------------
----------- ------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED MARCH 31,
------------------------ -----------------------
1994 1995 1995 1996
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................. $(1,405,035) $ 50,013 $ (95,031) $ 79,029
Adjustments to reconcile net (loss) income to cash provided by (used in)
operating activities:
Depreciation and amortization -- property and equipment..................... 219,748 295,324 36,531 118,993
Interest expense associated with amortization of deferred financing costs... 40,421 60,000
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................................... 176,378 (636,809) 159,255 160,103
Inventory............................................................... 221,828 (1,067,668) (865,249) 201,153
Equipment held for sale................................................. (596,283) (2,607,031) (28,725) (989,782)
Prepaid expenses........................................................ (5,345) (582) (20,540) (39,651)
Increase (decrease) in:
Accounts payable........................................................ 246,888 550,793 1,234,509 226,694
Accrued expenses........................................................ (19,129) 136,366 10,037 112,693
Customer advances....................................................... 1,530,435
----------- ----------- ---------- -----------
Cash provided by (used in) operating activities....................... 369,485 (3,239,173) 410,713 (70,768)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.............................................. (1,983,422) (2,474,835) (697,201) (877,916)
Deferred offering costs....................................................... (111,511)
Other assets.................................................................. 1,516
----------- ----------- ---------- -----------
Cash used in investing activities..................................... (1,981,906) (2,474,835) (697,201) (989,427)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge financing, net of financing fees of $222,286 in fiscal
1995......................................................................... 4,000,000
Proceeds from lines of credit................................................. 2,141,480 50,000
Proceeds from notes payable and long-term debt, net of financing fees of
$10,126 in fiscal 1995....................................................... 45,348 1,411,692 213,520 40,083
Payments of notes payable and long-term debt.................................. (81,174) (490,013) (36,268) (263,231)
Common stock issued........................................................... 913,681 10,050
----------- ----------- ---------- -----------
Cash provided by (used in) financing activities....................... 877,855 7,073,209 177,252 (173,148)
----------- ----------- ---------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (734,566) 1,359,201 (109,296) (1,233,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 907,726 173,160 173,160 1,532,361
----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 173,160 $ 1,532,361 $ 63,864 $ 299,018
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH FINANCING
ACTIVITIES:
Cash paid for interest........................................................ $ 48,710 $ 146,492 $ 14,611 $ 66,467
Acquisition of property by capital lease...................................... 45,348 128,466 13,520 40,083
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
1. BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING LOSSES AND
LIQUIDITY
Photran Corporation (the Company) is engaged in the manufacture and sale of
products incorporating thin film coatings which consist of microscopic layers of
metal and metal oxide materials. Materials coated with these thin film coatings
are components in a wide variety of products, including liquid crystal displays,
glare reducing/radiation blocking filters for use with computer monitors and
television screens and anti-reflective glass. To date, the Company's sales have
consisted of coated glass products to a limited number of companies located in
Asian countries for use in liquid crystal displays.
Upon incorporation on May 3, 1991, the principal activities performed by the
Company were product development, marketing, financing, and construction of
production equipment. During the latter half of fiscal 1993, the Company
commenced pilot production and sales of twisted nematic indium tin oxide
(TN-ITO) electrically conductive glass products. In fiscal 1994, management made
the strategic decision to suspend pilot production and to redesign the Company's
production equipment and facility to enable it to produce anti-reflective
coatings and to increase the efficiency of the equipment.
The Company resumed operations of its manufacturing facility during July
1995. However, the manufacturing facility has been operational for only a
limited number of available operating days since such time to allow for the
simultaneous modification of the facility for production of super twisted
nematic glass (STN-ITO), anti-reflection and enhanced reflection mirror
products.
During fiscal 1994, the Company entered into a joint venture and will sell
to the venture a coating system and technology to enable the venture to produce
and market TN-ITO glass products. See Note 8 for further description of the
terms of the sale and joint venture agreement.
The Company has incurred accumulated losses since its inception of
$3,357,832. The Company had negative working capital of $3,216,717 and
$4,420,587 at December 31, 1995 and March 31, 1996, respectively, which includes
approximately $6.2 million of bridge financing and lines of credit due in 1996.
The Company incurred negative cash flows from operating activities of $3,239,173
and $70,768 for the year ended December 31, 1995 and the three month period
ended March 31, 1996, respectively. The Company had cash outlays for property
and equipment additions of $1,983,422, $2,474,835 and $877,916 for the years
ended December 31, 1994 and 1995, and for the three month period ended March 31,
1996, respectively.
These factors, among others, indicate the Company may be unable to continue
as a going concern for a reasonable period of time. The Company's continuation
as a going concern is dependent on its ability to meet its obligations as they
become due. The Company is attempting to sell approximately 2,000,000 shares of
common stock in a public offering to raise net proceeds to the Company of
approximately $15 million (Note 9). If the public offering is not completed, it
will become necessary for the Company to pursue financing from other sources in
order to pay its current obligations, including $6,141,480 of bridge financing
and lines of credit due in 1996.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management anticipates that the Company
will complete its sale of the coating system to the joint venture during 1996.
Management anticipates receipt of $3,300,000 upon shipment of the coating
system. Such proceeds will be used to repay the related line-of-credit which,
during the three months ended March 31, 1996, was extended and is now due May
31, 1996. Collection of the final $600,000 of the sales price is
F-7
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
1. BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING LOSSES AND
LIQUIDITY (CONTINUED)
expected during the latter half of 1996 if the coating system meets all final
acceptance tests at the joint venture site. Management believes substantially
all modifications to its manufacturing facility will be completed during the
first half of fiscal 1996. Management believes that these improvements will
increase production efficiency and allow the Company to commence production of
higher margin products which will result in improved operating results. During
the last six months of fiscal 1995, coated glass production operating activities
provided positive cash flows. Management believes that the Company's coated
glass production operating activities will continue to provide positive cash
flows in future periods. If the public offering is not completed, management
plans to pursue additional financing with various lending institutions. However,
such financing is currently not in place and there can be no assurance that
additional financing will be available or that the Company's business will
develop as anticipated by management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED FINANCIAL STATEMENTS The Company's balance sheet as of March 31,
1996, statements of operations and cash flows for the three months ended March
31, 1995 and 1996, statement of shareholders' equity for the three months ended
March 31, 1996 and the interim information in the notes to financial statements
as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 are
unaudited. In the opinion of management, such unaudited financial statements
include all adjustments, consisting of only normal, recurring accruals,
necessary for a fair presentation thereof. The results of operations for any
interim period are not necessarily indicative of the results for the year.
MANAGEMENT'S 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.
REVENUE RECOGNITION Revenues are recognized upon shipment of products to
customers.
REVENUE FROM SIGNIFICANT CUSTOMERS Substantially all of the Company's sales
for the years ended December 31, 1994 and 1995 and three months ended March 31,
1995 and 1996 were to customers located in Asian countries. The percentages of
total revenue from sales to customers in excess of 10% of the total for each
period were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
------------ ------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A.................... 26% 57% -- 71%
Customer B.................... -- 28 -- --
Customer C.................... 32 -- -- --
Customer D.................... 14 -- -- --
Customer E.................... -- -- 92% --
</TABLE>
PROCESS AND PRODUCT DEVELOPMENT Expenditures for process and product
development include research and development expense and additionally include
start-up manufacturing cost of $202,159 in 1994 associated with manufacturing
test runs. Expenditures for research and development of
F-8
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
products and manufacturing processes are expensed as incurred. Research and
development expense was $445,480, $353,636, $72,451 and $84,657 for the years
ended December 31, 1994 and 1995, and the three month periods ended March 31,
1995 and 1996, respectively.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE The Company's accounts receivable at December 31, 1994
and 1995 and March 31, 1996 are due primarily from foreign customers located in
Asian countries. In 1994 and 1995, the Company has required the establishment of
irrevocable letters of credit in its favor from approved banks prior to shipment
of the products underlying these accounts receivable in order to reduce its
exposure to bad debts. At March 31, 1996, $292,000 of accounts receivable were
not secured by letters of credit. These accounts were due from customers with
whom the Company has had a creditor relationship for over one year. Accounts
receivable include amounts due from one customer of $167,000, $240,000 and
$150,000 at December 31, 1994 and 1995, and March 31, 1996, respectively, and
$544,000 and $308,000 due from a second customer at December 31, 1995 and March
31, 1996, respectively. The Company's sales are denominated in U.S. dollars.
INVENTORY Inventory is valued at the lower of cost, determined on the
first-in, first-out method, or market value. Inventory consists of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------- AT MARCH 31,
1994 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
Finished goods - glass............. $ 187,909
Raw materials and supplies......... 164,471 $ 1,420,048 $ 1,218,895
----------- ------------- -------------
$ 352,380 $ 1,420,048 $ 1,218,895
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
Inventories are periodically reviewed for obsolescence, overstock and
quality defects by physical examination and by comparing quantities on hand to
forecasted future requirements. Items considered obsolete or overstock are
written off. Items with quality defects are valued at net realizable value.
The Company purchases substantially all of its raw glass, which is the
majority of the raw materials used in the manufacture of its products, from a
single source supplier. The Company believes that acceptable alternative sources
of this material are available.
EQUIPMENT HELD FOR SALE Equipment held for sale in association with the
joint venture described in Note 8 is carried at cost. Equipment held for sale
includes $85,000 and $178,000 of interest capitalized for the year ended
December 31, 1995 and the three month period ended March 31, 1996, respectively.
CUSTOMER ADVANCES Customer advances represent amounts received from
customers primarily related to Equipment Held for Sale. Revenue will be
recognized upon successful completion of the Company's obligations under these
contracts.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Cost
includes expenditures for new equipment and incremental labor and direct costs
incurred for construction of equipment modifications. Property and equipment
includes $30,000 of interest capitalized during the three months ended March 31,
1996.
F-9
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, other than manufacturing process equipment, is depreciated using
the straight-line method over estimated useful lives of three to ten years.
Manufacturing process equipment is depreciated using the units-of-production
method, with such equipments' useful life estimated to be approximately 10
years. Amortization of equipment under capital leases is over the shorter of the
lease term or the economic useful life and is recorded as depreciation expense.
Depreciation is not recorded on property not yet placed in service. Repairs and
maintenance are charged to expense as incurred.
DEFERRED FINANCING COSTS Deferred financing costs consist primarily of
underwriting and legal fees associated with the issuance of bridge note
financing in fiscal 1995 (Note 4). Amortization of deferred financing costs is
recorded using the straight line method over the life of the related notes.
Accumulated amortization was $40,000 at December 31, 1995 and $100,000 at March
31, 1996.
DEFERRED OFFERING COSTS Deferred offering costs consist of legal,
accounting and other costs associated with the Company's proposed initial public
offering of common stock (see Note 9). Such costs will be reclassified to
shareholders' equity upon the successful completion of an offering. Such costs
will be expensed if an offering of common stock is not completed.
OTHER ASSETS The Company has obtained patent rights to various
manufacturing processes and product technology. The founding shareholder has
transferred key manufacturing and product technology to the Company, including
patent rights, for the sum of $1. In addition, the Company has purchased an
exclusive license for certain related technology from Applied Elastomerics, Inc.
The consideration paid to Applied Elastomerics, Inc. of $13,000 has been
capitalized and will be amortized upon commencement of production over the term
of the license agreement. The Company has agreed to pay royalties of 5 - 7 % of
the net sales price of products relating to the Applied Elastomerics, Inc.
technology through May 1996. The license expires in May 1996. The license is
subject to certain renewal options and the Company is currently negotiating
renewal of the license. However, there is no assurance that the license will be
renewed. The Company's minimum annual royalty obligation is $80,000 and begins
at the time the Company commences sales of products subject to this license. As
of December 31, 1995 and March 31, 1996, there were no product sales subject to
royalty.
IMPAIRMENT OF LONG-LIVED ASSETS Management periodically reviews the
carrying value of property and equipment for potential impairment by comparing
its carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset. To date,
management has determined that no impairment of these assets exists. The
technology used in the Company's manufacturing equipment may be subject to rapid
technological change within time frames not currently anticipated by the
Company. It is reasonably possible that the Company's estimate of recoverability
of the carrying value of its equipment will change in the future.
INCOME TAXES The Company calculates income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. SFAS No. 109 requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the period in which the differences are expected to affect taxable
income.
F-10
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Net income (loss)
per common and common equivalent share is computed by dividing net income (loss)
by the weighted average number of common stock and dilutive common stock
equivalents outstanding. The total weighted average number of common and common
equivalent shares outstanding has been adjusted to give effect to the reverse
stock split authorized by the Company's shareholders on March 2, 1996, which
will not become effective until a proposed initial public offering of the
Company's common stock is allowed to become effective by the Securities and
Exchange Commission (Note 7). Common stock equivalents result from dilutive
stock options and warrants. Common equivalent shares are not included in the per
share calculations when the effect of their inclusion would be antidilutive,
except that, in accordance with Securities and Exchange Commission requirements,
common and common equivalent shares issued during the 12 months prior to the
Company's proposed initial public offering have been included in the calculation
(using the treasury stock method based on an assumed initial public offering
price of $8.50 per share) as if they were outstanding for all periods presented.
The net income (loss) per common share will change if the actual initial public
offering price differs from the assumed initial public offering price per share
utilized in this calculation. Fully diluted earnings (loss) per common share is
not presented because of its antidilutive effect.
RECENTLY ISSUED ACCOUNTING STANDARDS In October, 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). SFAS 123 requires
expanded disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) application of the fair value recognition
provisions of SFAS 123 to such arrangements. SFAS 123 is required to be adopted
for reporting purposes by the Company in fiscal 1996. The Company is currently
evaluating whether or not it will change to the recognition provisions of SFAS
123 and has not yet performed the required calculations. The fair value
recognition and measurement provisions of SFAS 123 for stock-based arrangements
with nonemployees is not expected to have a significant impact on the Company as
such transactions were accounted for on the fair value basis during fiscal 1994
and 1995.
FINANCIAL RISKS AND UNCERTAINTIES In accordance with American Institute of
Certified Public Accountants Statement of Position No. 94-6, DISCLOSURE OF
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES, the Company has disclosed in the
financial statements certain financial risks and uncertainties to which it is
subject: Concentration of sales to a limited number of customers; single source
supplier of raw materials; and use of estimates to review the carrying value of
long-lived assets and equipment held for sale which may change in the future
given the rapid technological changes associated with the industry in which the
Company operates.
F-11
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
ESTIMATED USEFUL ---------------------- AT MARCH 31,
LIVES IN YEARS 1994 1995 1996
---------------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Leasehold improvements................................................ 10 $ 724,954 $ 912,395 $ 1,189,978
Manufacturing process equipment....................................... 10 3,256,558 4,157,449 4,364,793
Construction in progress.............................................. 98,746 1,139,023 1,524,042
Other manufacturing equipment......................................... 7 850,702 1,084,621 1,030,382
Fixtures and equipment................................................ 3-7 159,765 272,072 324,281
---------- ---------- ------------
5,090,725 7,565,560 8,433,476
Less accumulated depreciation and amortization........................ 274,855 570,179 679,172
---------- ---------- ------------
$4,815,870 $6,995,381 $ 7,754,304
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Property and equipment includes assets under capital lease at cost of
$104,843, $276,824 and $319,518 and accumulated amortization of $14,539, $39,926
and $46,469 as of December 31, 1994 and 1995 and March 31, 1996, respectively.
4. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS
Notes payable, long-term debt, and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------- AT MARCH 31,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable:
Bridge financing (A)................................................. $ 4,000,000 $ 4,000,000
Line of credit (B)................................................... 1,916,480 1,966,480
Line of credit (C)................................................... 225,000 225,000
Long-term debt and capital lease obligations:
Shareholder note payable (D)......................................... $ 1,416,667 1,166,667
Shareholder note payable (E)......................................... $ 200,000 200,000 200,000
Capital lease obligations (F)........................................ 105,275 187,663 214,515
SBA loan, repaid in 1995............................................. 344,965
------------- ------------- -------------
650,240 1,804,330 1,581,182
Less current maturities.............................................. 122,164 1,041,547 1,290,864
------------- ------------- -------------
Long-term debt....................................................... $ 528,076 $ 762,783 $ 290,318
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The carrying amounts of long-term debt approximate fair market value on
December 31, 1994 and 1995 and March 31, 1996, respectively. Rates currently
available to the Company for debt with similar terms and remaining maturities
are used to estimate the fair value of the existing debt.
(A) In October 1995, the Company issued $4 million of notes payable (the Bridge
Notes). The Bridge Notes bear interest at 11.75% per annum with interest and
principal due the earlier of October 15, 1996 or the receipt by the Company
of gross proceeds of at least $7 million in a private or
F-12
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
4. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
public financing that includes securities with equity features or debt with
a term of one year or more. The Bridge Notes are secured by substantially
all of the Company's assets, subject to the prior security interest of the
Company's lines of credit and $1,416,667 shareholder note payable.
The Company incurred costs of approximately $220,000 relating to the
issuance of the Bridge Notes. These costs are being amortized, on a
straight-line basis, from the date of issuance until October 15, 1996. If
the Bridge Notes are repaid earlier than October 15, 1996, any unamortized
related costs will be charged to interest expense at such time.
In connection with this financing, the Company issued warrants to the
purchasers of the Bridge Notes to purchase a total of 400,000 shares of the
Company's common stock and to the selling agent of the Bridge Note financing
warrants to purchase a total of 40,000 shares of the Company's common stock.
See Note 7 for a description of the terms and accounting for these warrants.
(B) During fiscal 1995, the Company obtained a $2,000,000 transaction-specific
line of credit ($1,916,480 and $1,966,480 outstanding at December 31, 1995
and March 31, 1996, respectively) through the Bank of America, guaranteed by
the Export Import Bank (EXIM) of the United States. Under terms of the line
of credit, proceeds from this borrowing are to be used by the Company to
complete the coating system equipment to be sold to joint venture (see Note
8). Borrowings bear interest at 1% over prime (9.5% and 9.25% at December
31, 1995 and March 31, 1996, respectively) and are secured by the equipment
held for sale and all other current assets. Borrowings are limited to the
lesser of $2,000,000 or 75% of the value of the equipment held for sale, as
defined. The borrowings will be repaid from the proceeds of such coating
system equipment sale, and during the three months ended March 31, 1996 the
due date was extended to May 31, 1996 if not repaid sooner.
(C) The EXIM guarantee has been extended to a $500,000 revolving line of credit
($225,000 outstanding at December 31, 1995 and March 31, 1996). This line of
credit is to be used to finance products for export. Borrowings bear
interest at a rate of 1% over prime (9.5% and 9.25% at December 31, 1995 and
March 31, 1996, respectively) and are secured by accounts receivable and
inventory. Borrowings are limited to the lesser of $500,000 or a borrowing
base, as defined, which exceeded $500,000 at December 31, 1995 and March 31,
1996. The line was extended during the three months ended March 31, 1996 and
is now due May 31, 1996.
Repayment of both the transaction specific and revolving lines of credit are
guaranteed by the Company's president, who is also a shareholder of the
Company. The underlying credit agreement prohibits the payment of dividends,
repurchase of Company stock, and requires the lender's written consent to
incur additional debt. The credit agreement contains various financial and
other restrictive covenants, which require, among other matters, the Company
to maintain profitability for each quarterly accounting period commencing
July 1, 1995, maintain a tangible net worth, as defined, of at least $2.8
million and to maintain a ratio of total nonsubordinated liabilities to
tangible net worth, as defined, not to exceed 2.1:1.0. Subordinated debt of
$4 million (the Bridge Notes) is added to total shareholders' equity to
calculate tangible net worth for purposes of the credit agreement. The
Company was in compliance with the terms of the credit agreement at December
31, 1995 and March 31, 1996.
(D) On May 1, 1995, a director of the Company made a loan to the Company in the
original principal amount of $1.5 million. The loan bears interest at prime
plus 3.75% (12.25% and 12% at December 31, 1995 and March 31, 1996,
respectively) and is secured by substantially all equipment and
F-13
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
4. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
intellectual property of the Company. The note is subject to periodic
payments of principal and accrued interest, and is payable in full, if not
sooner paid, on May 10, 1997. The Company incurred costs of approximately
$10,000 relating to the issuance of the note. These costs are being
amortized, on a straight-line basis, from the date of issuance until May 10,
1997. If the note is repaid earlier than May 10, 1997 any unamortized
related costs will be charged to interest expense at such time. In
connection with the issuance of this loan, warrants were issued to the
director to purchase up to 75,000 shares of the Company's common stock. See
Note 7 for a description of the terms and accounting for these warrants.
(E) The $200,000 shareholder note payable bears interest at 10%, is unsecured
and is convertible, at the shareholder's option, into shares of the
Company's common stock at a conversion rate of $2.00 per share. The note is
due January 1997. This note is subordinate to the $2,000,000 and $500,000
lines of credit. In connection with the issuance of this loan, warrants were
issued to the director to purchase up to 20,000 shares of the Company's
common stock, exercisable from August 1994 to August 1997, at an exercise
price of $2.00 per share.
(F) Capital lease obligations are secured by the underlying property and bear
interest at effective interest rates of approximately 8.75% to 15.70%.
The principal maturities of notes payable, long-term debt, and capital lease
obligations outstanding at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
DEBT AND
NOTES CAPITAL
PAYABLE LEASES TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
12 months ending December 31,:
1996................................................................. $ 7,141,480 $ 61,602 $ 7,203,082
1997................................................................. 616,667 57,230 673,897
1998................................................................. 54,188 54,188
1999................................................................. 43,477 43,477
2000................................................................. 22,059 22,059
------------- ----------- -------------
7,758,147 238,556 7,996,703
Less amounts representing interest..................................... 50,893 50,893
------------- ----------- -------------
Notes payable, debt and capital lease obligations outstanding.......... $ 7,758,147 $ 187,663 $ 7,945,810
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
5. INCOME TAXES
For income tax purposes, the Company has a U.S. federal net operating loss
carryforward of approximately $4,000,000 as of December 31, 1995. The
carryforward expires in 2006 through 2009.
Due to certain ownership changes, as defined in Section 382 of the Internal
Revenue Code, which occurred during the year ended December 31, 1993, the
Company's net operating loss carryforwards incurred through February, 1993 of
$700,000 are limited to annual utilization of approximately $50,000 per year.
Utilization of the Company's net operating loss carryforward is not expected
to be limited as a result of this Offering. However, the Company's ability to
use its net operating loss carryforwards may be further limited by subsequent
issuances of common stock.
F-14
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
5. INCOME TAXES (CONTINUED)
The benefit for income taxes in fiscal 1994 and the three months ended March
31, 1995 have been offset by a valuation allowance because the Company's net
operating losses could not be carried back and future realization of the net
operating loss carryforwards is uncertain. The Company has utilized net
operating loss carryforwards in fiscal 1995 and the three months ended March 31,
1996 to substantially offset any taxes due.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
------------ ----------
<S> <C> <C>
Tax expense (benefit) computed at statutory rates............................. $ (492,000) $ 18,000
State taxes................................................................... 2,000 2,000
Change in valuation allowance................................................. 490,000 (20,000)
------------ ----------
$ -- $ --
------------ ----------
------------ ----------
</TABLE>
Temporary differences, tax carryforwards, and valuation allowances consist
of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Noncurrent:
Excess of tax over book depreciation and other........................ $ (230,000) $ (200,000)
Tax loss carryforward................................................. 1,450,000 1,400,000
Valuation allowance................................................... (1,220,000) (1,200,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
6. COMMITMENTS
OPERATING LEASE COMMITMENTS -- The Company is obligated under a
noncancelable operating lease for the rental of its office and manufacturing
facility through July 2001. The lease contains provisions for payment of the
facility operating expenses and real estate taxes as additional rents. The
Company has the option to terminate the lease on the fifth anniversary of the
commencement of the lease by providing 120-days written notice to the lessor,
with a penalty. Rent expense for the years ended December 31, 1994 and 1995 was
approximately $100,000 in both years. Rent expense for the three month periods
ended March 31, 1995 and 1996 was $18,088 and $25,703, respectively. During
January 1996, the Company entered into an operating lease to rent additional
manufacturing space for a term of ten years. This lease contains provisions for
payment of the facility operating expenses and real estate taxes as additional
rents. Minimum lease payments due under these operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996................................................................. $ 135,942
1997................................................................. 221,610
1998................................................................. 221,610
1999................................................................. 221,610
2000................................................................. 221,610
Thereafter........................................................... 738,393
----------
Total minimum payments................................................. $1,760,775
----------
----------
</TABLE>
F-15
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
6. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENT -- The Company has executed an employment agreement
with its president through 1997. The agreement provides for a maximum base
compensation of $120,000 per year if certain financial performance goals, as set
by the Company's Board of Directors, are met. The maximum base compensation may
be reset through mutual agreement of the president and Board of Directors. The
agreement also provides for the issuance of options, at the discretion of the
Board of Directors, for the purchase of the Company's common stock, payment of
annual incentive bonuses, and an option for the president to require the Company
to purchase his shares if the Company terminates his employment without cause.
As of December 31, 1995 and March 31, 1996, options for the purchase of 25,000
shares of the Company's common stock have been issued pursuant to this
agreement.
GUARANTEE -- The Company has guaranteed $400,000 of the purchase price of a
building which its joint venture investee is required to pay (see Note 8).
7. SHAREHOLDERS EQUITY
AUTHORIZED SHARES -- On March 2, 1996, the Company's shareholders approved
an amendment to the Company's Articles of Incorporation, whereby the authorized
stock of the Company was stated as 24,000,000 shares of common stock, no par
value, and 6,000,000 undesignated shares, no par value. The Company's Board of
Directors may designate any series and fix any relative rights and preferences
of the undesignated stock. The authorized shares have been restated in the
financial statements to reflect the impact of this amendment.
REVERSE STOCK SPLIT -- On March 2, 1996, the Company's shareholders approved
a one for two reverse stock split. The reverse stock split will become effective
when a proposed initial public offering of the Company's common stock becomes
effective (Note 9). All share and per share amounts included in the financial
statements and notes thereto have been restated to reflect the impact of the
reverse stock split.
STOCK OPTION PLAN -- On March 2, 1996, the Company's shareholders approved
the amendment of the Company's 1992 Stock Option Plan (the Plan) to provide for
the issuance of up to 625,000 shares of the Company's common stock under the
Plan. Under the Plan, incentive stock options and nonqualified stock options may
be granted to key employees and others at exercise prices not less then 85% of
the fair market value of the underlying common stock at the date of grant. The
Board of Directors establishes all terms and conditions of each grant. The
following summarizes stock option activity related to the Plan:
<TABLE>
<CAPTION>
OPTION SHARES
---------------------------------------
OUTSTANDING EXERCISABLE PRICE RANGE
----------- ----------- -------------
<S> <C> <C> <C>
Balances at December 31, 1993.................................. 23,500 1,313 $ 2.00
Granted........................................................ 4,250 2.00 - 4.00
Became exercisable............................................. 5,813 2.00 - 4.00
----------- ----------- -------------
Balances at December 31, 1994.................................. 27,750 7,126 2.00 - 4.00
Granted........................................................ 48,500 4.00
Became exercisable............................................. 32,000 2.00 - 4.00
----------- ----------- -------------
Balances at December 31, 1995.................................. 76,250 39,126 2.00 - 4.00
Became exercisable............................................. 11,400 2.00 - 4.00
----------- ----------- -------------
Balances at March 31, 1996..................................... 76,250 50,526 2.00 - 4.00
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-16
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
7. SHAREHOLDERS EQUITY (CONTINUED)
During 1994, the Board of Directors granted an option to an unrelated party
to purchase 6,875 shares of the Company's common stock at an exercise price of
$4.00 per share. Options to purchase 2,500 shares of common stock were exercised
during 1995. Options to purchase 4,375 shares expired during 1995.
During 1995, the Board of Directors granted currently exercisable options to
purchase 5,000 shares of common stock at $4.00 per share to each outside member
of the Board of Directors (for options to purchase an aggregate of 15,000 shares
of common stock). In addition, the Board of Directors granted options to
purchase 15,000 shares of common stock at $4.00 per share to each outside member
of the Board of Directors (for options to purchase an aggregate of 45,000 shares
of common stock), which vest over a three-year period commencing March 15, 1996.
All options granted to Board of Directors members expire ten years after the
date of grant. 10,000 of such options expired during March 1996 upon the
resignation of a member of the Board of Directors.
STOCK WARRANTS -- The Company has granted warrants in connection with
certain debt financing obtained during 1992, 1993, and 1995 and in connection
with common stock issued during 1993 and 1994.
Warrants outstanding at December 31, 1995 and March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARES PERIOD EXERCISABLE
- --------- --------------- ------------------------------------
<S> <C> <C>
49,250 $ 2.00 Exercisable to November 1997
145,109 2.00 March 1994 to 1998
20,000 2.00 August 1994 to 1997
90,000 2.00 September 1994 to 1998
23,444 4.00 November 1994 to 1998
44,519 4.00 December 1994 to 1998
23,028 4.00 January 1995 to 1999
3,250 4.00 February 1995 to 1999
75,000 4.00 May 1996 to 2003
440,000 (A) October 1996 to 2000
- ---------
913,600
- ---------
- ---------
</TABLE>
(A) These warrants were issued in connection with the issuance of Bridge Notes
during fiscal 1995. In connection with this financing, the Company issued
warrants to the purchasers of the Bridge Notes to purchase a total of
400,000 shares of the Company's common stock and to the selling agent of the
Bridge Note financing warrants to purchase a total of 40,000 shares of the
Company's common stock. The exercise price of the warrants issued to the
Bridge Note holders is 75% of the per share price (100% in the case of the
selling agent warrants) of any shares of the Company's common stock sold in
the private or public equity offering next following the Bridge Notes
placement which results in gross proceeds to the Company of at least $7
million. In the event the Company does not complete a public or private
financing prior to March 31, 1997, the warrant exercise price will be $4.00
per share. The holders of the warrants may convert the warrants, at any time
during the exercise period, into the number of shares of the Company's
common stock obtained by dividing the differential between the then current
market price of the Company's common stock, as defined, and the warrant
exercise price by such current market price of the
F-17
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
7. SHAREHOLDERS EQUITY (CONTINUED)
Company's common stock. The Company has obtained a valuation of the warrants
and has determined, based on such valuation, that the value of the warrants,
if any, is insignificant to the financial statements.
In connection with a $1.5 million loan received in May, 1995 from a director
of the Company, warrants were issued to the director to purchase up to 75,000
shares of the Company's common stock at an exercise price of $4.00 per share.
The Company has obtained a valuation of the warrants and has determined, based
on such valuation, that the value of the warrants, if any, is insignificant to
the financial statements.
8. JOINT VENTURE AGREEMENT
The Company has entered into a joint venture agreement with the Shenzhen
WABO Group Company, Limited ("WABO"), of Shenzhen, China. The joint venture
company, known as the Shenzhen Fortune Conductive Glass Company, Ltd.
("Fortune"), was created to produce TN grade ITO coated glass for the Asian
market.
WABO has provided cash to Fortune to purchase a glass coating system from
the Company and for working capital purposes. The Company is obligated to
provide $4,658,000 (40% of the total capitalization of the joint venture of
$11,645,000). The Company has agreed to sell to Fortune the ITO glass coating
machine for $10,145,000. The contribution of $4,658,000 has been deducted from
the gross purchase price of the coating system because the Company is not
relying on any material earnings or distributions from Fortune in part due to
uncertainty of repatriation of funds from China. Therefore the Company will
record the net purchase price of $5,487,000 ($10,145,000-$4,658,000) as an
equipment sale and has not recorded its capital contribution as an asset. The
Company has followed the provisions of Emerging Issues Task Force (EITF) Issue
No. 89-7 in accounting for the glass coating system sale. EITF 89-7 offers
guidance regarding gain recognition on this sale and accounting for the
Company's investment in the joint venture. The Company is accounting for the
sale of the glass coating system using the completed contract method. The
Company is not obligated to make additional investments in the joint venture
other than a guarantee provided by the Company with respect to $400,000 of the
purchase price of a building which Fortune is obligated to pay in the second and
third years of operations.
The $5,487,000 million net purchase price being paid by Fortune to the
Company is secured by a letter of credit, confirmed by Chemical Bank, New York.
As of December 31, 1995 and March 31, 1996, the Company has received a deposit
of $1,530,000 from Fortune for the equipment. $3,270,000 is to be paid upon
shipment by the Company. Payment of the final $600,000 of this amount is
contingent upon the equipment operating within certain specifications for ten
days at twenty hours per day upon assembly at Fortune's facility as evidenced by
a certificate from Fortune. In addition, the letter of credit stipulates that
the equipment must be shipped on or before June 30, 1996. The Company expects to
comply with this requirement. The Company is subject to certain contractual
penalties for failure to ship by April 15, 1996. These penalties require the
Company to refund Fortune's deposit of $1,530,000, which amount has been
recorded as a current liability of the Company. The equipment was not shipped by
April 15 but the Company expects to ship by the end of May of 1996. WABO has
orally agreed to waive these penalties provided the equipment is shipped no
later than June 30, 1996. In addition, the Company contends the shipment was
delayed due to actions of WABO, in which case no penalty would be due. Any
penalties which the Company may incur cannot be withheld from the confirmed
letter of credit amounts. However, payment of the final $600,000 of the purchase
price will not occur until certification is received from Fortune after the
equipment is shipped. The Company
F-18
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
8. JOINT VENTURE AGREEMENT (CONTINUED)
will not commence installation procedures until a written waiver of penalties is
received. The Company is currently working with WABO to memorialize this waiver.
In the event the Company does not ship the equipment, it intends to use the
equipment to manufacture additional products.
The equipment was originally scheduled to be shipped by November 6, 1995.
Due to a delay by WABO in delivering the letter of credit and the Company's
inability to obtain working capital financing on a timely basis, the project was
delayed for several months. The Company has incurred costs through March 31,
1996 of $4,193,096 in construction of the coating system and anticipates that
additional costs of $350,000 will be incurred during 1996 in completing and
installing the coating system pursuant to its obligations under the agreement.
The Company has provided certain warranties to the joint venture for a
twelve-month period after the acceptance of the equipment. During this period,
any repairs or replacements to the equipment must be performed by the Company.
The Company's estimated obligation for this warranty is included in the
estimated costs to complete and install the coating system. The Company will
recognize profit under the contract when its obligations under the contract are
substantially completed, and the equipment is accepted by the joint venture.
Upon acceptance (when certification is received from Fortune), profit will be
deferred for the warranty costs and the $400,000 guarantee by the Company of the
purchase price for the building. Profit deferred for the guarantee will not be
recognized until such time as Fortune is generating cash flow from operations
that are sufficient to fund its debt service and other obligations. Given the
technical nature of the coating system being constructed, it is reasonably
possible that the Company's estimate of costs to complete the contract will
change in the future.
9. SUBSEQUENT EVENTS
PUBLIC OFFERING -- The Company is planning an initial public offering of
2,000,000 shares of common stock at an assumed initial public offering price of
$8.50 per share. The Company will grant to the underwriters an overallotment
option pursuant to which an additional 300,000 shares may be sold on the same
terms as the initial stock for the purpose of covering any overallotment sales
made in the public offering. In connection with the proposed initial public
offering, the representative of the underwriters would be granted warrants to
purchase up to 160,000 shares of common stock at 120% of the price to the
public, exercisable commencing one year after the effective date of the offering
for a period of four years.
F-19
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................ 3
Risk Factors...................................... 5
Use of Proceeds................................... 10
Dividend Policy................................... 11
Dilution.......................................... 11
Capitalization.................................... 12
Selected Financial Data........................... 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 14
Business.......................................... 21
Management........................................ 33
Certain Transactions.............................. 36
Principal Shareholders............................ 38
Description of Capital Stock...................... 38
Shares Eligible for Future Sale................... 40
Underwriting...................................... 42
Legal Matters..................................... 43
Experts........................................... 43
Available Information............................. 43
Index to Consolidated Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JOHN G. KINNARD AND COMPANY,
INCORPORATED
, 1996
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521 of the Minnesota Business Corporation Act provides that
unless prohibited or limited by a corporation's articles of incorporation or
by-laws, the corporation must indemnify its current and former officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, penalties, fines and amounts paid in settlement and which were
incurred in connection with actions, suits, or proceedings in which such persons
are parties by reason of the fact that they are or were an officer, director,
employee or agent of the corporation, if they (i) have not been indemnified by
another organization, (ii) acted in good faith, (iii) received no improper
personal benefit, (iv) in the case of a criminal proceeding, had no reasonable
cause to believe the conduct was unlawful, and (v) reasonably believed that the
conduct was in the best interests of the corporation. Section 302A.521 also
permits a corporation to purchase and maintain insurance on behalf of its
officers, directors, employees and agents against any liability which may be
asserted against, or incurred by, such persons in their capacities as officers,
directors, employees or agents of the corporation, whether or not the
corporation would have been required to indemnify such persons against such
liability under the provisions of such statutory section.
Article VII of the Second Amended and Restated Articles of Incorporation and
Article VI of the Amended and Restated By-Laws of the Registrant provide that
the directors, officers, employees and agents of the Registrant shall have the
rights to indemnification provided by Section 302A.521 of the Minnesota Business
Corporation Act.
Section 7 of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides certain indemnification rights to officers and
directors of the Registrant.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Registrant in connection with the issuance and distribution of the shares of
Common Stock offered hereby;
<TABLE>
<S> <C>
SEC registration fee............................................. $ 7,138
NASD Filing Fee.................................................. 2,444
Legal fees and expenses.......................................... 75,000
Accounting fees and expenses..................................... 75,000
Representative's accountable expenses............................ 50,000
Blue Sky fees and expenses....................................... 10,000
Printing expenses................................................ 90,000
Transfer agent fees and expenses................................. 7,500
Miscellaneous.................................................... 49,168
---------
Total........................................................ $ 400,000
---------
---------
</TABLE>
Each amount set forth above, except the SEC registration fee, the NASD
filing fees and the Representative's accountable expense allowance, is
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
All share and per share price data in this section has been restated to
reflect the 1-for-2 reverse stock split to become effective immediately prior to
the effectiveness of this Offering. During the past three years, the Registrant
has sold the following securities pursuant to exemptions from registration under
the Securities Act of 1933, as amended (the "Securities Act"):
SALES OF SHARES OF COMMON STOCK.
On November 17, 1993, the Registrant issued an aggregate of 234,437 shares
to 38 accredited investors and 7 nonaccredited investors pursuant to an offering
under Regulation D of Section 3(b) of the Securities Act for an aggregate
consideration of $937,750.
II-1
<PAGE>
On December 14, 1993, the Registrant issued an aggregate of 448,938 shares
to 74 accredited investors and 14 nonaccredited investors pursuant to an
offering under Regulation D of Section 3(b) of the Securities Act for an
aggregate consideration of $1,795,750.
On January 7, 1994, the Registrant issued an aggregate of 66,575 shares to
12 accredited investors and 3 nonaccredited investors pursuant to an offering
under Regulation D of Section 3(b) of the Securities Act for an aggregate
consideration of $266,300.
On January 31, 1994, the Registrant issued an aggregate of 163,700 shares to
41 accredited investors pursuant to an offering under Regulation D of Section
3(b) of the Securities Act for an aggregate consideration of $654,800.
On February 18, 1994, the Registrant issued an aggregate of 32,550 shares to
9 accredited investors pursuant to an offering under Regulation D of Section
3(b) of the Securities Act for an aggregate consideration of $130,200.
ISSUANCE AND EXERCISE OF STOCK OPTIONS. On various dates from January 1993
through November 1995, the Registrant issued options to purchase an aggregate of
19,000 shares at an exercise price of $2.00 per share and an aggregate of 57,250
shares at an exercise price of $4.00 per share to 66 employees under its 1992
Stock Option Plan pursuant to Rule 701 of Section 3(b) of the Securities Act.
None of these options have been exercised.
On June 9, 1994, the Registrant issued options to purchase 6,875 shares at
an exercise price of $4.00 per share pursuant to Sections 4(2) and 4(6) of the
Securities Act. On May 31, 1995 options to purchase 2,500 shares were exercised.
The balance of these options expired unexercised.
ISSUANCE OF BRIDGE NOTES AND WARRANTS.
On August 8, 1993, the Registrant issued $200,000 in bridge notes and
warrants to purchase 20,000 shares of Common Stock at $2.00 per share to a
director of the Registrant pursuant to Sections 4(2) and 4(6) of the Securities
Act. None of the warrants have been exercised.
On September 23, 1993, the Registrant issued $600,000 in bridge notes and
warrants to purchase 60,000 shares of Common Stock at $2.00 per share to eight
accredited investors pursuant to Sections 4(2) and 4(6) of the Securities Act,
and an agent's warrant to purchase 30,000 shares of Common Stock at $2.00 per
share to R.J. Steichen & Company, who served as placement agent in the offering.
None of the warrants have been exercised.
In November of 1993 through February of 1994, the Registrant issued agent's
warrants for an aggregate of 94,240 shares of Common Stock at $4.00 per share to
R.J. Steichen & Company, who served as placement agent in a private placement of
the Company's Common Stock. None of the warrants have been exercised.
On May 1, 1995, the Registrant issued a $1,500,000 note and warrants to
purchase 75,000 shares of Common Stock at $4.00 per share to a director of the
Registrant pursuant to Sections 4(2) and 4(6) of the Securities Act. None of the
warrants have been exercised.
On October 15 and 31, 1995, the Registrant issued $4,000,000 in bridge notes
and warrants to purchase 400,000 shares of Common Stock at 75% of the Price to
Public to twenty-eight accredited investors pursuant to Sections 4(2) and 4(6)
of the Securities Act. None of the warrants have been exercised.
On October 31, 1995 the Registrant issued agent's warrants for 40,000 shares
of Common Stock at the Price to Public to the Representative, who served as
placement agent in the $4,000,000 bridge note offering. None of the warrants
have been exercised.
II-2
<PAGE>
RESTRICTIONS ON SECURITIES. All securities issued or to be issued are
restricted securities and all certificates issued or to be issued contain a
legend that the securities represented thereby are restricted securities and are
not transferable without registration or an exemption from registration under
all applicable state and federal securities laws.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement, including Representative's Warrant.
1.2 Agreement Among Underwriters.
1.3 Selected Dealers Agreement.
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996.
3.2 Amended and Restated By-Laws of Photran Corporation, effective
December 23, 1992, as amended through February 3, 1996.
4.1 Second Amended and Restated Articles of Incorporation and Amended
and Restated By-Laws of Photran Corporation as amended. (See
Exhibits 3.1 and 3.2 above).
4.2 Specimen of Common Stock Certificate (to be filed by Amendment).
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18,
1992, for the purchase of 1,700 shares, issued to Christopher T.
Vanyo. An identical Warrant For Purchase of Shares of Common Stock
was granted to one other individual for the purchase of 1,600
shares.
4.4* Common Stock Purchase Warrant, dated January 5, 1993, for the
purchase of 29,500 shares, issued to R. J. Steichen & Company.
Identical Common Stock Purchase Warrants in the amounts of 149,964
shares, 35,000 shares and 105,254 shares were granted to R. J.
Steichen & Company on February 19, 1993, February 19, 1993, and
March 17, 1993, respectively.
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of
20,000 shares and 60,000 shares were granted to a total of eleven
individuals on August 8, 1993 and September 23, 1993, respectively.
4.6* Common Stock Purchase Warrant, dated September 23, 1993, for the
purchase of 48,500 shares, issued to R. J. Steichen & Company. An
identical Common Stock Purchase Warrant in the amount of 11,500
shares was granted to R. J. Steichen & Company on September 24,
1993.
4.7 Form of Promissory Note. Identical Notes totaling $600,000 in
principal amount were executed by Photran Corporation in favor of
ten individuals on September 23, 1993.
4.8* Common Stock Purchase Warrant, dated January 7, 1994, for the
purchase of 140,115 shares, issued to R. J. Steichen & Company.
Identical Common Stock Purchase Warrants in the amounts of 11,730
shares and 36,635 shares were granted to R. J. Steichen & Company on
January 31, 1994 and February 18, 1994, respectively.
4.10 Stock Purchase Warrant for 75,000 shares of Common Stock, dated May
1, 1995, granted to Steven King.
4.11 Promissory Note, dated May 1, 1995, executed by Photran Corporation
in favor of Steven King.
4.12 Promissory Note, dated May 26, 1995, executed by Photran Corporation
in favor of Bank of America National Trust and Savings Association,
dated May 26, 1995.
4.13 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a
total of 28 individuals on October 15, 1995 to purchase a total of
400,000 shares.
4.14 Form of Secured Promissory Note. Identical Notes were executed by
Photran Corporation in favor of 28 individuals on October 15, 1995
for a total principal amount of $4,000,000.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
<C> <S>
4.15 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated
October 31, 1995, granted to John G. Kinnard and Company,
Incorporated.
5.1 Opinion of Henson & Efron, P.A. (to be filed by Amendment).
10.1 Contract Agreement for the Joint Venture of Shenzhen Fortune
Conductive Glass Company, Ltd., between Photran Corporation and
Shenzhen Wabo (Group) Company, Limited.
10.2 License Agreement between Photran Corporation and Applied
Elastromerics dated May 30, 1991, as amended.
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries,
Inc. and Photran Corporation dated July 1991.
10.4 Photran Corporation 1992 Stock Option Plan.
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a
total of 76,250 shares.
10.6 Employment Agreement between David E. Stevenson and Photran
Corporation dated January 1, 1993.
10.7 Form of Bridge Loan Agreement. Identical Loan agreements were
entered into between Photran Corporation and ten individuals on
September 23, 1993 for a total principal amount of $600,000.
10.8 Working Capital Guarantee Program Borrower Agreement between Photran
Corporation and Bank of America National Trust and Savings
Association, dated September 1, 1994.
10.9 Loan Agreement, dated May 1, 1995, between Photran Corporation and
Steven King.
10.10* Eximbank-Guaranteed Line of Credit Agreement between Photran
Corporation and Bank of America National Trust and Savings
Association dated May 26, 1995, as amended.
10.11 Guaranty of indebtedness dated May 26, 1995, executed by David E.
Stevenson in favor of Bank of America National Trust and Savings
Association.
10.12 Irrevocable Letter of Credit issued by China Merchants Bank at the
request of Shenzhen WABO Group Co. Ltd. for the benefit of Photran
Corporation.
10.13 Distribution Agreement between Photran Corporation and Yorkwell
Company Limited dated September 6, 1994.
10.14 Form of Subscription and Loan Agreement. Identical Subscriptions and
Loan agreements were entered into with 28 individuals on October 25
or 31, 1995 for a total principal amount of $4,000,000.
10.15 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995.
10.16 Amended and Restated Bridge Loan Agreement between Steven King and
Photran Corporation dated March 15, 1996.
10.17 Forms of Lockup Agreements.
11.1* Statement re Computation of Per Share Earnings.
23.1 Consent of Henson & Efron, P.A. (included in Exhibit 5.1).
23.2* Consent of Deloitte & Touche LLP.
25.1 Powers of Attorney.
</TABLE>
- --------------------------
* Denotes documents filed herewith.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
provisions summarized in Item 24 above, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the small
business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that it will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4), or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective, shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(2) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized Amendment No. 2 to
this Registration Statement to be signed on its behalf by the undersigned, in
the City of Minneapolis, State of Minnesota, on the 23rd day of May, 1996.
PHOTRAN CORPORATION
By: /s/ DAVID E. STEVENSON
-----------------------------------------
David E. Stevenson
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, Amendment
No. 2 to this Registration Statement was signed below on the 23rd day of May,
1996 by the following persons in the capacities stated.
By: /s/ DAVID E. STEVENSON By: /s/ PAUL T. FINK
--------------------------------- ---------------------------------
David E. Stevenson Paul T. Fink
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE DIRECTOR (PRINCIPAL FINANCIAL AND
OFFICER) ACCOUNTING OFFICER)
Kathleen V. Stevenson )
Steven King ) Directors*
Robert S. Clarke )
- ------------------------
*This Registration Statement has been signed by the undersigned as
attorney-in-fact on behalf of each person so indicated pursuant to a power of
attorney duly executed by each such person.
By: /s/ DAVID E. STEVENSON
-----------------------------------------
David E. Stevenson
ATTORNEY-IN-FACT
II-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
CHICAGO
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PHOTRAN CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- -------------------------------------------------------------------- ----
<C> <S> <C>
1.1* Underwriting Agreement, including Representative's Warrant..........
1.2 Agreement Among Underwriters.
1.3 Selected Dealer Agreement.
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996.
3.2 Amended and Restated By-Laws of Photran Corporation, effective
December 23, 1992, as amended through February 3, 1996.
4.1 Second Amended and Restated Articles of Incorporation and Amended
and Restated By-Laws of Photran Corporation as amended. (See
Exhibits 3.1 and 3.2 above).
4.2 Specimen of Common Stock Certificate (to be filed by Amendment).
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18,
1992, for the purchase of 1,700 shares, issued to Christopher T.
Vanyo. An identical Warrant For Purchase of Shares of Common Stock
was granted to one other individual for the purchase of 1,600
shares.
4.4* Common Stock Purchase Warrant, dated January 5, 1993, for the
purchase of 29,500 shares, issued to R. J. Steichen & Company.
Identical Common Stock Purchase Warrants in the amounts of 149,964
shares, 35,000 shares and 105,254 shares were granted to R. J.
Steichen & Company on February 19, 1993, February 19, 1993, and
March 17, 1993, respectively.
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of
20,000 shares and 60,000 shares were granted to a total of eleven
individuals on August 8, 1993 and September 23, 1993, respectively.
4.6* Common Stock Purchase Warrant, dated September 23, 1993, for the
purchase of 48,500 shares, issued to R. J. Steichen & Company. An
identical Common Stock Purchase Warrant in the amount of 11,500
shares was granted to R. J. Steichen & Company on September 24,
1993.
4.7 Form of Promissory Note. Identical Notes totaling $600,000 in
principal amount were executed by Photran Corporation in favor of
ten individuals on September 23, 1993.
4.8* Common Stock Purchase Warrant, dated January 7, 1994, for the
purchase of 140,115 shares, issued to R. J. Steichen & Company.
Identical Common Stock Purchase Warrants in the amounts of 11,730
shares and 36,635 shares were granted to R. J. Steichen & Company on
January 31, 1994 and February 18, 1994, respectively.
4.10 Stock Purchase Warrant for 75,000 shares of Common Stock, dated May
1, 1995, granted to Steven King.
4.11 Promissory Note, dated May 1, 1995, executed by Photran Corporation
in favor of Steven King.
4.12 Promissory Note, dated May 26, 1995, executed by Photran Corporation
in favor of Bank of America National Trust and Savings Association,
dated May 26, 1995.
4.13 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a
total of 28 individuals on October 15, 1995 to purchase a total of
400,000 shares.
4.14 Form of Secured Promissory Note. Identical Notes were executed by
Photran Corporation in favor of 28 individuals on October 15, 1995
for a total principal amount of $4,000,000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- -------------------------------------------------------------------- ----
<C> <S> <C>
4.15 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated
October 31, 1995, granted to John G. Kinnard and Company,
Incorporated.
5.1 Opinion of Henson & Efron, P.A. (to be filed by Amendment).
10.1 Contract Agreement for the Joint Venture of Shenzhen Fortune
Conductive Glass Company, Ltd., between Photran Corporation and
Shenzhen Wabo (Group) Company, Limited.
10.2 License Agreement between Photran Corporation and Applied
Elastromerics dated May 30, 1991, as amended.
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries,
Inc. and Photran Corporation dated July 1991
10.4 Photran Corporation 1992 Stock Option Plan..........................
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a
total of 76,250 shares.
10.6 Employment Agreement between David E. Stevenson and Photran
Corporation dated January 1, 1993.
10.7 Form of Bridge Loan Agreement. Identical Loan agreements were
entered into between Photran Corporation and ten individuals on
September 23, 1993 for a total principal amount of $600,000.
10.8 Working Capital Guarantee Program Borrower Agreement between Photran
Corporation and Bank of America National Trust and Savings
Association, dated September 1, 1994................................
10.9 Loan Agreement, dated May 1, 1995, between Photran Corporation and
Steven King.
10.10 Eximbank-Guaranteed Line of Credit Agreement between Photran
Corporation and Bank of America National Trust and Savings
Association dated May 26, 1995, as amended..........................
10.11 Guaranty of indebtedness dated May 26, 1995, executed by David E.
Stevenson in favor of Bank of America National Trust and Savings
Association.
10.12 Irrevocable Letter of Credit issued by China Merchants Bank at the
request of Shenzhen WABO Group Co. Ltd. for the benefit of Photran
Corporation.........................................................
10.13 Distribution Agreement between Photran Corporation and Yorkwell
Company Limited dated September 6, 1994.............................
10.14 Form of Subscription and Loan Agreement. Identical Subscriptions and
Loan agreements were entered into with 28 individuals on October 25
or 31, 1995 for a total principal amount of $4,000,000.
10.15 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995.
10.16 Amended and Restated Bridge Loan Agreement between Steven King and
Photran Corporation dated March 15, 1996.
10.17 Forms of Lockup Agreements..........................................
11.1* Statement re Computation of Per Share Earnings......................
23.1 Consent of Henson & Efron, P.A. (included in Exhibit 5.1).
23.2* Consent of Deloitte & Touche LLP....................................
25.1 Powers of Attorney..................................................
</TABLE>
- ------------------------
* Denotes documents filed herewith.
<PAGE>
EXHIBIT 11.1
PHOTRAN CORPORATION
PER SHARE EARNINGS (LOSS) COMPUTATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
----------------------------- ----------------------------
1994 1995 1995 1996
-------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
PRIMARY EPS:
Weighted average number of common shares
outstanding...................................... 2,818,494 2,837,323 2,837,323 2,837,323
Common stock equivalents from assumed exercise of
options and warrants............................. 197,146 496,791 496,791 496,791
-------------- ------------- ------------- -------------
Total Shares........................................ 3,015,640 3,334,114 3,334,114 3,334,114
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net Income (Loss)................................... $ (1,405,035) $ 50,013 $ (95,031) $ 79,029
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Per Common Share.................................... $ (0.47) $ 0.02 $ (0.03) $ 0.02
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE -- Net income
(loss) per common and common equivalent share is computed by dividing net income
(loss) by the weighted average number of common stock and dilutive common stock
equivalents outstanding. The total weighted average number of common and common
equivalent shares outstanding has been adjusted to give effect to the reverse
stock split authorized by the Company's shareholders on March 2, 1996, which
will not become effective until a proposed initial public offering of the
Company's common stock is allowed to become effective by the Securities and
Exchange Commission. Common stock equivalents result from dilutive stock options
and warrants. Common equivalent shares are not included in the per share
calculations when the effect of their inclusion would be antidilutive, except
that, in accordance with Securities and Exchange Commission requirements, common
and common equivalent shares issued during 12 months prior to the Company's
proposed initial public offering have been included in the calculation (using
the treasury stock method based on an assumed initial public offering price of
$8.50 per share) as if they were outstanding for all periods presented. The net
income (loss) per common share will change if the actual initial public offering
price differs from the assumed initial public offering price per share utilized
in this calculation. Fully diluted earnings (loss) per common share is not
presented because of its antidilutive effect.
<PAGE>
Securities and Exchange Commission
Midwest Regional Office
500 West Madison Street, Suite 1400
Chicago, IL 60661-2511
April 30, 1996
RE: PHOTRAN CORPORATION (THE "COMPANY")
COMMISSION FILE NO. 333-02700C
OUR FILE: P405/29521
Ladies and Gentlemen:
On behalf of the Company, enclosed for filing please find Amendment No. 1 to
Form SB-2 previously filed with the Commission on March 22, 1996. In accordance
with Rule 472 of Regulation C, attached are 3 complete copies with exhibits, one
of which has been manually signed, and eight additional copies without exhibits,
five of which have been marked to show the changes from the original
registration statement.
Should you have any questions with respect to this filing, please contact
the undersigned.
Very truly yours,
Henson & Efron, P.A.
Jeffrey N. Saunders
cc: Nasdaq
David Stevenson
Paul Fink
Steven King
Robert S. Clarke
Jerry Johnson
D. William Kaufman
Ann Wheelock
<PAGE>
(This page has been left blank intentionally.)
