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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended: December 31, 1996, Commission File No. 000-20731
PHOTRAN CORPORATION
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(Exact Name of Registrant as specified in its Charter)
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MINNESOTA 41-1697628
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(State of Incorporation) (I.R.S. Employer Identification No.)
21875 Grenada Avenue, Lakeville, Minnesota 55044
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(Address of Principal Executive Offices) (Zip Code)
(612) 469-4880
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve 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
----- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB/A or any amendment to this Form
10-KSB/A.
[X]
State Issuer's revenues for its most recent fiscal year: $2,904,460.
The aggregate market value of voting stock held by nonaffiliates of the Issuer
on March 31, 1997 was $10,065,285.
The number of shares outstanding of the Issuer's only class of common stock on
March 31, 1997 was 5,154,392.
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PART I
ITEM 1: DESCRIPTION OF THE BUSINESS
BUSINESS DEVELOPMENT
Photran Corporation ("Photran" or the "Company") was incorporated in 1991
under the laws of the State of Minnesota. During the past three years, the
Company has not changed its form of organization or mode of conducting business,
except that the Company commenced commercial scale production of ITO coated
glass for the first time in July of 1995.
GENERAL
The Company develops, manufactures and markets high performance optical and
electrically conductive, thin film coated products. The Company employs a
process based on a technology known as planar magnetron sputtering. This process
is used to apply microscopically thin layers of metal, metal oxide, nitride,
boride, carbide and fluoride to a wide variety of substrate materials. These
thin film coatings provide essential optical, electrical or durability
properties to a substrate material such as glass, metal, or plastic. The Company
began commercial scale production on its first coating line in July 1995. The
Company's first product is its PCO brand of indium tin oxide ("ITO") coated
glass. ITO coated glass consists of a high quality sheet of thin glass which the
Company coats with a transparent, electrically conductive ITO coating. ITO
coated glass is a principal component of flat panel displays. These displays are
used in watches, calculators, lap top computers and consumer electronics
devices.
TECHNOLOGY
The Company's core manufacturing technology is based on a vacuum coating
process known as planar magnetron sputtering. This process is used to apply
microscopic thicknesses of thin film coatings onto a variety of substrate
materials. The coating process occurs in a specially designed vacuum chamber.
The source material for the coating is normally a metal plate referred to as the
"target," which is mounted on a device called a "magnetron sputtering cathode."
The cathode and target assembly becomes the negative terminal in an electrical
circuit. A regulated power supply energizes the cathode and target, providing a
source of electrons. A small volume of argon gas is introduced into the vacuum
chamber near the cathode. Electrons emitted from the cathode collide with these
argon atoms causing the argon atoms to become positively charged or "ionized."
The negative charge on the target provides a strong electrical attraction for
the argon gas ions causing them to strike the target with very high velocity.
The kinetic energy of the argon gas ions, which is transferred to the target
surface, results in an atom of the target material being "sputtered" off the
surface. The sputtered atom travels at a very high speed toward the substrate
material, which is passing through the vacuum chamber. The sputtered atom
strikes the substrate surface with sufficient force to form a strongly bonded
coating.
ITO COATED GLASS PRODUCTS AND MARKETS
To date, the Company's principal product has been its PCO brand TN grade
ITO coated glass. The Company had orders for approximately 1,000,000 pieces of
ITO coated glass as of December 31, 1996. The Company has also produced enhanced
reflection mirrors in limited quantities.
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PCO BRAND TN GRADE AND LCM BRAND STN GRADE ITO COATED GLASS. The first
product the Company introduced was its twisted nematic (TN) grade ITO coated
glass that is the primary material used to construct many types of flat panel
displays. The most common type of flat panel display is the TN grade liquid
crystal display ("LCD"), which is used in watches, calculators, electronic games
and most types of inexpensive consumer electronics devices. These displays,
which incorporate TN grade ITO coated glass, are produced in very high volume by
an estimated 200 display manufacturing companies located in Japan and other
Asian countries.
To further its market position and to attempt to secure higher margins, the
Company is developing a new ITO coated glass product for the high-resolution
super twisted nematic ("STN") segment of this market. In 1997 the Company plans
to continue to focus on development of the STN grade market and to expand its
production capacity to allow for greater output of TN grade and the production
of STN grade ITO coated glass.
Based on a report published by Stanford Resources, Inc., a market research
firm specializing in the electronic display industry, the worldwide market for
the ITO coated glass used to manufacture all types of LCDs is currently expected
to be approximately $268 million by the year 2000. A report from the same
service indicates that by the year 2002 the market for flat panel displays, of
which ITO coated glass is a major component, is forecast to be more than $23
billion annually. The projected compound annual growth rate for the LCD segment
of the flat panel display market is estimated to be approximately 21% for the
period from 1991 to 2000 by Semiconductor International, a trade publication.
This rapid growth in the market for finished displays is expected to drive a
corresponding increase in demand for ITO coated glass.
TOUCH SCREEN PANELS. The Company also coats glass panels with ITO and
antimony tin oxide materials. These coated glass panels are the principal
material component in all resistive and capacitive type touch screens. Resistive
and capacitive type touch screens account for the majority of the touch screen
market.
A/R PRODUCTS AND MARKETS
Anti-reflection ("A/R") coatings consist of microscopically thin layers of
metal and metal oxide materials that utilize the principle of light wave
interference to reduce the reflectivity of the surface of a glass or plastic
substrate. The Company is currently developing the two A/R products described
below.
POLARCLEAR POLARIZING FILM. The Company's PolarClear product will consist
of a sheet of plastic polarizing film, which is available from several sources
in the U.S. and Asia, to which the Company will apply an A/R coating. The
Company does not currently purchase this material and does not have any
agreements with any suppliers of the material.
Every LCD display utilizes a plastic polarizing film on the front of the
display. According to a report by Stanford Resources the annual market for
polarizers is projected to be $420 million by the year 2000.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas picture framing glass will consist
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of a high quality sheet of clear glass that the Company will coat with A/R and
UV light blocking coatings. UV light is present at very damaging levels in
sunlight and most fluorescent light. It is the primary cause of irreversible
fading in paintings, prints and photographs.
According to the Professional Picture Framers Association, the annual
market for picture framing is approximately $4 billion. Historically,
picture-framing glass has accounted for approximately 8% of the total framing
cost. The Company estimates that between 10% and 12% of the glass currently used
for picture framing is a chemically etched "non glare" type of glass. This
product reduces glare by creating a matte texture for the picture or artwork.
Although it reduces glare, etched glass also reduces the image clarity and color
fidelity. The Company is aware of two A/R coated picture framing glass products
produced by a chemical dip process but is not aware of any A/R picture framing
glass coating applied using sputtering technologies.
The Company plans to sell ArtGlas for approximately the same price as
existing chemically dipped glass. The Company believes that the price and
performance qualities of ArtGlas will provide the Company with competitive
advantages in the picture framing glass market.
The Company's current production system cannot accommodate the large sheets
of glass required to produce ArtGlas. The Company intends to install a coating
system that will be capable of coating 30" x 40" sheets of ArtGlas.
ENHANCED REFLECTION MIRROR PRODUCTS AND MARKETS
Enhanced reflection mirrors ("ERMs") are glass or plastic sheets coated
with highly reflective mirror coatings on the surface closest to the point of
use (front surface). The Company commenced shipments of ERM products on a
limited basis in 1996. To date, the Company's selling efforts with respect to
ERM products has been very limited. The Company intends to focus additional
development and selling efforts on certain Asian customers during 1997. ERM
products are not expected to contribute materially to the Company's revenues in
1997.
PMAX ENHANCED REFLECTION MIRRORS. The Company's PMAX enhanced reflection
mirrors consist of a polished glass sheet coated with an ultra-high reflection
mirror coating on the front surface. Front surface mirrors are used in all
photocopiers, laser and bar code scanners, projection televisions, overhead
projectors and many other types of specialty mirror applications.
SALES AND DISTRIBUTION
The Company's sales and distribution activities are currently handled on a
direct basis and through selling agents. The Company's sales efforts are
currently conducted largely by senior management. Sales and distribution of
products under development will vary, depending on the product and the markets
to be pursued.
ITO PRODUCTS
ITO products are sold to manufacturers of flat panel displays. These
displays are used in such products as watches, calculators and lap top
computers. The Company sells its ITO coated glass and touch screen products
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directly and through independent sales agents in the U.S. and Asia. This method
of distribution has provided a low cost, effective method of serving these
markets.
The Company has informal sales arrangements with several U.S. and Asian
sales agents and is in the process of formalizing these arrangements. These
sales agents are paid a sales commission that is standard for the industry.
A/R PRODUCTS
POLARCLEAR POLARIZING FILM. PolarClear A/R and UV light blocking polarizing
films will be distributed through the Company's existing ITO coated glass
selling agents. This product is used by the same customers who purchase the
Company's ITO coated glass products.
ARTGLAS PICTURE FRAMING GLASS. ArtGlas will be sold on a wholesale basis to
a limited number of established distributors of picture framing glass in the
U.S. and Europe.
ENHANCED REFLECTION MIRROR PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. To reach the markets for ERMs, the
Company will utilize sales agents to call on manufacturers of photocopiers,
laser and bar code scanners, overhead projectors and projection televisions.
COMPETITION
The Company has not yet shipped significant quantities of products in any
of the markets in which it intends to compete. It has not, therefore,
established a significant market presence in any of these markets.
ITO PRODUCTS
TN GRADE AND STN GRADE ITO COATED GLASS. Approximately half of the world's
production capacity for TN grade ITO coated glass is located in Japan. Japanese
LCD manufacturers utilize most of the ITO coated glass production capacity in
Japan. The principal suppliers of ITO coated glass for the LCD industry outside
of Japan are Applied Films Corporation of Boulder, Colorado; Samsung Corning of
Seoul, South Korea and Merck Balzers of Liechtenstein. These ITO suppliers have
substantial financial, technical, manufacturing and marketing resources, are
well established and will provide formidable competition to the Company for the
foreseeable future. The Japanese ITO coating manufacturers are not active in
supplying markets outside of Japan. However, to the extent the Company attempts
to develop business in Japan they will provide direct competition.
Because of the strong competition in the TN grade ITO coated glass market,
the Company is planning to focus on the higher quality, higher margin STN grade
segment of the ITO coated glass market. The Company believes that only three
Japanese ITO producers and Samsung Corning are able to supply significant
quantities of STN grade ITO coated glass. The Company estimates that until
recently, approximately 90% of the demand for STN grade ITO coated glass was in
Japan. However, beginning in the fourth quarter of 1995, several new STN grade
LCD production lines have commenced production in Taiwan, Singapore, Korea and
Hong Kong. The Company believes that the non-Japanese markets for STN grade ITO
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coated glass will be easier to penetrate than the Japanese market. The Company,
therefore, intends to target the non-Japanese markets for STN grade LCD
manufacturing and has made a strategic decision to refrain from entering the
Japanese market because formidable competition and captive markets would make
such penetration difficult and costly.
TOUCH SCREEN PANELS. The only existing supplier of ITO and antimony tin
oxide coated panels for the touch screen market of which the Company is aware is
the Display Products Division of Donnelly Corporation in Holland, Michigan.
Donnelly has fully integrated production facilities for glass bending and thin
film coating. The Company's touch screen product is manufactured using a
different coating technology which the Company believes is more efficient than
the process used by its competitors. The Company intends, therefore, to compete
in this market on the basis of price.
A/R PRODUCTS
POLARCLEAR POLARIZING FILTERS. The market for A/R coated polarizing plastic
sheets has developed rapidly in the last two years. Currently Optical Coating
Laboratory, Inc. (OCLI) of Santa Rosa, California and Nitto Denko of Japan
account for the majority of the market for A/R coated polarizing material. There
are five other principal suppliers of polarizing material worldwide. Three are
in Japan and two are in the U.S. Each of these companies has substantial
manufacturing, technical, marketing and financial resources. The Company
believes the processes it has under development will enable it to compete on the
basis of both cost and quality.
ARTGLASS PICTURE FRAMING GLASS. There are two companies of which the
Company is aware that currently supply anti-reflection picture framing glass.
Denton Vacuum, Inc. of Cherry Hill, New Jersey, and Schott Glas Werks of Mainz,
Germany, sell anti-reflection picture glass for the framing market that is
manufactured by a chemical dip process. The Company believes its ArtGlass
product will have more effective optical and A/R properties than products
offered by competitors and believes that these properties will provide a
competitive advantage in this market. The Company plans to sell ArtGlass for
approximately the same price as existing chemically dipped glass.
ERM PRODUCTS
PMAX ENHANCED REFLECTION MIRRORS. The market for enhanced reflection
mirrors is currently being served by OCLI, Viratec Thin Films, Inc. (Viratec) of
Faribault, Minnesota and Opton, Inc. of Norfolk, Virginia. These three companies
are believed to supply more than 90% of the worldwide demand for ERMs. All three
companies have large manufacturing facilities in the U.S., Europe and Asia for
cutting and edge grinding of these products to meet end user specifications. The
Company intends to compete in this market on the basis of price.
RAW MATERIALS
The principal raw materials used in the Company's manufacturing processes
are glass substrates, which are coated with thin films, and the targets, which
are the source material for the thin film coatings. The glass used for ITO
coated glass is a special grade of thin soda lime glass. This material is
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available from five suppliers worldwide. The Company currently purchases its
glass substrate from Glaverbel, S.A. of Belgium, although it does not have a
long term supply agreement with this supplier. Other suppliers are located in
the U.K. and Japan. The Company believes that it can obtain comparable quality
material from other suppliers should its current source be disrupted. Raw
materials for products to be introduced in 1997 and the target materials are
widely available from a variety of sources.
CUSTOMERS
During 1995, sales of ITO coated glass to the Company's two largest
customers accounted for 85% and 11% of total revenue, respectively. Sales to the
largest customer accounted for 82% of 1996 sales. The Company's largest customer
is located in Taiwan and is the largest LCD manufacturer outside of Japan. The
Company does not have any long-term contractual commitments from its customers.
The Company sold its PCO brand of ITO coated glass to a limited number of
customers in 1995 and 1996, primarily due to production capacity limitations.
The Company expects to increase its productive capacity during 1997, and
anticipates that it will be able to expand its ITO product customer base when
this increased capacity is available.
The Company plans to further expand its customer base in the near term
through new product offerings. Based on current sales to its largest customer,
however, the Company expects that customer to continue to account for at least
50% of its total revenue in 1997.
Customers for the Company's ITO coated glass products are predominantly
located in Asia. The Company anticipates that the initial customers for its A/R
and ERM products will be located predominantly in the U.S.
INTELLECTUAL PROPERTY
The Company's policy is to attempt to protect its technology by, among
other things, filing patent applications for technology that it considers
important to the development of its business. The Company has seven issued U.S.
patents, four U.S. patent applications which have been filed and 16 U.S. patent
applications which have been prepared and are in the process of being finalized
for filing. The validity and breadth of claims covered in the Company's patents
and patent applications involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that the Company's
pending applications will result in patents being issued or if issued that such
patents or the Company's existing patents will provide a competitive advantage,
or that competitors of the Company will not design around any patents issued to
the Company. Other than the prior art review done in connection with the
Company's patent applications, the Company has not undertaken any independent
investigation regarding potential infringement of its current or proposed
products on the property rights of others.
GOVERNMENT REGULATION; ENVIRONMENTAL LAWS
The Company's business is not subject to any material governmental
regulations, nor are any governmental approvals required for the operations of
the Company as currently conducted or anticipated to be conducted in the
foreseeable future. Costs and effects of environmental compliance are also not
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material to the Company's business.
RESEARCH AND DEVELOPMENT
The Company spent $353,636 and $455,847 on research and development
activities in 1995 and 1996, respectively. None of these expenditures are borne
directly by customers.
EMPLOYEES
As of December 31, 1996, the Company had 107 full-time employees and 2
part-time employees. Of these full-time employees, 15 were in research and
development and engineering, 40 were in manufacturing and production, 33 were in
machining, machine assembly and facilities maintenance, one was in sales, and 18
were in management or administrative positions. In March of 1997 management
eliminated 21 full-time positions. These staff reductions primarily affected the
engineering, research and machining departments. None of the Company's employees
are covered by a collective bargaining agreement, and management considers its
relations with its employees to be good.
ITEM 2 - DESCRIPTION OF PROPERTY
FACILITIES
The Company leases its main office and manufacturing facility located at
21875 Grenada Avenue, Lakeville, Minnesota 55044. This 23,000 square foot
facility consists of 16,000 square feet of manufacturing space (including
approximately 10,000 square feet of high quality environmentally controlled
clean room area). The remaining 7,000 square feet is used for administrative,
engineering, R & D and sales offices. The Company also leases a nearby 47,000
square foot building located at 21725 Hanover Avenue, Lakeville, Minnesota
55044. The Company intends to use this facility for its machine shop, shipping
and receiving, and another manufacturing line. The Company has options to
purchase both of these buildings. The Company believes these facilities are in
good condition and are adequate for the foreseeable future. The Company carries
insurance covering the full replacement value of these properties. For
discussion concerning the lease obligations, see Note 6 to Financial Statements.
EQUIPMENT
At December 31, 1996 the Company operated a single in-line coating machine
which it has designated "P-1." The P-1 line is housed in a high quality
environmentally controlled clean room. It is being used primarily to produce ITO
coated glass. During the fourth quarter of 1996, the Company was informed by its
Chinese joint venture partner of the partner's desire to dissolve the joint
venture. The Company had been constructing a coating line for sale to the joint
venture. The Company will now keep this coating line, designated the "P-3," and
is currently modifying it to suit the Company's manufacturing needs. This
equipment is owned by a lease financing company subject to the Company's
obligation to purchase the equipment at the end of the lease term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - China Joint Venture."
The Company owns the majority of its manufacturing equipment (other than
the P-3) as well as equipment used in its research and development
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activities. Some of the Company's machine shop and office equipment is subject
to operating and capital leases none of which are material to the Company's
business. All of the Company's personal property, whether owned or leased, is in
good condition and adequate for the foreseeable future.
ITEM 3 - LEGAL PROCEEDINGS
The Company was not a party to any legal proceedings during 1996. On
April 10, 1997, the Securities and Exchange Commission (SEC) notified the
Company that the Commission had commenced a formal investigation with respect
to certain financial and accounting irregularities that had been identified
by the Company and its independent auditors. The investigation is in the
preliminary stages and it is not possible to determine at this time what
impact, if any, the investigation will have on the Company's financial
condition or results of operations.
During the quarter ended December 31, 1996, the Company was informed by
its Chinese joint venture partner, Shenzhen WABO Group Company Limited
(WABO), of the partner's intention to dissolve the joint venture agreement
and cancel the related equipment purchase contract. In April 1997, the
Company received notice that arbitration proceedings had been commenced
against it by WABO, claiming approximately $4.4 million plus legal fees and
costs. In January 1998, the Company and WABO negotiated a settlement 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 approximately $1,735,000 for amounts due
to WABO. The balance of approximately $690,000 will be recorded in the
quarter ended September 30, 1997.
In connection with the coating equipment that the Company was building
for sale to the joint venture, 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 formally brought an
action against the Company in Dakota County District Court. The demand was
increased to $1.3 million in the fourth quarter of 1997. The Company has
denied any liability 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.
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
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inflated its stock price between May 29, 1996 and March 24, 1997. The
plaintiffs amended their complaint to make similar allegations with respect
to the disclosures made by the Company in October of 1997. The plaintiffs in
these actions are seeking class certification.
Both suits were filed in the United States District Court for the
District of Minnesota. In July of 1997 the court consolidated these lawsuits
into a single action captioned IN RE PHOTRAN CORPORATION SECURITIES
LITIGATION. The Company has moved the court for an order dismissing this
lawsuit. However, 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.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of security holders during
the quarter ended December 31, 1996.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common shares were listed on the NASDAQ National Market under
the symbol "PTRN." Effective January 13, 1998 the Company was delisted from
NASDAQ. The high and low bid prices during the fiscal quarters of 1996
following the Company's initial public offering, as reported in the NASDAQ NMS
monthly statistical report, were as follows:
1996
----
HIGH LOW
---- ---
Second quarter $14 1/4 $9 3/4
Third quarter 12 1/8 5 5/8
Fourth quarter 6 1/2 3 1/4
There were approximately 347 shareholders of record as of December 31,
1996. The Company has not paid any dividends on its common shares and
anticipates retaining future earnings, if any, to finance operations of the
Company.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA (1)
First Quarter Second Quarter Third Quarter
1995 1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 12,594 $ 677,459 $ 451,349 $ 803,567 $ 636,203 $ 758,085
Gross profit
(loss) (11,983) 251,752 5,180 64,958 (166,508) (94,495)
Other non-
recurring
charges
Loss from
operations (210,352) (69,549) (217,368) (272,136) (370,247) (441,556)
Loss before
extraordinary
item (227,675) (235,380) (278,330) (351,729) (465,392) (363,907)
Net loss (227,675) (235,380) (278,330) (423,719) (465,392) (363,907)
Loss per common
share before
extraordinary
item (.07) (.07) (.08) (.09) (.14) (.07)
Net loss per
common share (.07) (.07) (.08) (.11) (.14) (.07)
Total assets 7,130,593 12,642,013 8,814,908 23,167,660 9,402,634 22,663,653
Long-term debt
less current
portion 473,022 290,318 1,355,779 152,726 1,343,030 104,040
<CAPTION>
Fourth Quarter Total Year
1995 1996(2) 1995 1996
<S> <C> <C> <C> <C>
Revenues $ 1,026,592 $ 665,349 $ 2,126,738 $ 2,904,460
Gross profit
(loss) 260,969 (710,802) 87,658 (488,587)
Other non-
recurring
charges 2,216,894 2,216,894
Loss from
operations (92,228) (3,840,733) (890,195) (4,623,974)
Loss before
extraordinary
item (266,772) (3,793,311) (1,238,169) (4,744,327)
Net loss (266,772) (3,793,311) (1,238,169) (4,816,317)
Loss per common
share before
extraordinary
item (.08) (.89) (.37) (1.11)
Net loss per
common share (.08) (.89) (.37) (1.13)
Total assets 12,711,154 19,282,393 12,711,154 19,282,393
Long-term debt
less current
portion 762,783 327,813 762,783 327,813
</TABLE>
(1) As restated - see Restatements of Previously Reported Financial Statements.
(2) See Results of Operations -- Other Nonrecurring Charges.
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RESTATEMENTS OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
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 (See Note 11 to the
financial statements). The impact of the restatements on the selected
quarterly financial data for the years ended December 31, 1995 and 1996 is as
follows:
Fiscal 1995
<TABLE>
<CAPTION>
First Quarter 1995 Second Quarter 1995 Third Quarter 1995
As As As
Previously As Previously As previously As
reported restated reported restated reported restated
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 217,595 $ 12,594 $ 451,349 $ 451,349 $1,438,203 $ 636,203
Gross profit
(loss) 120,662 (11,983) 4,574 5,180 401,347 (166,508)
Income (loss) before
Extraordinary
Item (95,031) (227,675) (278,936) (278,330) 105,253 (465,392)
Net income (loss) (95,031) (227,675) (278,936) (278,330) 105,253 (465,392)
Income (loss) per common
Share before
Extraordinary
Item (.03) (.07) (.08) (.08) .03 (.14)
Net income (loss) per
Common share (.03) (.07) (.08) (.08) .03 (.14)
<CAPTION>
Fourth Quarter 1995 Total Year 1995
As As
Previously As Previously As
reported restated reported restated
<S> <C> <C> <C> <C>
Revenues $1,255,671 $1,026,592 $3,362,818 $2,126,738
Gross profit
(loss) 787,713 260,969 1,314,296 87,658
Income (loss) before
Extraordinary
Item 318,727 (266,772) 50,013 (1,238,169)
Net income (loss) 318,727 (266,772) 50,013 (1,238,169)
Income (loss) per common
Share before
Extraordinary
Item .09 (.08) .01 (.37)
Net income (loss) per
Common share .09 (.08) .01 (.37)
</TABLE>
Fiscal 1996
<TABLE>
<CAPTION>
First Quarter 1996 Second Quarter 1996 Third Quarter 1996
As As As
Previously As Previously As previously As
reported restated reported restated reported restated
<S> <C> <C> <C> <C> <C>
Revenues $ 677,459 $ 677,459 $ 785,648 $ 803,567 $ 758,085 $ 758,085
Gross profit
(loss) 248,743 251,752 44,029 64,958 (97,504) (94,495)
Loss before
Extraordinary
Item (217,396) (235,380) (351,665) (351,729) (366,916) (363,907)
Net loss (217,396) (235,380) (423,655) (423,719) (366,916) (363,907)
Loss per common
share before
extraordinary
item (.07) (.07) (.09) (.09) (.07) (.07)
Net loss per
common share (.07) (.07) (.11) (.11) (.07) (.07)
<CAPTION>
Fourth Quarter 1996 Total Year 1996
As As
Previously As Previously As
reported restated reported restated
<S> <C> <C> <C> <C>
Revenues $ 665,349 $ 665,349 $2,886,540 $2,904,460
Gross profit
(loss) (919,016) (710,802) (723,748) (488,587)
Loss before
Extraordinary
Item (4,273,940) (3,793,311) (5,209,917) (4,744,327)
Net loss (4,273,940) (3,793,311) (5,281,907) (4,816,317)
Loss per common
share before
extraordinary
item (1.00) (.89) (1.23) (1.11)
Net loss per
common share (1.00) (.89) (1.25) (1.13)
</TABLE>
FORWARD LOOKING STATEMENTS
THIS FORM 10-KSB/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 AND OTHER FACTORS DISCLOSED THROUGHOUT THIS FORM
10-KSB/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.
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations has been revised to reflect the impact of the restatement of the
financial statements discussed above.
REVENUES
For the year ended December 31, 1996 net sales increased 37% to $2,904,460
from $2,126,738 in 1995. Revenues consisted primarily of gross sales of TN grade
ITO coated glass. The increase in revenue for the year
11
<PAGE>
ended December 31, 1996 compared to 1995 is due primarily to increased unit
sales in 1996. This was partially offset by a combination of a general market
price reduction for TN grade ITO coated glass and a change by the Company's
principal customer to a smaller sheet size. These changes had the combined
effect of reducing the unit price of the Company's TN grade ITO coated glass by
approximately 50% from the beginning of the year to the end of the year.
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.
During 1996 most of the Company's engineering capabilities were dedicated
to the design and construction of two thin film coating lines, one of which was
held for sale at December 31, 1996. As a result, the Company did not realize
increases in productive capacity and capabilities in 1996.
In the summer of 1996, the Company entered into an agreement to sell
certain 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. The Company
determined that it was appropriate to account for this transaction under the
completed contract method of accounting. As such the associated costs have been
classified as equipment held for sale in the December 31, 1996 balance sheet.
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 credits against future glass purchases by the
customer. In 1997 the cost of this equipment was reclassified to property
and equipment.
The Company's largest customer accounted for 85% and 82% of the Company's
revenue during 1995 and 1996, respectively. Based on recent discussions with
this customer, management currently expects the customer's purchases of ITO
coated glass in future periods to be comparable to historical levels, although
no long-term purchase commitments exist.
GROSS PROFIT (LOSS)
Gross loss was $488,587 in 1996, compared to gross profit of $87,658 in
1995. The loss was due in part to the shift to smaller sheet size and market and
unit price decreases discussed above. Cost of sales consists of substrate costs,
target material costs, labor and overhead related to the Company's manufacturing
operations. Cost of sales also includes the costs
12
<PAGE>
associated with the enhancements of commercial scale production processes for
the manufacture of the Company's LCM brand ITO coated glass and improvements in
the process for enhanced reflection mirrors. The production of these products
requires ultra clean substrates and must be performed in a clean room
environment to achieve acceptable production yields. Management made the
decision to commence production of these products on its existing production
line prior to the installation of the clean room and material handling and
cleaning upgrades. As a result, production yields were significantly reduced and
scrap cost increased. Management believes that equipment and facility
improvements planned for 1997 and 1998 will resolve these problems.
In addition, during the fourth quarter of 1996, the Company determined
that certain glass inventory, a portion of which the Company had successfully
coated and sold earlier in 1996, had become stained by the packaging
materials. The multiple washings which this glass required and the poor
quality of output and high scrap rates have made it economically unfeasible
to attempt to coat this glass. Management, therefore, has reduced the
carrying value of this inventory by approximately $400,000 and charged that
amount to cost of sales in the fourth quarter.
PROCESS AND PRODUCT DEVELOPMENT
Process and product development expenses increased to $455,847 in 1996 from
$353,636 in 1995. These expenses consist of personnel costs, consulting,
testing, supplies and depreciation expenses. The increase in 1996 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 $1,003,365 in 1996 from
$462,686 in 1995. These expenses consist primarily of compensation expenses
for administration, finance, and general management personnel, as well as
office supplies, depreciation, bad debts and professional fees. The increase
in 1996 is partially a result of increased staffing. Bad debt expense
increased by approximately $80,000 due to the bankruptcy of one customer in
late 1996. In addition, the Company incurred significant professional fees in
connection with a special investigation of certain transactions recorded in
1996. The special investigation was initiated by the Board of Directors and
led to a restatement of previously reported interim financial results for the
first, second, and third quarters of 1996. Additional professional fees will
be incurred in connection with this investigation in 1997 and 1998, and such
amounts may be material to the Company's 1997 results of operations.
SELLING AND MARKETING EXPENSES
Selling expenses increased to $ 459,281 in 1996 from $161,531 in 1995.
These expenses consist 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 year ended December 31, 1996.
13
<PAGE>
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996 the Company's Chinese joint venture partner,WABO,
notified the Company of its intention to cancel a joint venture agreement with
the Company 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 a charge of $1,800,000.
In the fourth quarter of 1996, the Company discontinued its development of
commercial scale production equipment for its ZeroRay-TM- glare and radiation
control filters due to technical difficulties encountered with the large scale
production of the optical gel adhesive necessary for attaching the filters to
computer and television screens. Management believes that the resolution of
these issues would have required significant additional resources and would have
raised the cost of the filters to a point where the product could not be
competitive with other similar products. In connection with this decision,
management determined that production equipment that had been purchased to
manufacture the ZeroRay product had been impaired. The Company determined that
this equipment, which had a historical cost of approximately $378,000, had no
foreseeable future value and was, therefore, written off.
NET INTEREST EXPENSE
For the year ended December 31, 1996 the Company had net interest
expense of $120,353 compared to interest expense of $292,008 in 1995. The
change was due to the earnings from the investment of the proceeds from the
Company's initial public offering. In addition, the Company retired
substantially all of its outstanding debt in June of 1996 after its initial
public offering.
OTHER EXPENSE
Other expense in 1995 of $55,966 consisted of the write-off of certain
property and equipment the carrying value of which the Company determined
could not be recovered.
EXTRAORDINARY ITEM
Upon repayment of the Company's Bridge Notes in June 1996, the remaining
unamortized balance of $71,990 in deferred financing fees was written off. The
loss on extinguishment has been classified as an extraordinary item in the
Statement of Operations for the year ended December 31, 1996.
NET LOSS
The net loss of $4,816,317 for the year ended December 31, 1996 compared to a
net loss of $1,238,169 for 1995 was primarily due to the other nonrecurring
charges and inventory valuation adjustments discussed above. In addition, the
decrease
14
<PAGE>
in the per unit revenues discussed above and the product and process enhancement
costs included in cost of sales increased the 1996 loss.
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 $7.6 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 $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 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 Company was not relying on any material earnings or distributions
from Fortune and, therefore, recorded the costs incurred as equipment held for
sale. The Company was accounting for this sale on the completed contract method.
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 $1.7 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
15
<PAGE>
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. The equipment has been reclassified to
property and equipment at December 31, 1996. 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. A negotiated settlement of this matter was subsequently
reached 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 $2.4 million based on the market value of the Company's common
stock as of January 13, 1998. The Company had previously recorded a
liability of $1,735,000 for amounts due to WABO. The balance of $689,565
will be recorded in the quarter ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred accumulated losses since its inception of
$9,402,309 and incurred negative cash flows from operating activities of
$1,478,877 for the year ended December 31, 1996. The Company had cash outlays
for property and equipment additions of $8,896,744 for the year ended December
31, 1996.
The Company's continuation as a going concern is dependent on its
ability to meet its obligations as they become due. 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. Management's plans regarding
operating losses and its plans concerning the above matters are presented in
the Outlook section below. As of December 31, 1996, the Company's principal
sources of liquidity included cash and cash equivalents of $2,038,955 and net
accounts receivable of $544,340. As of the date of the original filing of the
annual report, management believed that its existing sources of liquidity and
anticipated funds from operations, including collections on equipment sales,
combined with the net proceeds from a first quarter 1997 sale-leaseback
accounted for as a financing transaction of $2,250,000, would satisfy the
Company's projected working capital and capital expenditure requirements for
1997. Management is, however, also
16
<PAGE>
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 1996 was $1,478,877 due
principally to the net loss for the year of $4,816,317 which was partially
offset by non-cash charges for depreciation and asset impairment losses.
Expenditures for equipment held for sale were $895,390, offset by the receipt of
a $500,000 downpayment.
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 December 31, 1996. Delivery of the equipment was
originally scheduled for the fourth quarter of 1996. This delivery was
delayed, and the customer 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 December 31, 1996.
Cash used in investing activities was $8,896,744 during 1996 compared to
$1,467,869 in 1995. In both periods this cash was used for the purchase of
equipment and leasehold improvements. In 1996, expenditures related to the
equipment intended for sale to the Company's China joint venture have been
categorized as additions to property and equipment due to the cancellation of
the equipment purchase agreement and the Company's decision to use this
equipment as an additional manufacturing line. Internal costs, consisting
primarily of direct labor and supplies used in the construction of equipment, of
approximately $2,470,000 and $1,010,000 were capitalized or charged to
construction-in progress during 1996 and 1995, respectively.
Cash flows from financing activities during the year ended December 31,
1996 consisted primarily of approximately $18,500,000 in proceeds from the
Company's initial public stock offering in May 1996. Following the offering, the
Company repaid $4,000,000 of Bridge Notes together with approximately $287,500
in accrued interest and a loan from a director of $1,166,668. The Company also
repaid a $2,000,000 EXIM secured bank line of credit from the proceeds of the
offering to reduce interest payments and to avoid payment of EXIM renewal fees.
Subsequent to the original filing date of the Company's annual report on
Form 10-KSB for the year ended December 31, 1996, 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. In addition, delays in
placing its second coating line into production reduced anticipated cash
flows from operations. 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. In September and October 1997, the
Company obtained a loan from a shareholder totalling $1,100,000. Such loan is
currently in default. In December 1997, the Company obtained an $833,000
transaction-specific export working capital line of credit. Management
believes these financings will meet the Company's working capital needs for
1997. However, the Company will require additional debt or equity financing
in 1998 to complete its capital expansion plans, to fund the settlement with
WABO and to cure the Company's defaults on certain loans and leases. The
Company is pursuing the possibility of obtaining such financing, but there
can be no assurance that such financing will be available or be available
on terms that are 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
17
<PAGE>
management team, together with the Company's Board of Directors, has taken
several steps to refocus the Company's efforts. In 1997, the Company 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 of 1997 the Company
also laid off 21 employees, and reassigned several others. In addition,
restructuring of manufacturing shifts and process modifications made to the P-1
line have resulted in a significant increase in production output. 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 relationship 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. The Company may
have to obtain additional capital through the issuance of equity or debt
securities. There can be no assurance that such additional capital will be
available or be available on terms acceptable 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 or 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, cash flows, and operating results.
18
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
INDEX TO RESTATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .20
Balance Sheets as of December 31, 1995 and 1996. . . . . . . . . . . . . . .21
Statements of Operations for the years ended December 31, 1995 and
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Statements of Shareholders' Equity for the years ended December 31,
1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Statements of Cash Flows for the years ended December 31, 1995 and
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Notes to Financial Statements for the years ended December 31,
1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Photran Corporation
Lakeville, Minnesota
We have audited the accompanying balance sheets of Photran Corporation (the
Company) as of December 31, 1995 and 1996 and the related statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Photran Corporation as of December 31, 1995
and 1996 and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's accumulated losses of $9,402,309 since
incorporation and negative cash flows from operating activities of $1,478,877
for the year ended December 31, 1996 raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are described in Notes 1 and 10. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 11, the accompanying 1995 and 1996 financial
statements have been restated.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 10, 1997 (January 29, 1998 as to Notes 10 and 11)
20
<PAGE>
PHOTRAN CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
(As Restated (As Restated
See Note 11) See Note 11)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,532,361 $ 2,038,955
Accounts receivable, net 728,469 544,340
Inventory 1,420,048 754,572
Equipment held for sale (Note 2) 3,072,736 907,812
Prepaid expenses 14,527 109,540
------------ ------------
Total current assets 6,768,141 4,355,219
PROPERTY AND EQUIPMENT, net (Note 3) 5,724,538 14,927,174
DEFERRED FINANCING COSTS 191,990
OTHER ASSETS 26,485
------------ ------------
$ 12,711,154 $ 19,282,393
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bridge financing (Note 4) $ 4,000,000
Line of credit (Note 4) 2,141,480
Current portion of long-term debt
notes payable and capital lease
obligations (Note 4) 1,041,547 $ 51,592
Accounts payable 1,195,833 663,411
Accrued expenses 261,221 758,915
Customer advances (Note 2) 1,760,435 2,260,420
------------ ------------
Total current liabilities 10,400,516 3,734,338
LONG-TERM DEBT (Note 4) 762,783 327,813
------------ ------------
Total liabilities 11,163,299 4,062,151
COMMITMENTS AND CONTINGENCIES (Notes 6 and 10)
SHAREHOLDERS' EQUITY (Notes 4 and 7):
Undesignated stock, no par value -
6,000,000 shares authorized, no shares
issued and outstanding
Common stock, no par value - 24,000,000
shares authorized, 2,837,323 and
5,154,392 shares issued and
outstanding, respectively 6,133,847 24,622,551
Accumulated deficit (4,585,992) (9,402,309)
------------ ------------
Total shareholders' equity 1,547,855 15,220,242
------------ ------------
$ 12,711,154 $ 19,282,393
------------ ------------
------------ ------------
See notes to financial statements.
21
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
(As Restated (As Restated
See Note 11) See Note 11)
------------ ------------
REVENUES $ 2,126,738 $ 2,904,460
COST OF SALES 2,039,080 3,393,047
------------ ------------
Gross profit (loss) 87,658 (488,587)
OPERATING EXPENSES:
Process and product development 353,636 455,847
General and administrative 462,686 1,003,365
Selling and marketing 161,531 459,281
Other nonrecurring charges (Note 8) 2,216,894
------------ ------------
Total operating expenses 977,853 4,135,387
------------ ------------
LOSS FROM OPERATIONS (890,195) (4,623,974)
INTEREST EXPENSE, net 292,008 120,353
OTHER EXPENSE 55,966
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,238,169) (4,744,327)
EXTRAORDINARY ITEM-loss on
extinguishment of debt (Note 1) (71,990)
------------ ------------
NET LOSS $(1,238,169) $(4,816,317)
------------ ------------
------------ ------------
LOSS PER COMMON SHARE (Notes 1 and 7):
Loss before extraordinary item $ (0.37) $ (1.11)
Extraordinary item (0.02)
------------ ------------
Net loss $ (0.37) $ (1.13)
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(Notes 1 and 7) 3,346,194 4,247,349
------------ ------------
------------ ------------
See notes to financial statements.
22
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(As Restated see Note 11)
COMMON STOCK
<TABLE>
<CAPTION>
--------------------- TOTAL
ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,834,823 $ 6,123,797 $(3,347,823) $ 2,775,974
Common stock issued upon
exercise of options -
July 1995 2,500 10,050 10,050
Net loss (1,238,169) (1,238,169)
---------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 2,837,323 6,133,847 (4,585,992) 1,547,855
Common stock issued in
Connection with initial public
offering, net of offering
costs of $2,248,372-
May and June 1996 2,300,000 18,451,628 18,451,628
Common stock issued upon
exercise of warrants -
June and August 1996 17,069 37,076 37,076
Net loss (4,816,317) (4,816,317)
---------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 5,154,392 $24,622,551 $(9,402,309) $15,220,242
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
See notes to financial statements.
23
<PAGE>
PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
(As Restated (As Restated
See Note 11) See Note 11)
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before extraordinary item $(1,238,169) $(4,744,327)
Adjustments to reconcile loss before extraordinary
item to cash used in operating activities:
Depreciation and amortization, property
and equipment 285,882 622,707
Loss on impairment of fixed and other assets 2,223,283
Amortization of deferred financing costs 40,421 120,000
Changes in current assets and liabilities that
provided (used) cash:
Accounts receivable (556,729) 159,129
Inventory (1,067,668) 665,476
Equipment held for sale (2,601,453) (895,390)
Prepaid expenses (582) (95,013)
Accounts payable 550,793 (532,421)
Accrued expenses 136,366 497,694
Customer advances 205,000 499,985
----------- -----------
Cash used in operating activities (4,246,139) (1,478,877)
CASH FLOWS FROM INVESTING ACTIVITIES -
Property and equipment additions (1,467,869) (8,896,744)
----------- -----------
Cash used in investing activities (1,467,869) (8,896,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge financing 4,000,000
Proceeds from lines of credit 2,141,480
Proceeds from notes payable and long-term debt 1,411,692
Payments of notes payable and long-term debt (490,013) (7,606,489)
Common stock issued net of offering costs
of $2,248,372 in 1996 10,050 18,488,704
----------- -----------
Cash provided by financing activities 7,073,209 10,882,215
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,359,201 506,594
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 173,160 1,532,361
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,532,361 $ 2,038,955
----------- -----------
----------- -----------
See notes to financial statements.
24
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING LOSSES AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Photran Corporation (the Company) is engaged in the manufacture
and sale of products incorporating thin film coatings which consist of
microscopic layers of metal and metal oxide materials. Materials coated with
these thin film coatings are components in a wide variety of products, including
liquid crystal displays, enhanced reflection mirrors and anti- reflective glass.
To date, the Company's sales have consisted of coated glass products to a
limited number of companies located in Asian countries for use in liquid crystal
displays.
MANAGEMENT'S PLANS REGARDING OPERATING LOSSES
The accompanying 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 Company
has incurred accumulated losses aggregating $9,402,309 since its inception.
The Company incurred negative cash flows from operating activities of
$1,478,877 for the year ended December 31, 1996. The Company had cash outlays
for property and equipment additions of $8,896,744 for the year ended
December 31, 1996.
At December 31, 1996 the Company had customer advances of $2,260,420.
$1,735,000 of that amount is the deposit payment from the Company's Chinese
joint venture partner, Shenzhen WABO Group Company Limited, for the purchase of
equipment. That equipment purchase agreement has been cancelled and the joint
venture partner has commenced arbitration proceedings claiming approximately
$4.4 million (including the $1,735,000 discussed above). (See Note 10 for
negotiated settlement of this matter).
In addition, the Company has received a deposit of $500,000 from a customer
for the purchase of a coating line for which the related contract was in default
at December 31, 1996. The customer delayed shipment of the equipment and the
Company was in the process of negotiating amendments to the purchase contract.
(See Note 10 for subsequent resolution of this matter.)
The Securities and Exchange Commission (SEC) has informed the Company that
it is conducting an 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.
These factors, among others, indicate the Company may be unable to continue
as a going concern for a reasonable period of time.
25
<PAGE>
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. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations as they become due, to comply
with the terms and conditions of the financing agreements entered into
subsequent to year end (see Note 10), to obtain additional financing or
refinancing as may be required, and ultimately attain sales and operating
levels to support its cost structure. Management's plans regarding operating
losses and its plans concerning the above matters are presented below.
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 largest customer. 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 sales 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, 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 revenue and earnings
necessary for the long-term financial health of the Company. (See Note 10 for
subsequent developments regarding these issues.)
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $2,038,955 and net accounts receivable
of $544,340. The Company believes that its existing sources of liquidity and
anticipated funds from operations, combined with the net proceeds from a
first quarter 1997 sale-leaseback accounted for as a financing transaction of
$2,250,000, will satisfy Company's projected working capital requirements for
1997. Management is, however, also investigating the possibility of obtaining
additional debt or equity financing, although there can be no assurance that
such financing will continue to be available or be available on terms
acceptable to the Company. (See also Note 10 for subsequent financing
obtained in 1997 and related defaults thereon.)
SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenues for coated glass sales are recognized upon
shipment of products to customers. Contracts for the sale of equipment are
accounted for using the completed contract method (see Note 2).
REVENUE FROM SIGNIFICANT CUSTOMERS - Substantially all of the Company's
sales for the years ended December 31, 1995 and 1996 were to customers located
in Asian countries. The percentages of total revenue from sales to customers in
excess of 10% of the total for each year were as follows:
1995 1996
---- ----
Customer A 85% 82%
Customer C 11% --
PROCESS AND PRODUCT DEVELOPMENT - Expenditures for research and development
of products and manufacturing processes are expensed as incurred. Research and
development expense was $353,636 and $455,847 for the years ended December 31,
1995 and 1996, respectively.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE - The Company's accounts receivable at December 31,
1995 and 1996 are due primarily from foreign customers located in Asian
26
<PAGE>
countries. In 1995, the Company required the establishment of irrevocable
letters of credit in its favor from approved banks prior to shipment of the
products underlying these accounts receivable in order to reduce its exposure to
bad debts. At December 31, 1996, $338,000 of accounts receivable from foreign
customers were not secured by letters of credit. These accounts were due from
customers with whom the Company has had a creditor relationship for over one
year.
The percentage of gross receivables due from customers in excess of 10% of
he December 31 balance is as follows:
1995 1996
---- ----
Customer A 63% 43%
Customer B -- 54%
Customer C 33% --
INVENTORY - Inventory is valued at the lower of cost, determined on the
first-in, first-out method, or market value. Inventory at December 31 consists
of the following:
1995 1996
------------ ------------
Raw materials and supplies $ 1,420,048 $ 1,117,569
Finished goods 34,892
------------ ------------
1,420,048 1,152,461
Less: Obsolescence reserve 397,889
------------ ------------
Net inventory $ 1,420,048 $ 754,572
------------ ------------
------------ ------------
Inventories are periodically reviewed for obsolescence, overstock, and
quality defects by physical examination and by comparing quantities on hand to
forecasted future requirements. Items considered obsolete or overstock are
written off. Items with quality defects are valued at net realizable value. In
the fourth quarter of 1996, the Company determined that certain glass inventory,
a portion of which the Company had successfully coated and sold earlier in 1996,
had become stained by the packaging materials. The multiple washings which this
glass required and the poor quality of output and high scrap rates have made it
economically unfeasible to attempt to coat this glass. Management has
established an obsolescence reserve of $397,889, which has been charged to cost
of sales in the fourth quarter to reduce the carrying value of this glass to its
estimated net realizable value if sold as uncoated scrap.
The Company purchases substantially all of its raw glass, which is the
majority of the raw materials used in the manufacture of its products, from a
single source supplier. The Company believes that acceptable alternative sources
of this material are available.
EQUIPMENT HELD FOR SALE - Equipment held for sale is carried at cost.
Equipment held for sale includes $79,400 and $17,000 of interest capitalized for
the years ended December 31, 1995 and 1996, respectively.
CUSTOMER ADVANCES - Customer advances represent amounts received from
27
<PAGE>
customers as down payments on equipment contracts. (See Note 2).
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Cost
includes expenditures for new equipment and incremental labor and direct costs
incurred for construction of equipment modifications. Property and equipment
include $209,000 of interest capitalized during the year ended December 31,
1996. Property, other than manufacturing process equipment, is depreciated using
the straight-line method over estimated useful lives of three to ten years.
Manufacturing process equipment is depreciated using the units-of-production
method, with such equipment's useful life estimated to be approximately ten
years. Amortization of equipment under capital leases is over the shorter of the
lease term or the economic useful life and is recorded as depreciation expense.
Depreciation is not recorded on property not yet placed in service. Repairs and
maintenance are charged to expense as incurred.
DEFERRED FINANCING COSTS - Deferred financing costs at December 31, 1995
consisted primarily of underwriting and legal fees associated with the issuance
of bridge note financing in fiscal 1995 (see Note 4). Accumulated amortization
was $40,000 at December 31, 1995. The unamortized balance was written off upon
repayment of the Bridge Notes in 1996, and has been classified as an
extraordinary item in the statements of operations.
OTHER ASSETS - The Company has obtained patent rights to various
manufacturing processes and product technology. The founding shareholder
transferred key manufacturing and product technology to the Company, including
patent rights, for the sum of $1. Through December 31, 1995 and 1996, there were
no sales of product subject to royalty. In addition, the Company had purchased
and capitalized an exclusive license for certain related technology from Applied
Elastomerics, Inc. for $13,000 which was to be amortized upon commencement of
production over the term of the license agreement. The license expired in May
1996 and was not renewed.
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of property and equipment and other long-lived assets for
potential impairment by comparing its carrying value to the estimated
undiscounted future cash flows expected to result from the use or disposed of
these assets. Should the sum of the related expected future net cash flows be
less than the carrying value, an impairment loss is recognized. An impairment
loss is measured by the amount by which the carrying value of the asset exceeds
the fair value of the asset.
As of December 31, 1996, the Company reassessed the carrying values of the
fixed assets related to several production projects in relation to the expected
future cash flows from sales of the manufactured products. The Company decided
that it would refocus its efforts with respect to such projects and would not
pursue those for which commercial production did not appear feasible in the near
term. The related fixed assets were, therefore, written down to their estimated
fair values, which in some cases were determined by their historical cost less a
restocking fee to the extent that the Company could return purchased components
to the manufacturer (see Note 8).
The value of certain license rights was deemed impaired as of December 31,
1996,
28
<PAGE>
and the costs were written off. These charges are included in other nonrecurring
charges in the statements of operations.
INCOME TAXES - The Company calculates income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the period in which the differences are expected to affect taxable
income.
NET LOSS PER COMMON SHARE - Net loss per common share is computed by
dividing net loss by the weighted average number of common stock outstanding,
adjusted to give retroactive effect to the reverse stock split authorized by
the Company's shareholders on March 2, 1996. Common stock equivalents
consisting of stock options and warrants are excluded from the calculation
because they are dilutive.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) application of
the fair value recognition provisions of SFAS No. 123 to such arrangements.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
(See Note 7).
FINANCIAL RISKS AND UNCERTAINTIES - The Company has disclosed in the
financial statements certain financial risks and uncertainties to which it is
subject: concentration of sales to a limited number of customers; single source
supplier of raw materials; and use of estimates to review the carrying value of
long-lived assets and equipment held for sale which may change in the future
given the rapid technological changes associated with the industry in which the
Company operates. The technology used in the Company's manufacturing equipment
may be subject to rapid technological change within time frames not currently
anticipated by the Company. It is reasonably possible that the Company's
estimate of recoverability of the carrying value of its equipment will change in
the future.
2. EQUIPMENT CONTRACTS AND EQUIPMENT HELD FOR SALE
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.
WABO provided cash to Fortune to purchase a glass coating system from the
29
<PAGE>
Company and for working capital purposes. The Company was obligated to provide
$4,658,000 (40% of the total capitalization of the joint venture of
$11,645,000). The Company agreed to sell to Fortune the ITO glass coating
machine for $10,145,000. The Company's contribution of $4,658,000 was to have
been deducted from the gross purchase price of the coating system. The Company
was recording the net purchase price of $5,487,000 ($10,145,000 - $4,658,000) as
an equipment sale. The Company was following the provisions of Emerging Issues
Task Force (EITF) Issue No. 89-7 in accounting for the glass coating system
sale. EITF 89-7 provides guidance regarding gain recognition on sales to joint
venture companies by a joint venture partner and accounting for the company's
investment in the joint venture. The Company was accounting for the sale of the
glass coating system using the completed contract method and has recorded the
down payment of $1,735,000 as a customer advance. All costs incurred in
constructing the equipment were classified as equipment held for sale at
December 31, 1995.
The equipment was scheduled to ship in April 1996, and the Company was
liable for various penalties for failure to ship by April 15, 1996, which had
been verbally waived by WABO provided the equipment was shipped by June 30,
1996. Due to various technical modifications requested, the equipment had not
shipped by September 30, 1996. During the quarter ended December 31, 1996,
the Company attempted to resolve the issues regarding payment of late
delivery penalties as well as payment for the various technical
modifications. The Company had negotiated with representatives of WABO and
had drafted an amendment to the agreement in which all penalties for late
delivery were waived in exchange for the technical modifications being
provided at no charge. The Company was subsequently informed by WABO of their
intention to dissolve the joint venture and cancel the related equipment
purchase contract. While the Company has determined that certain write-downs
were necessary as a result of the termination of this purchase contract (see
Note 8), the Company intends to keep the glass coating system, which
was a part of the equipment which was to have been sold to Fortune, and is
currently in the process of modifying the system for its own use. All costs
incurred for the machine were reclassified to construction-in-progress during
the quarter ended December 31, 1996. (See Notes 6 and 10).
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 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. Costs incurred to date have been classified as equipment
held for sale as of December 31, 1996. (See Note 10.)
30
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
Estimated
Useful
Lives in Years 1995 1996
Leasehold improvements 10 $ 912,395 $ 1,676,037
Manufacturing process equipment 10 3,857,204 5,589,383
Construction-in-progress 132,057 6,982,866
Other manufacturing equipment 7 1,084,621 1,413,892
Fixtures 3-7 259,947 402,791
----------- -----------
6,246,224 16,064,969
Less accumulated depreciation
and amortization 521,686 1,137,795
----------- -----------
$ 5,724,538 14,927,174
----------- -----------
----------- -----------
Manufacturing process equipment, other manufacturing equipment, and
fixtures includes assets under capital lease at costs of $276,824 and
$312,632 and accumulated amortization of $39,926 and $79,665 at December 31,
1995 and 1996, respectively.
4. NOTES PAYABLE, LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS
Notes payable, long-term debt, and capital lease obligations at December 31
consist of the following:
1995 1996
Notes payable:
Bridge financing (A) $ 4,000,000
Line of credit (B) 1,916,480
Line of credit (C) 225,000
Long-term debt and capital lease obligations:
Shareholder note payable (D) $ 1,416,667
Shareholder note payable (E) 200,000 $ 200,000
Capital lease obligations (F) 187,663 179,405
----------- ---------
1,804,330 379,405
Less current maturities (1,041,547) (51,592)
----------- ---------
Long-term debt $ 762,783 $ 327,813
----------- ---------
----------- ---------
The carrying amounts of long-term debt approximate fair market value on
December 31, 1995 and 1996, respectively. Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value of the existing debt.
(A) In October 1995, the Company issued $4 million of notes payable
31
<PAGE>
(the Bridge Notes). The Bridge Notes bore interest at 11.75% per annum with
interest and principal due the earlier of October 15, 1996 or the receipt
by the Company of gross proceeds of at least $7 million in a private or
public financing that includes securities with equity features or debt with
a term of one year or more. The Bridge Notes were repaid in June 1996 with
proceeds from the Company's initial public offering.
In connection with this financing, the Company issued warrants to the
purchasers of the Bridge Notes to purchase a total of 400,000 shares of the
Company's common stock and issued warrants to the selling agent of the
Bridge Notes to purchase a total of 40,000 shares of the Company's common
stock. See Note 7 for a description of the terms of these warrants.
(B) During fiscal 1995, the Company obtained a $2,000,000
transaction-specific line of credit ($1,916,480 outstanding at December 31,
1995) through the Bank of America, guaranteed by the Export Import Bank
(EXIM) of the United States. Under terms of the line of credit, proceeds
from this borrowing were to be used by the Company to complete the coating
system equipment which was to be sold to the joint venture (see Note 2).
Borrowings bore interest at 1% over prime (9.5% at December 31, 1995) and
were secured by the equipment held for sale and all other current assets.
The borrowings were repaid from the proceeds of the initial public
offering.
(C) The EXIM guarantee was extended to a $500,000 revolving line of
credit ($225,000 outstanding at December 31, 1995). This line of credit was
to be used to finance products for export. Borrowings bore interest at a
rate of 1% over prime (9.5% at December 31, 1995) and were secured by
accounts receivable and inventory. The line was repaid with the proceeds of
the initial public offering.
(D) On May 1, 1995, a director of the Company made a loan to the
Company in the original principal amount of $1.5 million. The loan bore
interest at prime plus 3.75% (12.25% at December 31, 1995) and was secured
by substantially all equipment and intellectual property of the Company.
The Company incurred costs of approximately $10,000 relating to the
issuance of the note. These costs were being amortized, on a straight-line
basis, from the date of issuance until May 10, 1997, which was the original
maturity date of the note. The note was repaid with the proceeds of the
initial public offering. In connection with the issuance of this loan,
warrants were issued to the director to purchase up to 75,000 shares of the
Company's common stock. See Note 7 for a description of the terms of these
warrants.
(E) The $200,000 shareholder note payable bears interest at 10%, is
unsecured, and is convertible, at the shareholder's option, into shares of
the Company's common stock at a conversion rate of $2.00 per share. The
note is due January 1998. (See Note 10.) In connection with the issuance of
this loan, warrants were issued to the director to purchase up to 20,000
shares of the Company's common stock, exercisable from August 1994 to
August 1997, at an exercise price of $2.00 per share. Interest payable on
this note was $47,500 and $67,500 at December 31, 1995 and 1996,
respectively.
32
<PAGE>
(F) Capital lease obligations are secured by the underlying property
and bear interest at effective interest rates of approximately 8.75% to
15.70%.
The principal maturities of long-term debt and minimum payments on capital
lease obligations outstanding at December 31, 1996 are as follows:
Long-Term Capital
Debt Leases Total
Years ending December 31:
1997 $ 69,430 $ 69,430
1998 $ 200,000 66,388 266,388
1999 50,685 50,685
2000 27,734 27,734
2001 1,413 1,413
--------- -------- --------
200,000 215,650 415,650
Less amounts representing
interest 36,245 36,245
--------- -------- --------
Long-term debt and capital
lease obligations outstanding $ 200,000 $179,405 $379,405
--------- -------- --------
--------- -------- --------
Total interest, including amortization of financing fees, incurred in 1995
and 1996 was approximately $384,000 and $605,000, respectively. Of these
amounts, approximately $79,400 and $226,000 were capitalized to
construction-in-progress or equipment held for sale during 1995 and 1996,
respectively.
5. INCOME TAXES
For income tax purposes, the Company has U.S. federal net operating loss
carryforwards of approximately $7,600,000 as of December 31, 1996. The
carryforwards expire in various amounts during the years 2006 through 2010.
Due to certain ownership changes, as defined in Section 382 of the Internal
Revenue Code, which occurred during the year ended December 31, 1993, the
Company's net operating loss carryforwards incurred through February 1993 of
approximately $700,000 are limited to annual utilization of approximately
$50,000 per year.
Utilization of the Company's net operating loss carryforwards was not
limited as a result of its public offering in June 1996. However, the Company's
ability to use its net operating loss carryforwards may be further limited by
subsequent issuances of common stock.
The benefit for income taxes in fiscal 1995 and 1996 have been offset by
a valuation allowance because future realization of the net operating loss
carryforwards is uncertain.
33
<PAGE>
1995 1996
---------- -----------
Tax expense (benefit) computed at
statutory rates $ (433,000) $(1,686,000)
Effect of nondeductible items (7,000) (44,000)
Other 2,000 2,000
Change in valuation allowance 438,000 1,728,000
---------- -----------
$ - $ -
---------- -----------
---------- -----------
Temporary differences, tax carryforwards, and valuation allowances at
December 31 consist of the following:
1995 1996
---------- -----------
Current:
Inventory valuation reserves and
other accruals $ 20,000 $ 243,000
Impairment losses not currently
deductible 776,000
Valuation allowance (20,000) (1,019,000)
---------- -----------
$ - $ -
---------- -----------
---------- -----------
Noncurrent:
Excess of tax over book depreciation
and amortization $(298,000) $ (370,000)
Tax loss carryforward 1,965,000 2,766,000
Valuation allowance (1,667,000) (2,396,000)
---------- -----------
$ - $ -
---------- -----------
---------- -----------
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS - The Company is obligated under a
noncancelable operating lease for the rental of its office and manufacturing
facility through July 2001. The lease contains provisions for payment of the
facility operating expenses and real estate taxes as additional rents. The
Company has the option to terminate the lease on the fifth anniversary of the
commencement of the lease by providing 120 days written notice to the lessor,
with a penalty. During January 1996, the Company entered into an operating lease
to rent additional manufacturing space for a term of ten years. This lease
contains provisions for payment of the facility operating expenses and real
estate taxes as additional rents. Rent expense for the years ended December 31,
1995 and 1996 was approximately $100,000 and $150,000, respectively. Minimum
lease payments due under these operating leases for the next five years are as
follows:
34
<PAGE>
Year ending December 31:
1997 $ 221,610
1998 221,610
1999 221,610
2000 221,610
2001 185,672
EMPLOYMENT AGREEMENT - The Company had executed an employment agreement
with its president, who resigned in March 1997. The agreement, which expired
December 31, 1997, provided for a maximum base compensation of $120,000 per year
if certain financial performance goals, as set by the Company's Board of
Directors, were met. The agreement also provided for the issuance of options, at
the discretion of the Board of Directors, for the purchase of the Company's
common stock, payment of annual incentive bonuses, and an option for the
president to require the Company to purchase his shares if the Company
terminated his employment without cause prior to an initial public offering of
the Company's common stock. Options for the purchase of 25,000 shares of the
Company's common stock have been issued pursuant to this agreement. The
Company's obligation under the agreement terminated in March 1997 when the
president resigned.
CONTINGENCIES - During the quarter ended December 31, 1996, the Company was
informed by WABO of their intention to dissolve the joint venture and cancel the
related equipment purchase contract. In April 1997, the Company received notice
that arbitration proceedings have been commenced against it by WABO, claiming
approximately $4.4 million plus legal fees and costs. (See Note 10 for
subsequent developments in this matter.)
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 (See Note
10.). 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 ultimately be paid.
The SEC has informed the Company that it is conducting an investigation
with respect to certain financial and accounting irregularities announced by the
Company in March 1997 relating to fiscal 1996. The Company has submitted
documents to the SEC pursuant to requests from the SEC as part of the
investigation. The investigation is on-going and it is impossible to determine
what impact, if any, the investigation will have on the Company's financial
condition or results of operations. (See also Note 10).
See Note 10 for discussion of additional contingencies which have arisen
subsequent to December 31, 1996.
7. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
shares of common stock in an initial public offering. In connection with this
offering, the Company issued an overallotment option to the underwriters to
purchase up to 300,000 shares solely to cover overallotments. This option was
exercised in June 1996. Total net
35
<PAGE>
proceeds to the Company of the initial offering and the overallotment option
were $18,451,628 after deducting offering costs of $2,248,372.
SUPPLEMENTARY LOSS PER SHARE - The Company utilized approximately
$7,500,000 of the net proceeds from the initial public offering to retire debt
and lines of credit outstanding. Had the Company issued a sufficient number of
shares to retire this debt, approximately 940,000 shares at a net price of $8.04
per share after deducting offering costs, as of January 1, 1996, the net loss
for the year would have been reduced by approximately $125,000 in interest
expense on these borrowings, and supplementary loss per share for the year ended
December 31, 1996 would have been $(1.10).
AUTHORIZED SHARES - On March 2, 1996, the Company's shareholders approved
an amendment to the Company's Articles of Incorporation whereby the authorized
stock of the Company was stated as 24,000,000 shares of common stock, no par
value, and 6,000,000 undesignated shares, no par value. The Company's Board of
Directors may designate any series and fix any relative rights and preferences
of the undesignated stock. The authorized shares have been restated in the
financial statements to reflect the impact of this amendment.
REVERSE STOCK SPLIT - On March 2, 1996, the Company's shareholders
approved a one-for-two reverse stock split. The reverse stock split became
effective on May 29, 1996 when the initial public offering of the Company's
common stock became effective. All share and per share amounts included in
the financial statements and notes thereto, for periods prior to the reverse
stock split, have been restated to reflect the impact of the reverse stock
split.
STOCK OPTIONS - On March 2, 1996, the Company's shareholders approved
the amendment of the Company's 1992 Stock Option Plan (the Plan) to provide
for the issuance of up to 625,000 shares of the Company's common stock under
the Plan. Under the Plan, incentive stock options and nonqualified stock
options may be granted to key employees and others at exercise prices not
less then 85% of the fair market value of the underlying common stock at the
date of grant. The Board of Directors establishes all terms and conditions of
each grant. The following summarizes stock option activity related to the
Employee Stock Option Plan:
Option Shares
-------------------------
Outstanding Exercisable Price Range
------------------------------------------
Balances at December 31, 1994 27,750 7,126 $ 2.00 - 4.00
Granted 48,500 4.00
Became exercisable 32,000 2.00 - 4.00
--------- -------- -------------
Balances at December 31, 1995 76,250 39,126 $ 2.00 - 4.00
Granted 36,375 4.13 - 12.75
Canceled (9,500) 4.00
Became exercisable 14,449 2.00 - 4.00
--------- -------- -------------
Balances at December 31, 1996 103,125 53,575 $2.00 - 12.75
--------- -------- -------------
--------- -------- -------------
36
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Estimated Prices Outstanding Life in Years Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 2.00 - $ 3.99 23,500 5.64 $ 2.00 18,941 $ 2.00
4.00 - 5.99 61,625 5.18 4.08 34,634 4.00
6.00 - 7.99 14,250 8.89 6.06 - -
8.00 - 9.99 1,250 10.00 8.75 - -
10.00 - 11.99 2,000 10.00 10.74 - -
12.00 - 12.75 500 10.00 12.75 - -
------- ------
103,125 53,575
------- ------
------- ------
</TABLE>
During 1994, the Board of Directors granted an option to an unrelated party
to purchase 6,875 shares of the Company's common stock at an exercise price of
$4.00 per share. Options to purchase 2,500 shares of common stock were exercised
during 1995. Options to purchase 4,375 shares expired during 1995.
During 1995, the Board of Directors granted currently exercisable options
to purchase 5,000 shares of common stock at $4.00 per share to each outside
member of the Board of Directors (for options to purchase an aggregate of 15,000
shares of common stock). In addition, the Board of Directors granted options to
purchase 15,000 shares of common stock at $4.00 per share to each outside member
of the Board of Directors (for options to purchase an aggregate of 45,000 shares
of common stock), which vest over a three-year period commencing March 15, 1996.
All options granted to members of the Board of Directors expire ten years after
the date of grant. Ten thousand of such options which had not vested expired
during March 1996 upon the resignation of a member of the Board of Directors.
37
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost
has been recognized for the stock options. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards vesting in 1995 and 1996 consistent with the provisions
of SFAS No. 123, the Company's net loss and loss per share would have been
increased to the proforma amounts indicated below:
1995 1996
Net loss - as reported $(1,238,169) $(4,816,317)
----------- -----------
----------- -----------
Net loss - pro forma $(1,247,427) $(4,848,236)
----------- -----------
----------- -----------
Loss per share - as reported $ (0.37) $ (1.13)
----------- -----------
----------- -----------
Loss per share - pro forma $ (0.37) $ (1.14)
----------- -----------
----------- -----------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: dividend yield of 0%; expected
volatility of 0%, as only grants prior to the Company's initial public offering
have vested in either year; risk-free interest rate of 5.75% to 6.75%; and
expected lives of 10 years.
STOCK WARRANTS - The Company has granted warrants in connection with
certain debt financing obtained during 1992, 1993, and 1995 and in connection
with common stock issued during 1993 and 1994.
Warrants outstanding at December 31, 1995 and 1996 are as follows:
Number of
Shares Exercise
-------------------- Price per Period
1995 1996 Share Exercisable
---- ---- ----- -----------
49,250 49,250 $2.00 Exercisable to November 1997
145,109 129,509 2.00 March 1994 to 1998
20,000 20,000 2.00 August 1994 to 1997
90,000 90,000 2.00 September 1994 to 1998
23,444 23,444 4.00 November 1994 to 1998
44,519 43,050 4.00 December 1994 to 1998
23,028 23,028 4.00 January 1995 to 1999
3,250 3,250 4.00 February 1995 to 1999
75,000 75,000 4.00 May 1996 to 2003
400,000 400,000 6.75 October 1996 to 2000 (A)
40,000 40,000 9.00 October 1996 to 2000 (A)
------- -------
913,600 896,531
------- -------
------- -------
38
<PAGE>
(A) These warrants were issued in connection with the issuance of Bridge Notes
during fiscal 1995. In connection with this financing, the Company issued
warrants to the purchasers of the Bridge Notes to purchase a total of
400,000 shares of the Company's common stock and to the selling agent of
the Bridge Note financing warrants to purchase a total of 40,000 shares of
the Company's common stock. The holders of the warrants may convert the
warrants, at any time during the exercise period, into the number of shares
of the Company's common stock obtained by dividing the differential between
the then-current market price of the Company's common stock, as defined,
and the warrant exercise price by such current market price of the
Company's common stock. The Company has obtained a valuation of the
warrants and has determined, based on such valuation, that the value of the
warrants, if any, is not material to the financial statements.
In connection with a $1,500,000 loan received in May 1995 from a director
of the Company, warrants were issued to the director to purchase up to 75,000
shares of the Company's common stock at an exercise price of $4.00 per share.
The Company has obtained a valuation of the warrants and has determined, based
on such valuation, that the value of the warrants, if any, is not material to
the financial statements.
8. OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's joint venture partner, WABO,
notified the Company of its intention to cancel the joint venture agreement and
the related equipment purchase contract. In connection with the cancellation of
the equipment purchase contract, the Company determined that certain equipment
which was to have been sold to Fortune and was also under development for the
Company's own use was no longer economically feasible or did not fit the
Company's current manufacturing needs. This equipment has been written down to
its fair value, which in some cases was determined as its cost less a restocking
charge to the extent such equipment can be returned to the manufacturer.
Equipment which had no foreseeable future value was written off. This resulted
in a charge of approximately $1,800,000 in the fourth quarter of 1996.
Also, the Company decided to discontinue its development of commercial
scale production equipment for its ZeroRay Glare and Radiation Control filters
due to technical difficulties encountered with the large scale production of the
Gelglas optical gel adhesive. Management believes that the resolution of these
technical difficulties would have required significant additional resources and
would have raised the cost of the filters to a point where the product could not
be competitive with other similar products. In connection with this decision,
management determined that, as of December 31, 1996, certain production
equipment which had been purchased to manufacture the ZeroRay product had been
impaired. This equipment was determined to have no foreseeable future value and
was written off. This resulted in a charge of approximately $378,000 in the
fourth quarter of 1996.
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was $146,492 and $484,160 for the years ended
December 31, 1995 and 1996, respectively. Property acquired by capital lease was
$128,466 and $40,083 for the years ended December 31, 1995 and
39
<PAGE>
1996, respectively.
As a result of the equipment sales contracts discussed in Note 2, assets
classified as equipment held for sale to Fortune at December 31, 1995 are
classified within property, and equipment at December 31, 1996. All expenditures
related to the Fortune contract during 1996 are classified as cash flows from
investing activities. In addition, equipment held for sale at December 31, 1996
had been classified within property and equipment at December 31, 1995. All
expenditures related to the contract with a customer during 1996 have been
classified as operating cash flows. The net effect of the changes in
classification of these two assets was a noncash transfer from equipment held
for sale to property, plant, and equipment of $3,060,314.
During 1996, the Company received equipment with an estimated fair value of
$25,000 from a customer in lieu of payment on accounts receivable.
10. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company entered into a sale-leaseback,
which will be treated as a financing transaction, for the coating equipment in
construction-in-progress that was originally intended to be sold to Fortune.
Under the terms of the agreement, the Company received proceeds of $4.5 million
of which $2.25 million is restricted and $2.25 million is available to the
Company.
During the second quarter of 1997, the board of directors approved an
extension of the expiration date of certain warrants that had been issued to a
shareholder in connection with a loan to the Company. The expiration date was
extended to August 1998.
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 amended their complaint to make similar allegations
with respect to the disclosures made by the Company in October of 1997. The
plaintiffs in these actions are seeking class certification.
Both suits were filed in the United States District Court for the
District of Minnesota. In July of 1997 the court consolidated these lawsuits
into a single action captioned IN RE PHOTRAN CORPORATION SECURITIES
LITIGATION. The Company has moved the Court for an order dismissing the
action; however, 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.
During the second quarter of 1997, the Company reached an agreement with
the customer for whom it had been building a coating line whereby the Company
will keep the equipment and refund the deposit previously received through
credits against future glass purchases by the customer. The cost of this
equipment has been reclassified from equipment held for sale to property and
equipment subsequent to December 31, 1996.
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, therefore, such shares were 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 Company's financial condition or results of
operations.
In September 1997, the Company entered into a loan agreement with a
shareholder, whereby the shareholder loaned the Company $1 million. 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 100,000 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
loan was increased by $100,000, and warrants to purchase an additional 10,000
shares of common stock were issued.
In October 1997, the Company was unable to continue to make principal
payments on the shareholder note and certain of its lease obligations. The
Company is currently in default on the shareholder loan and two leases,
including the $4,500,000 sale-lease back of the P-1000 line. The Company is
currently negotiating additional financing and is
40
<PAGE>
working with its creditors to cure these defaults or otherwise restructure these
obligations.
On or about June 20, 1997, the third party with whom the Company is
disputing the cancellation of a contract to build power supplies formally
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 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.
In January 1998, the Company and WABO negotiated a settlement 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
estimated cost of this settlement is approximately $2,425,000 based on the
market value of the Company's common stock as of January 13, 1998. Of the
$2,425,000 total, $1,735,435 is included in customer advances as of December
31, 1996. The balance of $689,565 will be recorded in the quarter ended
September 30, 1997.
In January 1998, the shareholder who holds a $200,000 convertible note
extended the due date of such note to January 1999.
11. 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 has 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 the restatement on shareholders' equity at December 31,
1994 was to reduce common stock by $537,370 and to reduce the accumulated
deficit by $139,051. The effects of the restatement of the Company's
financial statements as of and for the years ended December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
------------------------ ------------------------
YEAR ENDED DEC. 31, 1995 YEAR ENDED DEC. 31, 1996
------------------------- ------------------------
As previously As As previously As
reported Restated reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $3,362,818 $ 2,126,738 $ 2,886,540 $ 2,904,460
Cost of sales 2,048,522 2,039,080 3,610,288 3,393,047
Gross Profit (loss) 1,314,296 87,658 (723,748) (488,587)
Other non-recurring charges 2,489,309 2,216,894
Income (Loss) from operations 336,443 (890,195) (5,131,550) (4,623,974)
Interest expense, net 286,430 292,008 78,367 120,353
Other expense 55,966
Income (loss) before
extraordinary item 50,013 (1,238,169) (5,209,917) (4,744,327)
Net income (loss) 50,013 (1,238,169) (5,281,907) (4,816,317)
Income (loss) per common
share before extraordinary
item 0.01 (0.37) (1.22) (1.11)
Net income (loss) per share 0.01 (0.37) (1.24) (1.13)
41
<PAGE>
BALANCE SHEET DATA:
----------------------- -----------------------
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1996
----------------------- -----------------------
<CAPTION>
As previously As As previously As
reported Restated reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accounts receivable $ 808,549 $ 728,469 $ 606,500 $ 544,340
Equipment held for sale 3,203,314 3,072,736 1,547,426 907,812
Property & equipment, net 6,995,381 5,724,538 15,446,311 14,927,174
Total Assets 14,192,655 12,711,154 20,503,304 19,282,393
Customer advances 1,555,435 1,760,435 2,260,420 2,260,420
Common stock 6,671,217 6,133,847 25,159,921 24,622,551
Accumulated deficit (3,436,861) (4,585,992) (8,718,768) (9,402,309)
</TABLE>
42
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's independent
accountants during the two most recent fiscal years.
43
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors and executive officers as of December 31, 1996:
Name Age Position
- ---- --- --------
David E. Stevenson (4) 47 President, Chief Executive Officer, and
Chairman
Paul T. Fink 41 Chief Financial Officer, Treasurer, Director
Kathleen V. Stevenson (4) 47 Secretary, Director
Robert S. Clarke (1) (3) 53 Director
Steven King (2) (3) 51 Director
Frank Brantman (1) 52 Director
- -------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.
(4) Resigned in March 1997.
The Board of Directors is divided into three classes, and directors serve
for staggered three-year terms. Kathleen V. Stevenson served in a class with a
term expiring in 1997; Robert S. Clarke and Steven King serve in a class with a
term expiring in 1998; and David E. Stevenson served and Paul T. Fink serves in
a class with a term expiring in 1999. Frank Brantman was elected as a director
in October, 1996 by a unanimous vote of the Board. He serves in the same class
as Kathleen Stevenson served and was re-elected at the annual meeting of
shareholders in 1997. Officers serve at the discretion of the Board. David E.
Stevenson and Kathleen V. Stevenson are husband and wife.
DAVID E. STEVENSON, the founder of the Company, served as a director and
officer of the Company from its inception in May 1991 to March 1997, when he
resigned from all of his positions with the Company. From 1988 to 1991, Mr.
Stevenson was employed as president and CEO of Viratec Thin Films, Inc. and
Viratec Tru Vue, Inc. of Faribault, Minnesota. From 1984 to 1988, Mr. Stevenson
was executive vice president and chief operating officer of Viracon, Inc. of
Owatonna, Minnesota. From 1983 to 1984, he was director of corporate development
for Apogee Enterprises, Inc., of Minneapolis, Minnesota.
PAUL T. FINK has been employed by the Company since January 1995. Mr. Fink
joined the Company as Controller, was named Chief Financial Officer in February
1996 and was elected as a Director in March 1996. Prior to joining the Company,
Mr. Fink was employed as the Chief Financial Officer of Vomela Specialty
Company, St. Paul, Minnesota, from 1989 to 1994 and Com-Tal Machine and
Engineering, Vadnais Heights, Minnesota, from 1984 to 1989. Mr. Fink was
employed by McGladrey & Pullen, Certified Public Accountants, as an auditor from
1980 to 1984. Mr. Fink holds a Bachelor of Science degree in Accounting from the
University of Minnesota, a Masters of Business Administration degree in
Financial Management from the University of St. Thomas, and is also a Certified
Public Accountant.
44
<PAGE>
KATHLEEN V. STEVENSON served as a director and officer of the Company from
November 1991 to March 1997 and was a part-time employee of the Company
responsible for human resource matters. Ms. Stevenson resigned from all of her
positions with the Company in March of 1997. Ms. Stevenson has owned and
operated a tableware and linen mail order company in Wayzata, Minnesota since
1984. Previously, she was employed in various financial management and staff
positions with Norwest Bank, Minneapolis, Minnesota; Michigan Bank, Detroit,
Michigan, and City National Bank, Detroit, Michigan. Ms. Stevenson holds a
Bachelor of Science degree in Accounting from Michigan State University.
ROBERT S. CLARKE has been a director of the Company since March 1993. Since
1981 Mr. Clarke has been the President of Alpen, Inc., Boulder, Colorado, a
leading manufacturer of architectural insulating glass. Since 1991 Mr. Clarke
has also been President, Chairman and a director of Vac-Tec Systems, Inc., a
public company involved in the manufacture of high performance windows utilizing
suspended vacuum-coated films.
STEVEN KING has been a director of the Company since May 1993. Since 1986
Mr. King has been Chairman and CEO of Landscape Structures, Inc., of Delano,
Minnesota, a company that creates and manufactures innovative play structures
promoting early childhood development. Mr. King is also a registered architect.
FRANK BRANTMAN has been a director of the Company since October of 1996.
Since 1988 he has been president of Leaf Industries, Inc., Minneapolis,
Minnesota, a contract manufacturer. Mr. Brantman is also executive vice
president and director of BMB, Inc., a Lake Forest, Illinois, medical products
company. Mr. Brantman has significant private and public board experience.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors to file initial reports of ownership
and reports of changes in ownership of common stock of the Company with the
Securities and Exchange Commission (SEC). Executive officers, directors and
persons who beneficially own more than ten percent of the common stock of the
Company are required by SEC regulations to furnish the Company with copies of
all Section 16 (a) forms they file. Based solely on a review of the copies of
such forms furnished to the Company and written representations from the
Company's officers and directors, all Section 16 (a) filing requirements
applicable to the Company's executive officers and directors have been
satisfied.
45
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last two fiscal years to the Company's Chief
Executive Officer. No employee of the Company received salary and bonus in
excess of $100,000 for the covered periods:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY OPTIONS (2)
- --------------------------- ----------- ------ -------------------
<S> <C> <C> <C>
David E. Stevenson . . . . . . . . . 1996 $86,719 --
Former Chief Executive Officer 1995 81,560 25,000 (3)
and Chairman (1)
- ----------------------------
</TABLE>
(1) Resigned in March 1997.
(2) Number of shares of Common Stock subject to options granted during the year
indicated.
(3) Options to purchase 25,000 shares were granted to Mr. Stevenson as part of
his 1995 compensation as an officer and employee of the Company.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with David E. Stevenson,
its former Chief Executive Officer, for a five-year term ended December 31,
1997. The agreement provided for a maximum base compensation of $120,000 per
year if certain financial performance goals, as set by the Company's Board of
Directors, were met. The agreement also provided for the issuance of options, at
the discretion of the Board of Directors, for the purchase of the Company's
common stock. As of December 31, 1995, options to purchase 25,000 shares of the
Company's common stock had been issued to Mr. Stevenson pursuant to this
agreement. The agreement also provided for an annual incentive bonus in the
event the Company had earnings before taxes in excess of 30% of shareholders'
equity at the last day of the fiscal year. Mr. Stevenson never received any
annual incentive bonuses. Mr. Stevenson is required by the agreement to maintain
confidentiality of all Company trade secrets and upon termination is prohibited
from participating in a competing venture for a period of two years. Mr.
Stevenson resigned on March 19, 1997 and he is not entitled to any continuing
compensation or severance payments.
STOCK OPTIONS
On December 15, 1992, the Board of Directors and shareholders of the
Company adopted the 1992 Stock Option Plan (the "Plan") in order to provide
for the granting of stock purchase options to employees and officers of the
Company. The Plan permits the granting of incentive stock options meeting the
requirements of Section 422A of the Internal Revenue Code of 1986, as
amended, and also nonqualified stock options which do not meet the
requirements of such section. As amended by the Board of Directors and
approved by the shareholders in February of 1996, the Company has reserved
625,000 shares of its common stock
46
<PAGE>
for issuance upon the exercise of options granted under the Plan. As of the date
of this report, the Company has outstanding options to purchase an aggregate of
76,250 shares under the Plan.
OPTIONS GRANTED FOR THE YEAR ENDED DECEMBER 31, 1996
No options were granted to a named executive officer during the year ended
December 31, 1996.
AGGREGATE OPTION VALUES AT DECEMBER 31, 1996.
The following table sets forth certain information at December 31, 1996, as
to options held by the Company's former Chief Executive Officer:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN THE MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96
------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David E. Stevenson . . . . . . 25,000 (1) ---- $0 (2) ----
- --------------------
</TABLE>
(1) Options expire if not exercised within 90 days of termination of
employment. Mr. Stevenson resigned on March 19, 1997. The options expired
unexercised in June 1997.
(2) The value of exercisable options is equal to the difference between the
December 31, 1996 market price per share and the option exercise price per
share multiplied by the number of shares subject to options.
COMPENSATION OF DIRECTORS
Directors were not paid fees for attending meetings in 1996. All directors
are reimbursed for their travel expenses incurred in attending Board meetings.
On March 1, 1995, the Board of Directors granted currently exercisable
options to purchase 5,000 shares of Common Stock at $4.00 per share to each of
three outside members of the Board of Directors (for options to purchase an
aggregate of 15,000 shares of Common Stock) as compensation for prior service to
the Company. On the same date, the Board of Directors also granted options to
purchase 15,000 shares of Common Stock at $4.00 per share to each of three
outside members of the Board of Directors (for options to purchase an aggregate
of 45,000 shares of Common Stock) as compensation for each outside director's
then current three-year term. These 45,000 options vest ratably over a
three-year period commencing March 15, 1996. All options expire ten years after
the date of grant. Options for 10,000 shares expired in March 1996 upon the
resignation of one of the outside directors. This director, who is a sitting
judge, resigned prior to the Company's initial public offering due to an ethical
conflict of interest relating to a judge serving on the board of a public
company.
47
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the March 31, 1997 certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer, and (iv) all executive officers and directors of the Company
as a group.
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED (1) OWNERSHIP
- ---------------- ------------ ---------
DIRECTORS AND OFFICERS (2):
David E. Stevenson (3) (9). . . . . . . 350,042 6.76%
Paul T. Fink (4) . . . . . . . . . . . . 5,000 *
Kathleen V. Stevenson (5) (9). . . . . . 5,000 *
Robert S. Clarke (6) . . . . . . . . . . 15,000 *
Steven King (7) . . . . . . . . . . . . 336,319 6.27%
Frank Brantman . . . . . . . . . . . . . 1,000 *
All executive officers and directors as
a group (5 persons) (8) . . . . . . . . 712,361 13.16%
- --------------------
* Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of the effective date of this filing,
or within 60 days of such date, are treated as outstanding when determining
the percent of the class owned by such individual and when determining the
percent owned by the group. Unless otherwise indicated, each person named
or included in the group has sole voting and investment power with respect
to the shares of common stock set forth opposite the shareholder's name.
(2) The address of each director and officer of the Company is 21875 Grenada
Avenue, Lakeville, MN 55044.
(3) Includes 25,000 shares of common stock issuable pursuant to currently
exercisable options.
(4) Represents 5,000 shares of common stock issuable pursuant to currently
exercisable options.
(5) Represents 5,000 shares of common stock issuable pursuant to currently
exercisable options.
(6) Represents 15,000 shares of common stock issuable pursuant to currently
exercisable options.
(7) Includes (i) 15,000 shares of common stock issuable pursuant to currently
exercisable options, (ii) 95,000 shares of common stock issuable pursuant
to currently exercisable warrants, and (iii) 100,000 shares issuable upon
conversion of outstanding promissory notes.
(8) Includes 260,000 shares issuable pursuant to currently exercisable options
and warrants, and upon conversion of outstanding promissory notes.
(9) Resigned effective March 19, 1997.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LOANS FROM DIRECTOR
Steven King, a director of the Company, made a loan to the Company in the
original principal amount of $1.5 million on May 1, 1995 for working capital and
general corporate purposes. The note issued in connection with the loan bore
interest from the date of issue at an annual rate of 3.75 % in excess of the
48
<PAGE>
"Reference Rate" announced from time to time by First Bank National Association,
and was secured by substantially all equipment and intellectual property of the
Company. The note was subject to periodic payments of principal and accrued
interest. The note was repaid without penalty in June 1996.
In connection with this loan, warrants to purchase up to 75,000 shares of
common stock were issued to Mr. King. The warrants are exercisable at any time
after April 30, 1996, and expire on May 1, 2003. The exercise price of these
warrants is $4.00 per share. The warrants provide for the automatic adjustment
of the number of shares issuable upon exercise of the warrants, and of the
exercise price, in certain events, including stock dividends, stock splits,
reorganizations, reclassifications and the merger, consolidation or sale of all
or substantially all of the assets of the Company. The warrants grant certain
registration rights with respect to the stock issuable upon exercise of the
warrants in the event the Company proposes to register any shares of its common
stock under the Securities Act of 1993. These registration rights are not
applicable under certain circumstances.
ITEM 13. EXHIBITS
(a) Exhibits.
The following exhibits are included with this Annual Report on
Form 10-KSB/A (or incorporated by reference) as required by Item 601 of
Regulation S-B.
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996*
3.2 Amended and Restated By-Laws of Photran Corporation, effective December
23, 1992 as amended through February 3, 1996. *
4.1 Second Amended and Restated Articles of Incorporation and Amended and
Restated By-Laws of Photran Corporation as amended. (See Exhibits 3.1
and 3.2 above.) *
4.2 Specimen of Common Stock Certificate. *
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18, 1992,
for the purchase of 1,700 shares, issued to Christopher T. Vanyo. An
identical Warrant For Purchase of Shares of Common Stock was granted to
one other individual for the purchase of 1,600 shares. *
4.4 Form of Common Stock Purchase Warrant. Identical Common Stock Purchase
Warrants in the amounts of 20,000 shares, 14,500 shares, 14,750 shares,
92,482 shares, and 52,627 shares were granted to R.J. Steichen & Company
on November 1, 1992, December 1, 1992, January 5, 1993, February 19,
1993 and March 17, 1993, respectively. *
49
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of 20,000
shares and 60,000 shares were granted to a total of eleven individuals
on August 8, 1993 and September 23, 1993, respectively. *
4.6 Form of Agent's Common Stock Purchase Warrant. Identical Agent's Common
Stock Purchase Warrants in the amounts of 5,750 shares and 24,250 shares
were granted to R.J. Steichen & Company on September 23, 1993 and
September 24, 1993, respectively. *
4.7 Form of Stock Purchase Warrant. Identical Stock Purchase Warrants in the
amounts of 23,444 shares, 44,519 shares, and 23,028 shares were granted
to R.J. Steichen & Company on November 17, 1993, December 14, 1993, and
January 31, 1994, respectively. *
4.8 Form of Stock Purchase Warrant for 75,000 shares of Common Stock, dated
May 1, 1995, granted to Steven King. *
4.9 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a total
of 28 individuals on October 15, 1995 to purchase a total of 400,000
shares. *
4.10 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated October
31, 1995, granted to John G. Kinnard and Company, Incorporated. *
4.11 Representative's Warrant to purchase 160,000 shares of Common Stock,
dated June 3, 1996, granted to John G. Kinnard and Company,
Incorporated. *
10.1 Contract Agreement for the Joint Venture of Shenzhen Fortune Conductive
Glass Company, Ltd., between Photran Corporation and Shenzhen Wabo
(Group) Company, Limited. *
10.2 License Agreement between Photran Corporation and Applied Elastromerics
dated May 30, 1991, as amended. *
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries, Inc.
and Photran Corporation dated July 1991. *
10.4 Photran Corporation 1992 Stock Option Plan. *
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a total
of 76,250 shares.*
10.6 Employment Agreement between David E. Stevenson and Photran Corporation
dated January 1, 1993. *
10.7 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995. *
10.8 Equipment Lease between Textron and Photran Corporation dated June 21,
1995.*
10.9 Sale Agreement between Photran Corporation and Wintek Corporation dated
June 28, 1996 (incorporated by reference to the Registrant's quarterly
report on Form 10-QSB for the quarter ended June 30, 1996).
10.10 Equipment Lease Agreement between Photran Corporation and NBD Equipment
Finance, Inc. dated February 13, 1997. (incorporated by reference
to the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1996.)
23.1 Consent of Deloitte & Touche LLP. **
27.1 Financial Data Schedule. **
99.1 Resignations of David E. Stevenson and Kathleen V. Stevenson, dated
March 19, 1997. (incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1996.)
- --------------------------------
* Incorporated by reference to the Registrant's Registration Statement on Form
SB-2, declared effective May 29, 1996.
** Denotes document filed herewith.
50
<PAGE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
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.
51
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHOTRAN CORPORATION
By: /s/ Paul T. Fink
---------------------------------
Paul T. Fink
Chief Executive Officer
By: /s/ Judith E. Tucker
---------------------------------
Judith E. Tucker
Chief Financial Officer
Date: January 30, 1998
52
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Second Amended and Restated Articles of Incorporation of Photran
Corporation, effective March 2, 1996*
3.2 Amended and Restated By-Laws of Photran Corporation, effective December
23, 1992 as amended through February 3, 1996. *
4.1 Second Amended and Restated Articles of Incorporation and Amended and
Restated By-Laws of Photran Corporation as amended. (See Exhibits 3.1
and 3.2 above.). *
4.2 Specimen of Common Stock Certificate. *
4.3 Warrant for Purchase of Shares of Common Stock, dated November 18, 1992,
for the purchase of 1,700 shares, issued to Christopher T. Vanyo. An
identical Warrant For Purchase of Shares of Common Stock was granted to
one other individual for the purchase of 1,600 shares. *
4.4 Form of Common Stock Purchase Warrant. Identical Common Stock Purchase
Warrants in the amounts of 20,000 shares, 14,500 shares, 14,750 shares,
92,482 shares, and 52,627 shares were granted to R.J. Steichen & Company
on November 1, 1992, December 1, 1992, January 5, 1993, February 19,
1993 and March 17, 1993, respectively. *
4.5 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock in the amounts of 20,000
shares and 60,000 shares were granted to a total of eleven individuals
on August 8, 1993 and September 23, 1993, respectively. *
4.6 Form of Agent's Common Stock Purchase Warrant. Identical Agent's Common
Stock Purchase Warrants in the amounts of 5,750 shares and 24,250 shares
were granted to R.J. Steichen & Company on September 23, 1993 and
September 24, 1993, respectively. *
4.7 Form of Stock Purchase Warrant. Identical Stock Purchase Warrants in the
amounts of 23,444 shares, 44,519 shares, and 23,028 shares were granted
to R.J. Steichen & Company on November 17, 1993, December 14, 1993, and
January 31, 1994, respectively. *
4.8 Form of Stock Purchase Warrant for 75,000 shares of Common Stock, dated
May 1, 1995, granted to Steven King. *
4.9 Form of Warrant for Purchase of Shares of Common Stock. Identical
Warrants for Purchase of Shares of Common Stock were granted to a total
of 28 individuals on October 15, 1995 to purchase a total of 400,000
shares. *
4.10 Agent's Warrant to Purchase 40,000 shares of Common Stock, dated October
31, 1995, granted to John G. Kinnard and Company, Incorporated. *
4.11 Representative's Warrant to purchase 160,000 shares of Common Stock,
dated June 3, 1996, granted to John G. Kinnard and Company,
Incorporated. *
10.2 Contract Agreement for the Joint Venture of Shenzhen Fortune Conductive
Glass Company, Ltd., between Photran Corporation and Shenzhen Wabo
(Group) Company, Limited. *
10.2 License Agreement between Photran Corporation and Applied Elastromerics
dated May 30, 1991, as amended. *
10.3 Office Warehouse Lease between Owobopte Rehabilitation Industries, Inc.
and Photran Corporation dated July 1991. *
10.4 Photran Corporation 1992 Stock Option Plan. *
53
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.5 Form of Incentive Option Agreement. Identical Incentive Option
Agreements were entered into with 66 employees for purchase of a total
of 76,250 shares.*
10.6 Employment Agreement between David E. Stevenson and Photran Corporation
dated January 1, 1993. *
10.7 Office Warehouse Lease between Sparta Foods, Inc. and Photran
Corporation dated December 21, 1995. *
10.8 Equipment Lease between Textron and Photran Corporation dated June 21,
1995.*
10.9 Sale Agreement between Photran Corporation and Wintek Corporation dated
June 28, 1996 (incorporated by reference to the Registrant's quarterly
report on Form 10-QSB for the quarter ended June 30, 1996).
10.10 Equipment Lease Agreement between Photran Corporation and NBD Equipment
Finance, Inc. dated February 13, 1997. (incorporated by reference
to the Registrant's annual report on Form 10-KSB for the year ended
December 31, 1996.)
23.1 Consent of Deloitte & Touche LLP. **
27.1 Financial Data Schedule. **
99.1 Resignations of David E. Stevenson and Kathleen V. Stevenson, dated
March 19, 1997. (incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1996.)
- --------------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, declared effective May 29, 1996.
** Denotes document filed herewith.
55
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-07741 of Photran Corporation on Form S-8 of our report dated April 10,
1997 (January 29, 1998 as to Notes 10 and 11) (which report includes
explanatory paragraphs concerning the Company's ability to continue as a
going concern and relating to the restatement described in Note 11 to the
financial statements), appearing in this Annual Report on Form 10-KSB/A of
Photran Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
January 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,038,955
<SECURITIES> 0
<RECEIVABLES> 552,443
<ALLOWANCES> (8,103)
<INVENTORY> 754,572
<CURRENT-ASSETS> 4,355,219
<PP&E> 16,064,969
<DEPRECIATION> (1,137,795)
<TOTAL-ASSETS> 19,282,393
<CURRENT-LIABILITIES> 3,734,338
<BONDS> 0
0
0
<COMMON> 24,622,551
<OTHER-SE> (9,402,309)
<TOTAL-LIABILITY-AND-EQUITY> 19,282,393
<SALES> 2,904,460
<TOTAL-REVENUES> 2,904,460
<CGS> 3,393,047
<TOTAL-COSTS> 3,393,047
<OTHER-EXPENSES> 2,216,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,353
<INCOME-PRETAX> (4,744,327)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,744,327)
<DISCONTINUED> 0
<EXTRAORDINARY> (71,990)
<CHANGES> 0
<NET-INCOME> (4,816,317)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
