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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 June 30, 1997
Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________________ to _________________
Commission file number 000-20731
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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 Identification No.)
Incorporation or Organization)
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 May 15, 1997 was
5,154,392
Transitional Small Business Disclosure Format (check one):
Yes No X .
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PHOTRAN CORPORATION
FORM 10-QSB
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 7
Financial Condition and Results of
Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature page 13
Exhibit Index 14
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 374,644 $ 2,038,955
Accounts receivable 445,517 606,500
Inventory 495,646 754,572
Equipment held for sale 1,547,426
Prepaid expense 148,395 109,540
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Total current assets 1,464,202 5,056,993
PROPERTY AND EQUIPMENT, net 18,833,331 15,446,311
MARKETABLE SECURITIES, restricted 2,250,000
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$22,547,533 $20,503,304
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt,
notes payable, and capital lease obligations 833,085 51,592
Accounts payable 724,361 663,411
Accrued expenses 446,631 758,915
Customer advances 2,260,420 2,260,420
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Total current liabilities 4,264,497 3,734,338
LONG TERM DEBT 3,803,433 327,813
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 25,163,921 25,159,921
Accumulated deficit (10,684,318) (8,718,768)
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Total shareholders' equity 14,479,603 16,441,153
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$22,547,533 $20,503,304
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See notes to financial statements.
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PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 867,908 $ 785,648 $ 1,391,777 $1,463,106
COST OF SALES 1,092,506 741,619 2,015,578 1,198,911
---------- ---------- ----------- ----------
Gross profit (loss) (224,598) 44,029 (623,801) 264,195
OPERATING EXPENSES:
Process and product development 54,445 86,002 202,170 156,372
General and administrative 492,403 149,525 769,021 299,716
Selling and marketing 89,921 101,567 246,488 173,731
Other nonrecurring charges (note 8) 198,710
---------- ---------- ----------- ----------
Total operating expenses 636,769 337,094 1,416,389 629,819
---------- ---------- ----------- ----------
LOSS FROM OPERATIONS (861,367) (293,065) (2,040,190) (365,624)
INTEREST (INCOME) EXPENSE, net (47,609) 58,600 (53,332) 203,438
OTHER (INCOME) EXPENSE, net (21,308) (21,308)
---------- ---------- ----------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEM (792,450) (351,665) $(1,965,550) (569,062)
EXTRAORDINARY ITEM - loss on debt
extinguishment 71,990 71,990
---------- ---------- ----------- ----------
NET LOSS $ (792,450) (423,655) $(1,965,550) (641,052)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
Loss before extraordinary item $ (0.15) $ (0.09) $ (0.38) $ (0.17)
Extraordinary item (0.02) (0.02)
---------- ---------- ----------- ----------
$ (0.15) $ (0.11) $ (0.38) $ (0.19)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,156,392 3,689,268 5,156,092 3,352,620
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See notes to financial statements.
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PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
--------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary item $(1,965,550) $ (569,062)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization - property and
equipment 423,063 196,312
Interest expense associated with amortization
of Deferred financing costs 120,000
Changes in current assets and liabilities that
provided (used) cash:
Accounts receivable 160,983 131,612
Inventory 258,926 (116,332)
Equipment held for sale (1,859,959)
Prepaid expenses (38,855) (79,601)
Accounts payable 60,950 (317,059)
Accrued expenses (312,284) (116,571)
Customer advances 500,000
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Cash used in operating activities (1,412,767) (2,110,660)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (2,262,657) (2,397,419)
Purchases of marketable securities (2,250,000)
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Cash used in investing activities (4,512,657) (2,397,419)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 4,500,000
Payments of notes payable and long-debt (242,887) (7,546,485)
Common stock issued 4,000 18,595,721
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Cash provided by financing activities 4,261,113 11,049,236
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,664,311) 6,541,157
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,038,955 1,532,361
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 374,644 $ 8,073,518
------------ ------------
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See notes to financial statements.
5
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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 only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation. Operating
results for the three- and six-month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1996,
previously filed with the SEC as part of the Company's Annual Report on
form 10-KSB.
2. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1996
---- ----
Raw materials and supplies $495,646 $754,572
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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. EQUIPMENT HELD FOR SALE
In 1996 the Company entered into an agreement to sell ITO coating equipment
to its largest customer for a total contract price of $2,916,500. The
Company received a down payment of $500,000 which is recorded as a customer
advance at June 30, 1997 and December 31, 1996. During the second quarter
of 1997, the Company reached an agreement with the customer whereby the
Company will keep the equipment and refund the deposit previously
received via per sheet credits against future glass purchases by the
customer. The cost of this equipment has been reclassified to property and
equipment as of June 30, 1997.
5. COMMITMENTS AND CONTINGENCIES
During the quarter ended December 31, 1996, the Company was informed by
its Chinese joint venture partner, Shenzhen WABO Group Company Limited
(WABO) of their intention to dissolve the joint venture agreement
and cancel the related equipment purchase contract. In April 1997, the
Company received notice that arbitration proceedings have been
commenced against it by WABO in Shenzhen, China claiming approximately
$4.4 million plus legal fees and costs. This process is still in a very
early stage, and it is too soon to determine whether the Company will
be liable for any additional amounts beyond the return of amounts which
are recorded as customer advances. It is possible that additional
amounts due upon final dissolution of this agreement could be material
to the financial position and operating results of the Company.
In connection with the coating equipment that the Company was building
for sale to the joint venture company, known as the Shenzhen Fortune
Conductive Glass Company, Ltd. (Fortune), the Company entered into a
contract with a third party to design and build power supplies to be sold
under the equipment contract, as well as for the Company's own use. The
third party has asserted that the Company is liable to it for various costs
incurred in connection with the production of the power supplies and has
demanded payment of $240,000 in addition to amounts the Company has already
paid under the contract. Due to various defects in the contract as well as
the third party's failure to perform its obligations, the Company has
rescinded the contract and demanded that the third party refund all
monies paid to it by the Company. Management, in consultation with the
company's legal counsel, is of the opinion that the Company has valid
defenses against the claims asserted by the third party. However, it is
possible that the Company will be liable for amounts in addition to
those already paid under the contract. Such amounts could be material
but the Company is unable to estimate what amounts, if any, will be
ultimately paid.
The Securities and Exchange Commission (SEC) has informed the Company
that it is conducting a formal investigation with respect to certain
financial and accounting irregularities announced by the Company in
March 1997 relating to fiscal 1996. The investigation is in the
preliminary stages and it is impossible to determine what impact, if
any, the investigation will have on the Company's financial condition
or results of operations.
In May of 1997 the company was served with two separate lawsuits
against the Company, certain officers and directors of the
Company and the Company's former president. These lawsuits were
filed by certain purchasers of the Company's common stock
alleging that the Company's actions with respect to the financial
and accounting irregularities announced by the Company in March
of 1997 artificially inflated its stock price between May 29,
1996 and March 24, 1997. The plaintiffs in these actions are
seeking class certification.
Both suits were filed in the United States District Court for the
district in Minnesota. In July of 1997 the court consolidated
these lawsuits into a single action captioned IN RE PHOTRAN
CORPORATION SECURITIES LITIGATION. The Company has not yet
formally responded to this lawsuit, and it is not possible at
this time to determine what impact, if any, this lawsuit will
have on the Company's financial position or results of operations.
6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
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, AND THE ACTUAL PERFORMANCE OF NEW
MANUFACTURING EQUIPMENT, THE TIMELY COMPLETION, TESTING, ACCEPTANCE AND
SHIPMENT OF EQUIPMENT MANUFACTURED FOR SALE, THE TIMELY DEVELOPMENT AND
ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF PENDING AND THREATENED LITIGATION
AND OTHER FACTORS DISCLOSED THROUGHOUT THIS FORM 10-QSB. 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, INCLUDING THE DISCUSSION SET FORTH IN THE
SECTION TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - - OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS", AND IN THE COMPANY'S OTHER REGISTRATION STATEMENTS AND REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME THAT
ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT
THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
REVENUES
For the quarter ended June 30, 1997 net sales increased to $ 867,908 from $
785,648 for the quarter ended June 30, 1996. Revenues consisted primarily of
gross sales of TN grade ITO coated glass. The increase in revenue is due
primarily to strong market demand for the Company's TN grade ITO coated glass
and increased production on the Company's P-1 production line. Total production
for the quarter ended June 30, 1997 increased 286% over the quarter ended June
30, 1996. Revenue increases were not proportional to the increase in production,
however, due to a reduction in the general market price for TN grade ITO coated
glass and a change by the Company's principal customer to a smaller sheet size.
The market price reductions and change in sheet size had the combined effect of
reducing the unit price of the Company's TN grade ITO coated glass by
approximately 50% from the quarter ended June 30, 1996 to the quarter ended June
30, 1997. In addition, during the first quarter of 1997, the Company's
principal customer began supplying the raw glass and paying only for the coating
applied by the Company. Glass cost had been approximately 35% of the total unit
price. Since the customer is supplying the glass, revenue has been reduced
accordingly.
For the six months ended June 30, 1997 net sales decreased to $1,391,777
from $1,463,106 for the six months ended June 30, 1996. Revenues consisted
primarily of gross sales of TN grade ITO coated glass. The decrease in
revenue is due to 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. The market price reductions and change in sheet size had
the combined effect of reducing the unit price of the Company's TN grade ITO
coated glass by approximately 50% from the six months ended June 30, 1996 to
the six months ended June 30, 1997. In addition, during the first quarter of
1997, the Company's principal customer began supplying the raw glass and
paying only for the coating applied by the Company. Glass cost had been
approximately 35% of the total unit price. Since the customer is supplying
the glass, revenue has been reduced accordingly. The decreases in per unit
revenue were partially offset by an increase in the number of units produced
of approximately 121% during the six months ended June 30, 1997.
The Company expects the market price for TN grade ITO coated glass will
begin to recover in the second half of 1997. The Company is also pursuing
sales of larger size glass sheets that will provide increased revenue per
unit for substantially the same coating cost per unit. The Company also
expects to continue to expand its productive capacity in 1997 with the
addition of one or more thin film coating lines. Based on recent discussions
with its Asian selling agents and current
7
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customers, management anticipates significant growth in revenue from the sale of
ITO coated glass in 1997 following the addition of productive capacity. During
the third quarter, the Company has negotiated a 17% per unit price increase with
its principal customer. The Company currently has a firm order backlog of
approximately $2.5 million.
The Company's largest customer accounted for 85% of the Company's revenue
during both of the quarters ended June 30, 1997 and 1996. Based on recent
discussions with this customer, management currently expects the customer's
purchases of ITO coated glass in future periods to increase in comparison to
historical levels as the Company increases its production capacity, although no
long-term purchase commitments exist. As of June 30, 1997, this customer has
placed firm orders totalling approximately $1.9 million.
GROSS PROFIT (LOSS)
Gross loss was $ 224,598 for the quarter ended June 30, 1997, compared
to gross profit of $ 44,029 for the quarter ended June 30, 1996. The gross
loss was due to a combination of factors, including the shift to a smaller
sheet size by the Company's largest customer, loss of margin on glass
substrates which are now being supplied by the customer, and the market and
unit price decreases discussed above. Target material expense increased by
approximately $ 80,000 because the Company was using reprocessed scrap
material in the second quarter of 1996 which had previously been devalued as
it was believed to be worthless. Depreciation expense increased by $61,000
due to a change in estimate used in computing depreciation. In addition, the
Company incurred approximately $120,000 in manufacturing overhead for
facilities which were not included in cost of sales in 1996. Cost of sales
consists of substrate costs, target material costs, labor and overhead
related to the Company's manufacturing operations.
Gross loss was $ 623,801 for the six months ended June 30, 1997, compared
to gross profit of $ 264,195 for the six months ended June 30, 1996. The gross
loss was due to a combination of factors, including the shift to a smaller sheet
size by the Company's largest customer, loss of margin on glass substrates which
are now being supplied by the customer, and the market and unit price decreases
discussed above. Target material expense increased by approximately $ 180,000
because the Company was using reprocessed scrap material in the first and second
quarters of 1996. Depreciation expense increased by $100,000 due to a change in
estimate used in computing depreciation which the Company adopted in the fourth
quarter of 1996. In addition, the Company incurred approximately $200,000 in
manufacturing overhead for facilities which were not included in cost of sales
in 1996. Cost of sales consists of substrate costs, target material costs, labor
and overhead related to the Company's manufacturing operations.
The Company expects that the combination of per unit price increases
negotiated with its largest customer, higher margin orders from new customers
and increased production from its new production line will provide positive
gross margins in the second half of 1997.
PROCESS AND PRODUCT DEVELOPMENT
Process and product development expenses decreased to $ 54,445 for the
quarter ended June 30, 1997 from $ 86,002 for the quarter ended June 30, 1996.
These expenses consisted of personnel costs, consulting, testing, supplies and
depreciation expenses. The decrease was due primarily to a reduction in
research personnel associated with projects that did not relate to the Company's
core technology or markets.
Process and product development expenses increased to $ 202,170 for the
six months ended June 30, 1997 from $ 156,372 for the six months ended June
30, 1996. The increase was due primarily to costs of projects that did not
relate to the Company's core technology or markets and were discontinued at
the end of the first quarter of 1997.
The Company expects that product and process development expenditures for
new product research and improvements in its core deposition technology will
continue at approximately their current level during the second half of 1997
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $492,403 for the
quarter ended June 30, 1997 from $ 149,525 for the quarter ended June 30,
1996. These expenses consist primarily of compensation expenses for
administration, finance, and general management personnel, as well as office
supplies, depreciation, bad debt and professional fees. The increase is
primarily a result of professional fees incurred in connection with the
restatement of the Company's quarterly financial results for 1996 and the
shareholder lawsuits that were filed as a result, as well as the legal fees
related to a dispute with the Company's Chinese joint venture partner.
Additional professional fees will be incurred in the second half of 1997 in
connection with these matters as well as
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certain litigation described in Part II, Item 1. Legal Proceedings, and it is
possible that such fees could be material.
General and administrative expenses increased to $ 769,021 for the six
months ended June 30, 1997 from $ 299,716 for the six months ended June 30,
1996. The increase is primarily a result of professional fees incurred in
connection with an internal investigation of certain financial and accounting
irregularities, the restatement of the Company's quarterly financial results
for 1996 and the shareholder lawsuits that were filed as a result, as well as
the legal fees related to a dispute with the Company's Chinese joint venture
partner. Additional professional fees will be incurred in 1997 connection
with these matters as well as certain litigation described in Part II, Item
1. Legal Proceedings, and it is possible that such fees could be
material.
SELLING AND MARKETING
Selling and marketing expenses decreased to $89,121 for the quarter ended
June 30, 1997 from $101,567 for the quarter ended June 30, 1996. These expenses
consisted principally of compensation costs for sales personnel, commissions,
travel expenses, trade show expenses, and freight out costs. The decrease is
due to reduction of sales and customer support staff and decreases in trade show
costs, partially offset by increases in sales commissions paid to independent
sales representatives on sales to new customers.
Selling and marketing expenses increased to $ 246,488 for the six months
ended June 30, 1997 from $173,731 for the six months ended June 30, 1996. The
increase is due primarily to the addition of sales and customer support staff
and increases in trade show, travel and freight costs for the quarter ended
March 31, 1997, some of which were curtailed during the second quarter.
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's China joint venture partner
notified the Company of its intention to cancel the joint venture agreement and
a related equipment purchase contract with the Company. In connection with the
cancellation of the equipment purchase contract, the Company determined that
certain equipment which was to have been sold to the joint venture and equipment
that was under development for the Company's use was no longer economically
feasible or did not fit the Company's current manufacturing needs. This
equipment, which the Company determined had no foreseeable future value, was
written off, resulting in charges to the quarter ended March 31, 1997 of
$110,788.
In addition, the Company determined that as a result of refocusing its
operations, a facility it had been leasing was no longer necessary. Leasehold
improvements of $34,270 were written off in connection with the termination of
the lease agreement. Equipment, which was determined to have no future value to
the Company at March 31, 1997, was written down to its fair value, resulting in
an impairment charge of $53,652.
NET INTEREST EXPENSE
For the quarter ended June 30, 1997, the Company had interest income net
of interest expense of $47,609 compared to interest expense net of interest
income of $58,600 for the quarter ended June 30, 1996. The change was due to
the earnings from the investment of half of the proceeds from the lease
financing on the P-1000 line in the first quarter of 1997. In addition, the
Company retired substantially all of its outstanding debt in June 1996 after
its initial public offering.
For the six months ended June 30, 1997, the Company had interest income
net of interest expense of $53,332 compared to interest expense net of
interest income of $203,438 for the six months ended June 30, 1996. The
change was due to the earnings from the investment of half of the proceeds
from the lease financing on the P-1000 line in the first quarter of 1997. In
addition, the Company retired substantially all of its outstanding debt in
June 1996 after its initial public offering.
NET INCOME (LOSS)
The increase in net loss to $792,450 for the quarter ended June 30, 1997
compared to the net loss of $423,655 for the quarter ended June 30, 1996 was
primarily due to the increased professional fees and the decrease in the
unit revenues discussed above.
The increase in net loss to $1,965,550 for the six months ended June 30,
1997 compared to the net loss of $641,052 for the six months ended June 30, 1996
was primarily due to the increased professional fees, the non-recurring charges
and the decrease in the unit revenues discussed above.
9
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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,
1996, the Company had an NOL carryforward of approximately $6 million, which
expires in 2006 through 2010. 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 $5.3 million of NOL
carryforwards incurred after February 1993 is not limited under Section 382 of
the Code. However, the Company's ability to use its NOL carryforwards may be
further limited by subsequent issuances of common stock.
CHINA JOINT VENTURE
In 1994 the Company 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. 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 Company had 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 had 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 was
obligated to provide 40% of the $11,645,000 total capitalization of the joint
venture. This 40% contribution, totaling $4,658,000, was deducted from the
gross purchase price of the coating system. This was to result in the Company
receiving a net purchase price of $5,487,000 for the equipment sold to the joint
venture
The equipment was originally scheduled to be shipped by November 6, 1995.
The project was delayed for several months due to a delay by WABO in delivering
a required letter of credit and the Company's resulting inability to obtain
working capital financing on a timely basis. The project schedule was
subsequently extended by mutual agreement between the parties. WABO failed to
deliver a required 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 was subject to certain contractual
penalties for failure to ship by April 15, including the refund of Fortune's
advance of approximately $1.5 million, which amount had been recorded as a
current liability of the Company. WABO orally agreed to waive these penalties
provided the equipment was shipped no later than June 30, 1996. The equipment
did not ship by June 30, 1996.
During the quarter ended December 31, 1996, the Company attempted to
resolve the issues regarding payment of penalties as well as payment for various
technical modifications. The Company had negotiated with representatives of
WABO and had drafted an amendment to the agreement to resolve these issues. The
Company was subsequently informed by WABO of their intention to dissolve the
joint venture agreement.
The Company will keep the glass coating system, and plans to modify and
install the equipment for its own use. In the fourth quarter of 1996, the
Company has recorded an additional liability of approximately $200,000
related to glass that was provided by WABO for use in testing the system. In
April 1997, the Company received notice that arbitration proceedings have
been commenced against it by WABO, claiming damages of or reimbursement of
approximately $4.4 million plus legal fees. This process is still in a very
early stage, and it is too soon to determine whether the Company will be
liable for any additional amounts. It is possible, however, that additional
amounts due upon final dissolution of the joint venture could have a material
adverse effect on the financial position and operating results of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $ 374,644 and net accounts receivable
of $445,517. The Company believes that its existing sources of liquidity and
anticipated funds from operations and a pending $1 million private debt
placement will satisfy the Company' projected working capital and capital
expenditure requirements for 1997. The Company has reached an agreement in
principal with the Chairman of the board of directors to loan the Company $1
million. Management is, however, also investigating the possibility of
obtaining working capital financing, although there can be no assurance that
such financing will be available or be available on terms acceptable to the
Company.
The net cash used in operating activities for the six months ended June
30, 1997 and 1996 was $ 1,412,767 and $2,110,660 respectively. This decrease was
due principally to the $1.8 million in expenditures on equipment held for sale
10
<PAGE>
which is now classified as equipment purchases as the Company will now keep
the machine it was previously holding for sale. This decrease in 1997 is
partially offset by a larger net loss than in 1996.
In 1996, the Company entered into an agreement to sell ITO coating
equipment to its largest customer for a total contract price of $2,916,500. The
Company received a down payment of $500,000 which is recorded as a customer
advance at June 30, 1997. Delivery of the equipment was originally scheduled
for the fourth quarter of 1996. During the second quarter of 1997, the Company
reached an agreement with the customer whereby the Company will keep the
equipment and refund the deposit previously received via a per-unit credit
against future glass purchases.
Cash used in investing activities was $ 4,512,656 for the six months
ended June 30, 1997 compared to $ 2,397,419 for the six months ended June 30,
1996. In both periods this cash was used for the purchase of equipment and
leasehold improvements. This increase in 1997 was due to the purchase of
$2,250,000 in restricted investments resulting from the Company's $4,500,000
sale-leaseback of the coating equipment that was originally intended to be
sold to Fortune. These investments are required to be retained by the Company
for the term of the lease. Thus these funds are not available for use by the
Company.
Cash flows from financing activities of $ 4,261,112 for six months ended
June 30, 1997 consisted primarily of $4,500,000 in proceeds from the Company's
sale-leaseback for the coating equipment that was originally intended to be sold
to Fortune. Under the terms of the agreement, which will be treated as a
financing transaction, the Company received proceeds of $4,500,000 of which
$2,250,000 is restricted and $2,250,000 is available to the Company.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's future operating results may fluctuate significantly 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, changes in the level of operating expenses, inventory obsolescence and
asset impairments, 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, and general economic
conditions. All of the above factors are difficult for the Company to forecast,
and these and other factors may materially adversely affect the Company's
business and operating results for one quarter or a series of quarters. The
Company's current expense levels are based in part on its expectations regarding
future 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 financial condition
and operating results.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company was informed by
WABO of their intention to dissolve the joint venture agreement and cancel
the related equipment purchase contract. In April 1997, the Company received
notice that arbitration proceedings have been commenced against it by WABO in
Shenzhen, China claiming approximately $4.4 million plus legal fees and
costs. This process is still in a very early stage, and it is too soon to
determine whether the Company will be liable for any additional amounts
beyond the return of amounts which are recorded as customer advances. It is
possible that additional amounts due upon final dissolution of this agreement
could be material to the financial position and operating results of the
Company.
In connection with the coating equipment that the Company was building for
sale to Fortune, the Company entered into a contract with a third party to
design and build power supplies to be sold under the equipment contract, as well
as for the Company's own use. The third party has asserted that the Company is
liable to it for various costs incurred in connection with the production of the
power supplies and has demanded payment of $240,000 in addition to amounts the
Company has already paid under the contract. Due to various defects in the
contract as well as the third party's failure to perform its obligations, the
Company has rescinded the contract and demanded that the third-party refund all
monies paid to it by the Company. Management, in consultation with the
company's legal counsel, is of the opinion that the Company has valid defenses
against the claims asserted by the third party. However, it is possible that
the Company will be liable for amounts in addition to those already paid under
the contract. Such amounts could be material but the Company is unable to
estimate what amounts, if any, will be ultimately paid.
The Securities and Exchange Commission (SEC) has informed the Company that
it is conducting a formal investigation with respect to certain financial and
accounting irregularities announced by the Company in March 1997 relating to
fiscal 1996. The investigation is in the preliminary stages and it is impossible
to determine what impact, if any, the investigation will have on the Company's
financial condition or results of operations.
In May of 1997 the company was served with two separate lawsuits against
the Company, certain officers and directors of the Company and the Company's
former president. These lawsuits were filed by certain purchasers of the
Company's common stock alleging that the Company's actions with respect to
the financial and accounting irregularities announced by the Company in March
of 1997 artificially inflated its stock price between May 29, 1996 and March
24, 1997. The plaintiffs in these actions are seeking class certification.
Both suits were filed in the United States District Court for the
district in Minnesota. In July of 1997 the court consolidated these lawsuits
into a single action captioned IN RE PHOTRAN CORPORATION SECURITIES
LITIGATION. The Company has not yet formally responded to this lawsuit, and
it is not possible at this time to determine what impact, if any, this
lawsuit will have on the Company's financial position or results of
operations.
ITEM 6.
a. Exhibits
11. Computation of Net Loss per Share
27. Financial Data Schedule
b. Reports on Form 8-K
None.
12
<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.
/s/ Paul T. Fink
Dated August 15, 1997 ----------------------------
Paul T. Fink, President
Chief Executive Officer, Treasurer,
Secretary and Director
/s/ Judith E. Tucker
----------------------------
Judith E. Tucker,
Vice President for Finance and
Administration, Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
11 Computation of Net Loss per Share 15
27 Financial Data Schedule 16
14
<PAGE>
EXHIBIT 11
PHOTRAN CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of
common shares outstanding 5,156,392 3,502,879 5,156,092 3,168,262
Common stock equivalents from
exercise of options and warrants 186,390 184,358
------------ ------------ ------------ ------------
Total shares 5,156,392 3,689,268 5,156,092 3,352,620
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM $ (792,450) $ (351,665) $(1,965,550) $ (569,062)
EXTRAORDINARY ITEM - loss on debt
extinguishment (71,990) (71,990)
------------ ------------ ------------ ------------
NET LOSS $ (792,450) $ (423,655) $(1,965,550) $ (641,052)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE
Loss before extraordinary item $ (0.15) $ (0.09) $ (0.38) $ (0.17)
Extraordinary item (0.02) (0.02)
------------ ------------ ------------ ------------
Net loss $ (0.15) $ (0.11) $ (0.38) $ (0.19)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Fully diluted net loss . per common and common equivalent share is not
separately presented because the effects of including outstanding common stock
equivalents would be anti-dilutive. Calculations for 1996 include certain
options and warrants granted prior to the Company's initial public offering in
accordance with Securities and Exchange Commission (SEC) regulations, although
contrary to Accounting Principles Board (APB) Opinion No. 15, because they
produce anti-dilutive results.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 374,644
<SECURITIES> 0
<RECEIVABLES> 330,218
<ALLOWANCES> (1,424)
<INVENTORY> 495,646
<CURRENT-ASSETS> 1,464,202
<PP&E> 20,434,518
<DEPRECIATION> (1,601,187)
<TOTAL-ASSETS> 22,547,533
<CURRENT-LIABILITIES> 4,264,497
<BONDS> 3,803,433
0
0
<COMMON> 25,163,921
<OTHER-SE> (10,684,318)
<TOTAL-LIABILITY-AND-EQUITY> 22,547,533
<SALES> 1,391,777
<TOTAL-REVENUES> 1,391,777
<CGS> 2,015,578
<TOTAL-COSTS> 2,015,578
<OTHER-EXPENSES> 198,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,939
<INCOME-PRETAX> (1,965,550)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,965,550)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,965,550)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
