<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to _________________
Commission file number 000-20731
PHOTRAN CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1697628
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21875 GRENADA AVENUE
LAKEVILLE, MN 55044
(Address of Principal Executive Offices)
(612) 469-4880
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
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The number of the registrant's common shares outstanding as of November 6,
1996 was 5,154,392
Transitional Small Business Disclosure Format (check one):
Yes No X .
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PHOTRAN CORPORATION
FORM 10QSB
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature page 15
Exhibit Index 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,590,105 $ 1,532,361
Accounts receivable 1,085,161 808,549
Costs and earnings in excess of billings 1,543,636
Inventory 1,343,144 1,420,048
Equipment held for sale 4,781,229 3,203,314
Prepaid expense 63,457 14,527
----------- -----------
Total current assets 14,406,732 6,978,799
PROPERTY AND EQUIPMENT, net 10,626,044 6,995,381
DEFERRED FINANCING COSTS 191,990
OTHER ASSETS 26,485 26,485
----------- -----------
$25,059,261 $14,192,655
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge financing $ 4,000,000
Line of credit 1,916,480
Line of credit 225,000
Current portion of long term debt,
notes payable, and capital lease obligations $ 284,462 1,041,547
Accounts payable 783,964 1,195,833
Accrued expenses 205,461 261,221
Customer advances 1,555,435 1,555,435
----------- -----------
Total current liabilities 2,829,322 10,195,516
LONG TERM DEBT 104,040 762,783
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Undesignated stock, no par value, 6,000,000
shares authorized, no shares issued
Common stock, no par value, 24,000,000 shares
authorized, 5,154,392 and 2,834,823 shares
issued and outstanding, respectively 25,171,661 6,671,217
Accumulated deficit (3,045,762) (3,436,861)
----------- -----------
Total shareholders' equity 22,125,899 3,234,356
----------- -----------
$25,059,261 $14,192,655
----------- -----------
----------- -----------
See notes to financial statements.
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PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $2,071,055 $1,438,203 $4,862,105 $2,107,146
COST OF SALES 1,616,714 1,036,856 3,528,996 1,580,562
---------- ---------- ---------- ----------
Gross profit 454,341 401,347 1,333,109 526,584
OPERATING EXPENSES:
Process and product development 91,332 78,838 247,703 218,738
General and administrative 172,725 90,823 472,443 277,886
Selling and marketing 83,004 34,077 256,734 128,031
---------- ---------- ---------- ----------
Total operating expenses 347,061 203,738 976,880 624,655
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 107,280 197,609 356,229 (98,071)
INTEREST INCOME (EXPENSE), net 77,649 (92,356) 34,870 (170,641)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $184,929 $105,253 $391,099 $(268,712)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.03 $ 0.03 $ 0.09 $ (0.08)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,502,419 3,346,194 4,297,606 3,346,194
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
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<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 391,099 $ (268,712)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization - property and
equipment 337,268 190,588
Interest expense associated with amortization of
deferred financing costs 191,990
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (276,612) (897,938)
Costs and earnings in excess of billings (1,543,636)
Inventory 76,904 (580,477)
Equipment held for sale (1,577,915) (1,825,706)
Prepaid expenses (48,930) (127,968)
Increase (decrease) in:
Accounts payable (411,869) 1,375,921
Accrued expenses (55,760) 50,372
------------ -----------
Cash used in operating activities (2,917,461) (2,083,920)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (3,967,931) (1,067,116)
------------ -----------
Cash used in investing activities (3,967,931) (1,067,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 0 3,369,466
Payments of notes payable and long-debt (7,557,308) (388,272)
Common stock issued 18,500,444 10,000
------------ -----------
Cash provided by financing activities 10,943,136 2,991,194
------------ -----------
INCREASE IN CASH 4,057,744 (159,842)
CASH AT BEGINNING OF PERIOD 1,532,361 173,160
------------ -----------
CASH AT END OF PERIOD $ 5,590,105 $ 13,318
------------ -----------
------------ -----------
See notes to financial statements.
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and reflect all
adjustments, consisting of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation. Operating
results for the three and nine month periods ended September 30, 1996
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1995, previously filed with the SEC as part of the Company's
Registration Statement on form SB-2, which was declared effective by the
Commission on May 29, 1996.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1996 1995
---------- ----------
Raw materials and supplies $1,343,144 $1,420,048
---------- ----------
---------- ----------
3. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
Common Shares in an initial public offering. Net proceeds to the
Company were approximately $16,025,444 after deducting offering costs,
including underwriting commissions, of approximately $1,974,556.
OVERALLOTMENT OPTION - In connection with the Company's initial public
offering of common stock the company issued an option to the
underwriters to purchase up to 300,000 shares solely to cover
overallotments. This option was exercised in June 1996 resulting in
additional net proceeds of approximately $2,470,000 after deducting
offering costs, including underwriting commissions, of approximately
$230,000.
4. COST AND EARNINGS IN EXCESS OF BILLINGS
In June 1996 the Company entered into an agreement to sell refurbished
ITO coating equipment for a total contract price of $2,916,500. The
Company has received a down payment of $500,000. $2,000,000 is to be
paid upon completion of the in factory acceptance test and shipment by
the Company. The final payment of $416,500 is payable upon completion of
the installation and the final acceptance test at the buyer's facility.
The Company has reclassified certain coating equipment it was in the
process of refurbishing from property and equipment to contract
accounting as discussed below.
Revenue from the equipment contract is being recognized on the
percentage-of-completion method, measured by the percentage of costs
incurred to date on the contract to estimated total contract costs at
the end of an accounting period. Management considers expended costs to
be the best available measure of progress on uncompleted contracts.
Revenue for the three and nine month periods ended September 30, 1996,
included $1,140,000 and $2,050,000 respectively related to this
contract.
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PHOTRAN CORPORATION NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Contract costs include all direct material, subcontract, labor and
labor-related costs and those indirect costs related to contract
performance, such as indirect labor, supplies, small tools, repairs and
depreciation costs. Selling, general and administrative expenses are
charged to expense as incurred. Changes in job performance, job
conditions, estimated profitability and final contract settlements may
result in revisions to costs and income, and will be recognized in the
period in which the revisions are determined. Cost of sales for the
three and nine month periods ended September 30, 1996 include $756,070
and $1,366,120 respectively related to this contract.
Cost incurred and earnings in excess of billings on the contract are as
follows:
Costs and estimated earnings incurred
on uncompleted contract $2,043,636.
Billings on uncompleted contract 500,000.
----------
Cost incurred and earnings in excess of billings $1,543,636
----------
----------
5. EQUIPMENT HELD FOR SALE
The Company and its Chinese joint venture partner have drafted an
amendment to the contract for the sale of equipment to the joint venture
company. This agreement must be approved by the Board of Directors of
both parties prior to execution. Under the terms of this amendment the
buyer has agreed to waive all penalties that would have been payable by
the seller due to the late shipment of the equipment in exchange for non
cash consideration in the form of equipment improvements and technology
for the production of optical grade front surface mirror assemblies.
The Company will not receive additional payment for these improvements
and due to the additional cost incurred to provide these enhancements
the gross margin for the project will be significantly reduced. As of
September 30, 1996, the Company has incurred cost of $4,781,229 and
anticipates additional cost of $350,000 will be incurred to complete and
the install the equipment pursuant to its obligations under the
agreement.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Form 10-QSB contains forward-looking statements as defined in
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve a number of risks and uncertainties,
including demand from major customers, effects of competition, changes in the
product or customer mix or revenues and in the level of operating expenses,
rapidly changing technologies and the Company's ability to respond thereto,
the impact of competitive products and pricing, the timely completion of
construction and installation of new manufacturing equipment, the timely
completion, testing, acceptance and shipment of equipment manufactured for
sale, the timely development and acceptance of new products and other factors
disclosed throughout this Form 10-QSB, the Company's Form 10-QSB for the
quarter ended June 30, 1996 and the Company's registration statement on Form
SB-2 which became effective May 29, 1996. The actual results that the
Company achieves may differ materially from any forward-looking statements
due to such risks and uncertainties. The Company undertakes no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties
of the risks and factors that may affect the Company's business and results
of operations.
REVENUES
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Revenues $2,071,055 1,438,203 44%
Nine Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Revenues $4,862,105 2,107,146 131%
Revenues consist primarily of gross sales of products and equipment,
less discounts and sales returns and allowance. Substantially all of the
increase in revenues for the three and nine months ended September 30, 1996
compared to the same periods in 1995 resulted from the recognition of
equipment sales revenue. The following table sets forth, for the periods
indicated, the revenues generated from the Company's major products in
absolute dollars and as a percentage of total revenue.
Sources of Revenues
Three Months Ended September 30,
-------------------------------------------
1996 % 1995 %
------------ ---- ------------ ----
Coated products 931,055 45% 1,438,203 100%
Equipment 1,140,000 55% - 0%
------------ ---- ------------ ----
Total Revenues $ 2,071,055 100% $ 1,438,203 100%
------------ ---- ------------ ----
------------ ---- ------------ ----
Nine Months Ended September 30,
-------------------------------------------
1996 % 1995 %
------------ ---- ------------ ----
Coated products 2,812,105 58% 2,107,146 100%
Equipment 2,050,000 42% - 0%
------------ ---- ------------ ----
Total Revenues $ 4,862,105 100% $ 2,107,146 100%
------------ ---- ------------ ----
------------ ---- ------------ ----
Revenue from the sale of TN grade ITO coated glass for the quarter ended
September 30, 1996 was 42% less than the 1995 quarter. This decrease is due
to primarily a combination of a general market price reduction for TN grade
ITO coated glass and a change by the Company's principal customer to a
smaller sheet size. These changes had the combined effect of reducing the
unit price of the Company's TN grade ITO coated glass by 41% during the quarter.
The Company expects the market price for TN grade ITO coated glass will not
recover for several quarters and that its principal customer for this product
will continue to order the smaller sheet size.
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<PAGE>
During the 1996 quarter the Company dedicated a significant portion of
its available production time on the P-1 line to the development of full
scale production processes for enhanced reflective mirrors and it's LCM brand
STN grade ITO coated glass. Management believes because of the change in the
market for TN grade ITO it is necessary to accelerate the shift in product
mix from TN grade ITO to these products. The Company is providing samples to
prospective customers and is working with its independent sales
representatives to develop customers for these products.
Revenues from the sale of coated products for the nine months ended
September 30, 1996 increased compared to the first nine months of 1995
because the Company did not commence production of TN grade ITO glass until
the third quarter of 1995 and sales in the first six months of 1995 consisted
primarily of TN grade ITO coated glass the Company had inventoried prior to
the suspension of production operations to in 1994 to redesign and modify its
equipment.
Revenues for the first nine months of 1996 were less than expected
because of the lower market price for TN grade ITO glass and the change in
sheet size by the Company's major customer. In addition the Company
commenced sample production runs of its enhanced reflection mirror and LCM
brand STN grade ITO coated glass and devoted a significant portion of its
available production capacity to the development of commercial scale
production processes for these products.
In late June 1996 the Company entered into an agreement to sell ITO
coating equipment for a total contract price of $2,916,500. The Company has
received a down payment of $500,000. An additional $2,000,000 is to be paid
upon completion of the in factory acceptance test. The final payment of
$416,500 is payable upon completion of the installation and the final
acceptance test. Revenue of $1,140,000 and $2,050,000 from the equipment
contract was recognized on the percentage-of-completion method in the third
quarter of 1996 and year to date respectively. (See Liquidity & Capital
Resources and Note 4 to Financial Statements)
The Company has purchased the equipment and completed the engineering
for its second production line. The installation of this line has been
delayed until completion of the equipment fabrication projects in process.
The Company expects to have this line operational by the end of the first
quarter of 1997.
Risks that could cause actual revenues to differ from expected revenues
include the Company's ability to reduce its dependence on its TN grade ITO
coated glass product and successfully develop and market new products, the
impact of competitive products and pricing, the timely completion of
construction and installation of new manufacturing equipment, the timely
completion, testing, acceptance and shipment of equipment manufactured for
sale and the loss of a major customer.
GROSS PROFIT
Three Months Ended September 30,
---------------------------------------------------
1996 % of Sales 1995 % of Sales
------------ ---------- ------------ ----------
Coated Products $ 70,411 8% 401,347 28%
Equipment 383,930 34% - 0%
------------ ---------- ------------ ----------
Total Gross Profit $ 454,341 22% $ 401,347 28%
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
Nine Months Ended September 30,
---------------------------------------------------
1996 % of Sales 1995 % of Sales
------------ ---------- ------------ ----------
Coated Products $ 649,229 23% 526,584 25%
Equipment 683,880 33% - 0%
------------ ---------- ------------ ----------
Total Gross Profit $1,333,109 27% $ 526,584 25%
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
Cost of revenues consists of substrate costs, target material costs,
equipment components and materials, and overhead related to the Company's
manufacturing operations. The primary reason for the increase in gross
profit for the third quarter of 1996 compared to the third quarter of 1995
was the $383,930 in gross profit recognized on the equipment contract. The
decrease in gross profit on coated products both as a percentage of sales and
in real dollar terms was due primarily to the reduced revenue and the market
and unit price decreases discussed above. In addition, cost of revenues for
coated products includes the costs associated with the development of
commercial scale production processes for the manufacture of the
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<PAGE>
Company's LCM brand STN grade ITO coated glass and improvements in the
process for enhanced reflection mirrors. The production of these products
requires ultra clean substrates and must be performed in a clean room
environment to achieve acceptable production yields. Because of the change
in the market for TN grade ITO management made the decision to commence
production of these products on the P-1 line prior to the installation of the
clean room and material handling and cleaning upgrades. As a result
production yields were significantly reduced and scrap cost increased.
Management believes that the equipment and facility improvements to be
completed in fourth quarter will resolve these problems.
The increase in gross profit for the first nine months of 1996 compared
to the first nine months of 1995 is due primarily to recognition of $683,880
in gross profit on the equipment contract and increased revenue for coated
products in the first six months of 1996. Gross profit on coated products as
a percentage of sales decreased in 1996 due to the costs associated with
sample and process development runs and the market and unit price decreases
discussed above.
PROCESS AND PRODUCT DEVELOPMENT
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Process and Product
Development $ 91,332 $ 78,838 16%
As a percentage of
revenues 4% 5%
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Process and Product
Development $ 247,703 $ 218,738 13%
As a percentage of
revenues 5% 10%
Process and product development expenses consist of personnel costs,
consulting, testing, supplies and depreciation expenses. The increase in
process and product development expenses for the third quarter and nine
months ended September 30, 1996 compared to the same periods for 1995 was due
primarily to increased personnel and consulting fees incurred for the purpose
of expanding the Company's product line and to a lesser extent to increased
expenses for supplies and occupancy costs. The decrease in research and
development expenses as a percentage of the Company's revenues was the result
of the growth in the Company's revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
General and
Administrative 172,725 90,823 90%
As a percentage of
revenues 8% 6%
Nine Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
General and
Administrative 472,443 277,886 70%
As a percentage of
revenues 10% 13%
General and administrative expenses consist primarily of compensation
expenses for administration, finance, and general management personnel, as
well as office supplies, depreciation and professional fees. The increase in
general and administrative expenses for the three and nine months ended
September 30, 1996 compared to the same periods for 1995 is primarily a
result of increased staffing. In addition, expenses for office supplies,
depreciation, consulting and professional fees increased during the three and
nine months ended September 30, 1996 compared to the same periods for 1995.
These increased costs are the reason for the increase in general and
administrative expense as a percentage of revenue for the three months ended
September 30, 1996 compared to 1995. The decrease in general and
administrative expenses as a percentage of revenue for the nine months ended
September 30, 1996 compared to 1996 was a result of the growth in the
Company's revenues.
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<PAGE>
SELLING AND MARKETING EXPENSES
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Selling and Marketing 83,004 34,077 144%
As a percentage of
revenues 4% 2%
Nine Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Selling and Marketing 256,734 128,031 101%
As a percentage of
revenues 5% 6%
Selling expenses consist principally of compensation costs for sales and
marketing personnel, commissions, travel expenses, trade show expenses, and
freight out costs. The addition of sales and custmoer support staff and
increases in trade show, travel and freight costs are the primary reasons for
the increase in selling expenses for the three and nine months ended
September 30, 1996 compared to 1995. These increased costs are the reason
selling expenses increased as a percentage of revenues for the three months
ended September 30, 1996 compared to 1995. The decrease in selling expenses
as a percentage of revenue for the nine months ended September 30, 1996
compared to 1996 was a result of the growth in the Company's revenues.
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<PAGE>
NET INTEREST INCOME (EXPENSE).
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Interest income
(expense), net $ 77,649 $ (92,356) 184%
As a percentage of
revenues 4% (6)%
Nine Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Interest income
(expense), net $ 34,870 $(170,641) 120%
As a percentage of
revenues 1% (8)%
For the three months and nine months ended September 30, 1996 the Company had
interest income compared to interest expense for the same periods in 1995.
The change was due to the earnings from the investment of the proceeds from
the Company's initial public offering. In addition, the Company retired
substantially all of its outstanding debt in June of 1996 after its initial
public offering.
NET INCOME.
Three Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Net Income (Loss) $ 184,929 $ 105,253 76%
As a percentage of
revenues 9% 7%
Nine Months Ended September 30,
------------------------------------------
1996 1995 % Change
---------- --------- --------
Net Income (Loss) $ 391,099 $ (268,712) 246%
As a percentage of
revenues 8% (13)%
The increase in net income for the three and nine months ended September 30,
1996 compared to 1995 is primarily due to the gross profit recognized on the
equipment sales contract in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $5,590,105 and net accounts receivable
of $1,085,161. The Company believes that its existing sources of liquidity
and anticipated funds from operations, including collections on equipment
sales, will satisfy the Company's projected working capital and capital
expenditure requirements for at least 12 months.
-11-
<PAGE>
The net cash used in operating activities for the first nine months of
1996 was $2,917,461 primarily for increases in work in process for the sale
of equipment to the Chinese joint venture of $1,577,915 and an increase in
cost and earnings in excess of billings of $1,543,363 related to the
equipment contract the Company entered into in June 1996.
The Company and its Chinese joint venture partner have drafted an amendment
to the contract for the sale of equipment to the joint venture company. This
agreement must be approved by the Board of Directors of both parties prior to
execution. Under the terms of this amendment the buyer has agreed to waive all
penalties that would have been payable by the seller due to the late shipment of
the equipment in exchange for non cash consideration in the form of equipment
improvements and technology for the production of optical grade front surface
mirror assemblies. The Company will not receive additional payment for these
improvements and due to the additional cost incurred to provide these
enhancements the gross margin for the project will be significantly reduced. As
of September 30, 1996, the Company has incurred cost of $4,781,229 and
anticipates additional cost of $350,000 will be incurred to complete and the
install the equipment pursuant to its obligations under the agreement.
Due to a change in Chinese customs laws, the equipment must clear Chinese
customs no later that December 31, 1996, or it will be subject to taxes and
duties of up to 32% of the invoice value. The Company must complete the full
operational test and prepare the equipment for shipment by the end of November
1996. Under the terms of the amendment the parties have agreed that if the full
operational test can not be completed in time for shipment, this test will take
place in China. The Company will receive a payment of $3,347,850 upon
completion of the full operational test as defined in the purchase contract. If
this test takes place in China the Company will not receive this payment until
the first quarter of 1997. A final payment of $608,700 will be paid when the
final acceptance test has been completed in accordance with the contract
agreement. These payments will be secured by an amended letter of credit which
the Company's joint venture partner must provide no later than November 21,
1996.
Risks that could affect the Company's ability to complete the contract or
the amount of gross profit ultimately realized by the Company under the contract
include the ability of the parties to obtain the approval of their respective
boards of directors, the ability of the joint venture partner to provide an
acceptable letter of credit incorporating the contract amendments, the
possibility that costs to complete and install the equipment could exceed
current estimates, or that the equipment does not reach China before
December 31, 1996. These and other factors could cause actual results to differ
materially from current expectations.
During the three months ended September 30, 1996 the Company began
exporting TN grade ITO coated glass to select customers on open credit terms.
The Company has relied on letters of credit to secure payment in the past. At
September 30, 1996 accounts receivable included approximately $714,000 of
receivables to foreign customers not secured by letters of credit.
In June 1996 the Company entered into an agreement to sell ITO coating
equipment for a total contract price of $2,916,500. The buyer has been
unable to complete their facility and accept shipment of the equipment. The
Company has reached an agreement in principle with the buyer to delay
shipment of the equipment until February 1997 to allow the buyer to complete
its facility. Under the terms of this agreement the buyer has agreed to pay
$2,000,000 upon completion of the in factory acceptance test at the Company's
facility. The buyer will provide the personnel to operate the equipment for
1 production shift per day and will pay the Company for all expenses related
to the operation of the equipment. In addition, the buyer has agreed to
allow the Company to use the equipment for the production of its products
until the equipment is shipped. The final payment of $416,500 will be made
after the installation of the equipment in the buyer's facility.
Cash used in investing activities was $3,967,931 during the first nine
months of 1996 and $1,067,116 in the first nine months of 1995. In both
periods this cash was used for the purchase of equipment and leasehold
improvements. Internal costs, consisting primarily of direct labor and
supplies used in the construction of equipment, of $2,246,316 and $1,102,229
were capitalized or charged to construction in process during the first six
months of 1996 and 1995 respectively.
The Company has entered into negotiations to purchase the buildings it
currently leases. The Company has received a commitment for financing from
the Bank of America and the Small Business Administration. Management
expects the impact on cash to be positive since the Company's down payment is
in the form of leasehold improvements already complete and the debt service
will be less than the rent payments due under the terms of the existing
leases.
Cash flows from financing activities during the nine months ended
September 30, 1996 consisted primarily of the approximately $18,500,444 in
proceeds from the Company's initial public stock offering in May of 1996. In
addition, the Company repaid the $4,000,000 of Bridge Notes together with
approximately $287,500 in accrued interest and a loan from a director of
$1,166,668 from the proceeds of the initial public offering. The Company
also repaid the $2,000,000 EXIM secured bank lines of credit from the
proceeds of the initial public offering to reduce interest payments and to
avoid payment of EXIM renewal fees.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In November 1996 the Company rejected three shipments of raw glass intended
for the production of TN grade ITO coated glass. The effect on revenues and net
earning, if any, for the fourth quarter of 1996 cannot be determined at this
time.
The Company's operating results may fluctuate due to factors such as the
timing of new product announcements and introductions by the Company, its
major customer and its competitors, market acceptance of new or enhanced
versions of the company's products, changes in the product or customer mix of
revenues, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased product and
process development costs associated with new product introductions, the
timely completion of construction and installation of new manufacturing
equipment, the timely completion, testing, acceptance and shipment of
equipment manufactured for sale and general economic conditions. All of the
above factors are difficult for the Company to forecast, and these or other
factors can materially adversely affect the Company's business and operating
results for one quarter or a series of quarters. The Company's expense
levels are based in part on its expectations regarding future
-12-
<PAGE>
revenues and in the short term are fixed to a large extent. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant decline in
demand relative to the Company's expectations or any material delay of
customer orders would have a material adverse effect on the company's
business and operating results.
RECENTLY ISSUED ACCOUNTING STANDARD
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.
-13-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6.
a. Exhibits
11. Computation of Net Income per Share
27. Financial Data Schedule
b. Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fiscal quarter
ended September 30, 1996.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOTRAN CORPORATION
Registrant
/s/ David E. Stevenson
Dated November 11, 1996 By: ___________________________
David E. Stevenson
President, Chief Executive Officer
and Chairman of Board of
Directors
and
/s/ Paul T. Fink
Dated November 11, 1996 ____________________________
Paul T. Fink
Chief Financial Officer, Treasurer
and Director
-15-
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
11 Computation of Net Income per Share 17
27 Financial Data Schedule 18
-16-
<PAGE>
EXHIBIT 11
PHOTRAN CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of
common shares outstanding 5,152,854 2,837,323 3,837,155 2,837,323
Common stock equivalents from assumed
exercise of options and warrants 349,566 508,871 460,452 508,871
---------- ---------- ---------- -----------
Total shares 5,502,420 3,346,194 4,297,606 3,346,194
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income applicable to common shareholders $ 184,929 $ 105,253 $ 391,099 $ (268,712)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income per common and common
equivalent share $ 0.03 $ 0.03 $ 0.09 $ (0.08)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
Fully diluted net income per common and common equivalent share is not
separately presented because it is substantially the same as primary net
income per common and common equivalent share.
-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,590,105
<SECURITIES> 0
<RECEIVABLES> 1,091,840
<ALLOWANCES> 6,679
<INVENTORY> 1,343,144
<CURRENT-ASSETS> 14,406,732
<PP&E> 11,533,491
<DEPRECIATION> 907,447
<TOTAL-ASSETS> 25,059,261
<CURRENT-LIABILITIES> 2,829,322
<BONDS> 0
0
0
<COMMON> 25,171,661
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,125,661
<SALES> 4,862,105
<TOTAL-REVENUES> 4,862,105
<CGS> 3,528,996
<TOTAL-COSTS> 3,528,996
<OTHER-EXPENSES> 976,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,870
<INCOME-PRETAX> 391,099
<INCOME-TAX> 0
<INCOME-CONTINUING> 391,099
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391,099
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
