<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
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 .
------- --------
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 .
------- --------
<PAGE>
PHOTRAN CORPORATION
FORM 10-QSB/A
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature page 16
Exhibit Index 17
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
MARCH 31,
1997
(AS RESTATED DECEMBER 31,
SEE NOTE 7) 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,619,827 $ 2,038,955
Accounts receivable 573,365 544,340
Inventory 587,355 754,572
Equipment held for sale 1,453,534 907,812
Prepaid expenses 161,234 109,540
------------- -------------
Total current assets 4,395,315 4,355,219
PROPERTY AND EQUIPMENT, net 15,551,584 14,927,174
MARKETABLE SECURITIES, restricted 2,250,000
------------- -------------
$ 22,196,899 $19,282,393
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt,
notes payable, and capital lease
obligations $ 726,627 $ 51,592
Accounts payable 715,783 663,411
Accrued expenses 298,552 758,915
Customer advances 2,260,420 2,260,420
------------- -------------
Total current liabilities 4,001,382 3,734,338
LONG TERM DEBT 4,094,953 327,813
COMMITMENTS AND CONTINGENCIES (Note 8)
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, 5,156,392 and
5,154,392 shares issued and outstanding,
respectively 24,626,551 24,622,551
Accumulated deficit (10,525,987) (9,402,309)
------------- -------------
Total shareholders' equity 14,100,564 15,220,242
------------- -------------
$22,196,899 $19,282,393
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
2
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended
March 31
------------------------------
1997 1996
(AS RESTATED (AS RESTATED
SEE NOTE 7) SEE NOTE 7)
-------------- --------------
REVENUES $ 567,951 $ 677,459
COST OF SALES 917,732 425,707
-------------- --------------
Gross (loss) profit (349,781) 251,752
OPERATING EXPENSES:
Process and product development 147,725 84,657
General and administrative 276,618 164,479
Selling and marketing 156,567 72,165
Other nonrecurring charges (note 6) 198,710
-------------- --------------
Total operating expenses 779,620 321,301
-------------- --------------
LOSS FROM OPERATIONS (1,129,401) (69,549)
INTEREST (INCOME) EXPENSE, net (5,723) 165,831
-------------- --------------
-------------- --------------
NET LOSS $ (1,123,678) $ (235,380)
-------------- --------------
-------------- --------------
NET LOSS PER COMMON SHARE $ (0.22) $ (0.08)
-------------- --------------
-------------- --------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,156,259 3,038,990
-------------- --------------
-------------- --------------
See notes to financial statements.
3
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31
------------------------------
1997 1996
(AS RESTATED (AS RESTATED
SEE NOTE 7) SEE NOTE 7)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,123,678) $ (235,380)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization - property
and equipment 178,682 125,984
Interest expense associated with
amortization of deferred financing costs 60,000
Changes in current assets and liabilities
that provided (used) cash:
Accounts receivable (29,025) 620,594
Inventory 167,217 (66,913)
Equipment held for sale (545,722) (926,789)
Prepaid expenses (51,694) (39,651)
Accounts payable 52,372 226,694
Accrued expenses (460,363) 112,693
-------------- --------------
Cash used in operating activities (1,812,211) (122,768)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (803,092) (825,916)
Deferred offering costs (111,511)
Purchases of investments (2,250,000)
-------------- --------------
Cash used in investing activities (3,053,092) (937,427)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term
debt 4,500,000 40,083
Proceeds from lines of credit 50,000
Payments of notes payable and long-debt (57,825) (263,231)
Common stock issued 4,000
-------------- --------------
Cash provided by (used in) financing
activities 4,446,175 (173,148)
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (419,128) (1,233,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 2,038,955 1,532,361
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,619,827 $ 299,018
-------------- --------------
-------------- --------------
See notes to financial statements.
4
<PAGE>
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-month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
As discussed in Note 7, the accompanying financial statements have been
restated. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1996, filed with the SEC as part of the Company's Annual Report on Form
10-KSB/A.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The accompanying 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. As of March 31, 1997, the
Company's principal sources of liquidity included cash and cash
equivalents of $1,619,827 and net accounts receivable of $573,365. The
Company will require additional debt or equity financing in 1997.
Management is pursuing the possibility of obtaining such additional
capital expansion financing, although there can be no assurance that such
financing will be available or be available on terms acceptable to the
Company. (See Note 8 for subsequent financings obtained and the related
defaults thereon.)
2. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1997 1996
------------ ------------
Raw materials and supplies at cost $1,009,630 $1,117,569
Finished goods 16,705 34,892
------------ ------------
1,026,335 1,152,461
Less obsolescence reserve 438,980 397,889
------------ ------------
$ 587,355 $ 754,572
------------ ------------
------------ ------------
3. 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 March 31, 1997 and December 31, 1996.
Delivery of the equipment was originally scheduled for the fourth quarter
of 1996. This delivery was delayed, and the customer had requested the
Company to install and operate the equipment in the Company's facilities
during 1997 . (See Note 8)
5
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
4. 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 $16,025,444 after deducting offering costs, including underwriting
commissions, of $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 common 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 $230,000.
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. See Note 8 for subsequent resolution of this matter.
In connection with the coating equipment that the Company was building for
sale to the joint venture company, 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 moneys
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 ultimately be paid. (See
Note 8).
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.
6
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
Both suits were filed in the United States District Court for the District
of Minnesota. In July 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. (See
Note 8).
6. 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 deemed to be impaired and
additional costs of $110,788 relating to this equipment that were incurred
during the quarter ended March 31, 1997 were written off.
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 has been written down
to its fair value, resulting in an impairment charge of $53,652.
7. RESTATEMENT
As a result of an investigation which was reopened in October 1997 and was
completed in January 1998, the Company has restated its previously issued
financial statements. The Company determined that previously recorded
amounts purportedly received in 1991 and 1992 for certain issuances of
common stock to a former officer of the Company were improper. Also in
1991, 1993 and 1995 certain equipment purchases were recorded improperly.
In addition, the Company determined that in 1995 revenues were recorded
for product sales that did not occur.
The Company's financial statements for all affected periods have been
restated to reflect adjustments for these items. The effects of these
adjustments on the financial statements for the three month periods
ended March 31, 1997 and 1996 and as of March 31, 1997 are as follows:
7
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
---------------------------------------------------
As As
previously As previously As
reported restated reported restated
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Revenues $ 523,869 $ 567,951 $ 677,459 $ 677,459
Cost of sales 923,072 917,732 428,716 425,707
Gross profit (loss) (399,203) (349,781) 248,743 251,752
Loss from operations (1,178,823) (1,129,401) (72,558) (69,549)
Interest (income) expense, net (5,723) (5,723) 144,838 165,831
Net loss (1,173,100) (1,123,678) (217,396) (235,380)
Net loss per share (0.23) (0.22) (0.07) (0.08)
</TABLE>
BALANCE SHEET DATA:
As of
MARCH 31, 1997
-------------------------
As
previously As
reported restated
----------- ------------
Accounts receivable $ 591,443 $ 573,365
Equipment held for sale 2,093,148 1,435,534
Property & equipment, net 16,065,381 15,551,584
Common stock 25,163,921 24,626,551
Accumulated deficit (9,891,868) (10,525,987)
8. SUBSEQUENT EVENTS
During the second quarter of 1997, the Company reached an agreement with
the customer for whom it was building a coating line whereby the Company
will keep the equipment and refund the deposit previously received via
credits against future glass purchases by the customer. The cost of this
equipment has been reclassified to property and equipment subsequent to
March 31, 1997.
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name which are currently in the
possession of the Company. In October 1997, the Company filed a
counterclaim alleging that Stevenson had committed fraud and had damaged
the Company and that his shares should be awarded to the Company. The
Company further alleged that Stevenson did not provide adequate
consideration for such shares and that therefore they are not properly
issued. This suit is in the early stages of discovery and it is not
possible to determine what impact, if any, its outcome could have on the
financial condition or results of operations of the Company.
In September and October 1997, the Company entered into a loan agreement with
a shareholder, whereby the shareholder loaned the Company a total of
$1,100,000. The loan bears interest at 3.5% over the reference rate, as
defined, and is payable in monthly installments through September 1999. In
connection with the loan, the Company issued to the shareholder warrants for
the purchase of 110,000 shares of the Company's common stock at a price of
$5.00 per share. The warrants are exercisable between September 1998 and
September 2007.
In October 1997, the Company was unable to continue making principal
payments on the shareholder note discussed above and certain of its lease
obligations. The Company is currently in default on the shareholder loan
and two leases, including the $4,500,000 lease financing of the P-1000
line. The Company is currently pursuing additional financing and is
negotiating with its creditors to cure these defaults or otherwise
restructure these obligations. Should these negotiations prove
unsuccessful, the Company could be liable for additional interest and
penalties. Such additional amounts may be material to the results of
operations and financial condition of the Company.
On or about June 20, 1997, the third party with whom the Company is
disputing the cancellation of a contract to build power supplies brought
an action against the Company in Dakota County District Court. In the
fourth quarter of 1997, this third party increased its demand for damages
from $240,000 to $1,300,000. The Company has denied liability and demanded
the return of all monies paid to the third party 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 ultimately be paid.
In November 1997, the shareholder lawsuit was amended to make similar
allegations with respect to the disclosures made by the Company in October
1997. The Company has moved the court for an order to dismiss the action;
however, it is not possible at this time to determine what impact, if any,
this matter may have on the Company's financial position or results of
operations.
In the fourth quarter of 1997, the Company was informed by the SEC that
they have expanded their investigation to include certain accounting and
financial reporting irregularities prior to 1996 which the Company
announced in October 1997.
In December 1997, the Company obtained an $833,000 transaction-specific
export working capital line of credit.
The Company and WABO finalized a negotiated settlement in January 1998
subject to a final approval by the Chinese arbitration board. Under the
terms of the settlement, the Company will pay WABO $1.5 million in cash
and issue 200,000 shares of common stock to settle all claims in connection
with the joint venture contract, the equipment contract, and related
agreements. The total value of this settlement is approximately $2,425,000
based on the market value of the Company's common stock as of January 13,
1998. The Company had previously recorded a liability of $1,735,435 for
amounts due to WABO. The balance of $689,565, will be recorded in the
quarter ended September 30, 1997.
In January 1998, a shareholder agreed to extend the due date on a $200,000
convertible note to January 1999.
8
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
9. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE. This statement specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS). The Statement is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company's EPS
determined in accordance with SFAS No. 128 will not be materially
different than the current disclosure under Accounting Principles Board
(APB) Opinion No. 15, EARNINGS PER SHARE.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
THIS FORM 10-QSB/A 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/A. 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.
Management's discussion and analysis has been revised to reflect the impact
of the restatement of the financial statements discussed in Item 1 above.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The accompanying 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. See further discussion at "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
REVENUES
For the quarter ended March 31, 1997, net sales decreased to $567,951 from
$677,459 for the quarter ended March 31, 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 quarter ended March 31, 1996 to the quarter
ended March 31, 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 32%.
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 substrates that will provide increased revenue per unit
for substantially the same coating cost per unit. The Company also expects
to expand its productive capacity in 1997 with the addition of one thin film
coating line. Based on recent discussions with its Asian selling agents and
current customers, management anticipates significant growth in revenue from
the sale of ITO coated glass in 1997 following the addition of productive
capacity.
During 1996, the Company dedicated a significant portion of its available
production time on its P-1 line to the development of full scale production
processes for enhanced reflection mirrors and its LCM brand ITO coated glass.
Management believes because of the fluctuations 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.
The Company's largest customer accounted for 93% and 95% of the Company's
revenue during the quarters ended March 31, 1997 and 1996, respectively.
GROSS PROFIT (LOSS)
Gross loss was $349,781 for the quarter ended March 31, 1997, compared to
gross profit of $251,752 for the quarter ended March 31, 1996. The gross
loss was primarily due to the shift to a smaller sheet size by the Company's
largest customer, the supplying of raw glass by the Company's largest
customer (rather than purchasing it from the Company), and market and unit
price decreases discussed above. Target material expense increased by
$100,000 during the first quarter of 1997 because in the first quarter of
1996 the Company developed a process to reuse spent target materials which
had been expensed in 1995 thereby reducing target material expense during the
first quarter of 1996. In addition, depreciation expense increased under the
units of production method due to an increase in units produced over 1996
levels and an increase in the capitalized cost basis of the Company's
production equipment. Cost of sales consists of substrate costs, target
material costs, labor and overhead related to the Company's manufacturing
operations.
10
<PAGE>
PROCESS AND PRODUCT DEVELOPMENT
Process and product development expenses increased to $147,725 for the
quarter ended March 31, 1997 from $84,657 for the quarter ended March 31,
1996. These expenses consisted of personnel costs, consulting, testing,
supplies and depreciation expenses. The increase was due primarily to
increased personnel and consulting fees incurred for the purpose of expanding
the Company's product line.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $276,618 for the quarter
ended March 31, 1997 from $164,479 for the quarter ended March 31, 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 increased staffing. Professional fees also increased in the first
quarter of 1997 due to a special investigation of certain accounting and
financial reporting irregularities related to interim periods in 1996 and
legal fees related to a dispute with the Company's Chinese joint venture
partner. Additional professional fees will be incurred in 1997 and 1998 in
connection with these matters as well as certain litigation described in Part
II, Item 1. Legal Proceedings, and such fees may be material to the
Company's future results of operations.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased to $156,567 for the quarter ended
March 31, 1997 from $72,165 for the quarter ended March 31, 1996. These
expenses consisted principally of compensation costs for sales personnel,
commissions, travel expenses, trade show expenses, and freight out costs.
The addition of sales and customer support staff and increases in trade show,
travel and freight costs are the primary reasons for the increase in selling
expenses for the quarter ended March 31, 1997.
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 deemed to be impaired and additional costs of
$110,788 relating to this equipment that were incurred during the quarter
ended March 31, 1997 were written off.
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 has been written down to its
fair value, resulting in an impairment charge of $53,652.
NET INTEREST EXPENSE
For the quarter ended March 31, 1997, the Company had net interest income
of $5,723 compared to interest expense of $165,831 for the quarter ended
March 31, 1996. The Company retired substantially all of its outstanding debt
in June 1996 after its initial public offering.
NET LOSS
The net loss of $1,123,678 for the quarter ended March 31, 1997 compares
to a net loss of $235,380 for the quarter ended March 31, 1996. The
increase was primarily due to the nonrecurring charges and the decrease in
the revenues discussed above.
NET OPERATING LOSS CARRYFORWARDS
11
<PAGE>
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 $7.6
million, which expires in 2006 through 2010. Due to certain ownership
changes which occurred during the year ended December 31, 1993, 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 $6.9 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 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 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. The project schedule was
subsequently extended by mutual agreement between the parties. Further delays
prevented the Company from meeting the extended shipment date, which
triggered certain penalty clauses in the agreement.
During the quarter ended December 31, 1996, the Company was 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 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. The Company and WABO finalized a negotiated settlement in January 1998
subject to final approval by the Chinese arbitration board. Under the terms
of this settlement the Company will pay WABO $1.5 million in cash and issue
200,000 shares of common stock to settle all claims in connection with the
joint venture contract, the equipment contract and related agreements. The
total value of this settlement is approximately $2,425,000 based on the
market value of the Company's common stock as of January 13, 1998. The
Company had previously recorded a liability of $1,735,435 for amounts due to
WABO. The balance of $689,565 will be recorded in the quarter ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $1,619,827 and net accounts receivable
of $573,365. At the date of the original filing of the quarterly report, the
Company believed that its existing sources of liquidity and anticipated funds
from operations, including collections on equipment sales, would satisfy the
Company's projected working capital and capital expenditure requirements for
1997. 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.
12
<PAGE>
The net cash used in operating activities for quarters ended March 31,
1997 and 1996 was $1,812,211 and $122,768, respectively. This change was due
principally to the net loss for the period which was partially offset by
non-cash charges for depreciation and asset impairment losses. Expenditures
for equipment held for sale were $545,722 for the three months ended March
31, 1997, compared to $926,789 for the quarter ended March 31, 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 March 31, 1997. Delivery of the equipment was originally
scheduled for the fourth quarter of 1996. This delivery has been delayed,
and the customer has requested the Company to install and operate the
equipment in the Company's facilities during 1997. Costs incurred to date
have been classified as equipment held for sale as of March 31, 1997.
Cash used in investing activities was $3,053,092 for the quarter ended
March 31, 1997 compared to $937,427 for the quarter ended March 31, 1996. In
both periods this cash was used for the purchase of equipment and leasehold
improvements. In the quarter ended March 31, 1997, $2,250,000 was used to
purchase investments in connection with the Company's $4,500,000
sale-leaseback of the coating equipment in construction-in-progress that was
originally intended to be sold to Fortune.
Cash flows from financing activities of $4,446,175 for quarter ended March
31, 1997 consisted primarily of $4,500,000 in proceeds from the Company's
sale-leaseback for the coating equipment in construction-in-progress that was
originally intended to be sold to Fortune. Under the terms of the agreement,
which was 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.
In October 1997, the Company was unable to continue making principal payments
on the shareholder note discussed above and certain of its lease obligations.
As a result, the Company is in default on the shareholder loan and two
leases, including the $4,500,000 lease financing of the P-1000 line. The
Company is pursuing additional financing and is negotiating with its
creditors to cure these defaults or otherwise restructure these obligations.
Should these negotiations prove unsuccessful, the Company could be liable for
additional interest and penalties. Such additional amounts may be material to
the results of operations and financial condition of the Company.
While the Company had previously believed that its existing sources of
liquidity and anticipated funds from operations, including proceeds from the
sale of equipment discussed above, would satisfy its working capital and
capital expansion needs for 1997, it was subsequently forced to seek
additional financing. During the third and fourth quarters of 1997, the
Company received a total of $1,100,000 as a loan from a shareholder, and an
$833,000 transaction-specific working capital export line of credit which
management believes will satisfy the Company's projected working capital
requirements for 1997. The Company will require additional debt or equity
financing in 1998. Management is pursuing the possibility of obtaining such
additional financing, although there can be no assurance that such financing
will be available or be available on terms acceptable to the Company.
OUTLOOK
In March 1997, David E. Stevenson, the Company's president and founder,
resigned as an officer and director. The Company has assembled an executive
committee comprised of its new President, a Vice President for Finance and
Administration, a Vice President for Manufacturing, and a Vice President for
Technology. The Company's short-term focus is on increasing revenues,
decreasing expenses, increasing production capacity, and improving
manufacturing capabilities. The executive committee, together with the Board
of Directors, is currently developing a strategic plan to ensure the
Company's future profitability. The new management team, together with the
Company's Board of Directors, has taken several steps to refocus the
Company's efforts. The Company has terminated several engineering projects
that did not directly relate to the installation of additional coating
equipment at the Company's facilities. In an effort to focus all of the
Company's personnel on manufacturing activities and the development and
refinement of core deposition technologies, in March 1997 the Company also
laid off 21 employees, and reassigned several others. In addition, the
restructuring of manufacturing shifts and process modifications made to the
Company's manufacturing line have resulted in a significant increase in
production output.
13
<PAGE>
Moreover, the Company has engaged in direct discussions with its major
customers, selling agents, and suppliers, and none of these customers,
selling agents or suppliers have indicated an intention to terminate their
relationships with the Company.
Management expects that sales of TN grade ITO coated glass will be the
predominant source of revenue during 1997. Although the Company is
continuing to work on the development of additional products for introduction
in 1998, management expects that TN grade ITO coated glass sales will
continue to generate the majority of the Company's revenues in 1998 as well.
Based on the actions described above and the subsequent financings
discussed above, the Company believes that its existing sources of liquidity
and anticipated funds generated by operations will satisfy the Company's
working capital and capital expenditure requirements for 1997. The Company
will require additional debt or equity financing in 1998. Management is
pursuing the possibility of obtaining such additional financing, although
there can be no assurance that such additional capital will be available or
be available on terms acceptable to the Company.
New product introductions will depend on the success of the Company's
development efforts and on the results of management's analysis of market
opportunities and capital expenditure requirements. The Company's ability to
increase revenues is highly dependent on its ability to complete the
installation of additional coating equipment. The capital expenditures
related to such installation are expected to be available from internally
generated funds, including proceeds from the sale of ITO coating equipment to
the Company's principal customer (see "Results of Operations - Revenues"). If
the Company is unable to finalize the contract amendments currently under
discussion with that customer, it intends to keep the equipment for its own
use; the loss of equipment sale revenue associated with this transaction,
together with a refund of the customer's down payment of $500,000, however,
would force the Company to slow the process of installing additional
equipment significantly, and possibly force it to seek external capital to
fund necessary capital expenditures. Barring any unforeseen adverse external
developments, however, management believes that the Company's new plan, which
will build on the Company's asset base and technology position, will provide
for the growth in revenues and earnings necessary for the long term financial
health of the Company.
Subsequent to the original filing date of the quarterly report, the
Company reached an agreement with the customer for whom it had been building
a coating line whereby the Company would keep the coating line. As a result,
the Company will not collect the remainder of the sale price, and will refund
the $500,000 down payment received from the customer.
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.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE. This statement specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS). The Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company's EPS determined in accordance with
SFAS No. 128 will not be materially different than the current disclosure
under Accounting Principles Board (APB) Opinion No. 15, EARNINGS PER SHARE.
14
<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. The Company and WABO finalized a negotiated settlement in January 1998
subject to approval by the Chinese arbitration board. Under the terms of
this settlement the Company will pay WABO $1.5 million is cash and issue
200,000 shares of common stock to settle all claims in connection with the
joint venture contract, the equipment contract and related agreements. The
total value of this settlement is approximately $2,425,000 based on the
market value of the Company's common stock as of January 13, 1998. The
Company had previously recorded a liability of $1,735,435 for amounts due to
WABO. The balance of $689,565 will be recorded in the quarter ended
September 30, 1997.
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. On or
about June 20, 1997, the third party brought an action against the Company in
Dakota County District Court. The demand was subsequently increased to $1.3
million during the fourth quarter of 1997. The Company has denied liability
and demanded that the third-party refund all moneys 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 and October 1997
relating to fiscal 1996 and prior periods. 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 filed in
the United States District Court for the District of Minnesota by two
shareholders who purport to act on their own behalf and on behalf of a class
consisting of individuals and entities who purchased the Company's stock in
its initial public offering, and in the secondary market up to and including
March 24, 1997. This complaint alleges that the registration statement and
prospectus for the Company's offering dated May 29, 1996 as well as quarterly
reports filed with the Securities and Exchange Commission during 1996,
contained false and misleading information, including the reported financial
results. Plaintiffs seek to have the action certified as a class action on
behalf of certain purchasers of the Company's stock from May 29, 1996 through
March 24, 1997, and seek damages, costs, expenses and reasonable attorneys'
fees. The Company denies that the plaintiffs are entitled to any relief. In
November 1997, the shareholder lawsuit was amended to make similar
allegations regarding the disclosures made by the Company in October 1997.
The Company has moved the court for an order to dismiss the action; however,
it is not possible at this time to determine what impact, if any, this matter
may have on the Company's financial position or results of operations.
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name which are currently in the
possession of the Company. In October 1997 the Company filed a counterclaim
alleging that Stevenson had committed fraud and had damaged the Company and
that his shares should be awarded to the Company. The Company
further alleged that Stevenson did not provide adequate consideration for
such shares and that therefore they are not properly issued. This suit is in
the early stages of discovery and it is not possible to determine what
impact, if any, its outcome could have on the financial condition or results
of operations of the Company.
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October of 1997, the Company became unable to make principal and
interest payments on the shareholder loan obtained in the third quarter of
1997. The Company is currently in default on this note in the amount of
approximately $220,000 in principal and interest payments, but was not in
default as of the date of the original filing of this report.
Also in October 1997, the Company was unable to continue making payments
on the $4,500,000 lease financing transaction entered into in the first
quarter of 1997. The Company is currently in default on this obligation in
the amount of approximately $400,000.
ITEM 6.
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
A report on Form 8-K was filed with the Commission on March 25, 1997
regarding the resignation of two persons who were officers and directors of
the Company, including David E. Stevenson, the Company's Chief Executive
Officer, Chairman and its founder.
A report on Form 8-K was filed with the Commission on May 7, 1997
regarding the restatement of previously reported interim results for the
first, second and third quarters of 1996.
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 January 30, 1998 -------------------------
Paul T. Fink,
President, Chief Executive Officer
/s/ Judith E. Tucker
Dated January 30, 1998 -------------------------
Judith E. Tucker,
Vice President for Finance and
Administration, Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
27 Financial Data Schedule
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,619,827
<SECURITIES> 0
<RECEIVABLES> 581,468
<ALLOWANCES> (8,103)
<INVENTORY> 587,355
<CURRENT-ASSETS> 4,395,315
<PP&E> 16,868,061
<DEPRECIATION> (1,316,477)
<TOTAL-ASSETS> 22,196,899
<CURRENT-LIABILITIES> 4,001,382
<BONDS> 4,094,953
0
0
<COMMON> 24,626,551
<OTHER-SE> (10,525,987)
<TOTAL-LIABILITY-AND-EQUITY> 22,196,899
<SALES> 567,951
<TOTAL-REVENUES> 567,951
<CGS> 917,732
<TOTAL-COSTS> 917,732
<OTHER-EXPENSES> 198,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,723)
<INCOME-PRETAX> (1,123,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,123,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,123,678)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
