<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1997
Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________________ to _________________
Commission file number 000-20731
---------
PHOTRAN CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1697628
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21875 GRENADA AVENUE
LAKEVILLE, MN 55044
(Address of Principal Executive Offices)
(612) 469-4880
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----.
The number of the registrant's common shares outstanding as of August 15, 1997
was 5,154,392
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----.
<PAGE>
PHOTRAN CORPORATION
FORM 10-QSB/A
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 3. Defaults Upon Senior Securities 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibit Index 16
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTRAN CORPORATION
BALANCE SHEETS (UNAUDITED)
JUNE 30,
1997
(AS RESTATED DECEMBER 31,
SEE NOTE 6) 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 374,644 $ 2,038,955
Accounts receivable 427,439 544,340
Inventory 495,646 754,572
Equipment held for sale 907,812
Prepaid expenses 148,395 109,540
------------ -----------
Total current assets 1,446,124 4,355,219
PROPERTY AND EQUIPMENT, net 17,687,716 14,927,174
MARKETABLE SECURITIES, restricted 2,250,000
------------ -----------
$ 21,383,840 $19,282,393
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt,
notes payable, and capital lease
obligations $ 833,085 $ 51,592
Accounts payable 724,361 663,411
Accrued expenses 446,631 758,915
Customer advances 2,260,420 2,260,420
------------ -----------
Total current liabilities 4,264,497 3,734,338
LONG TERM DEBT 3,803,433 327,813
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Undesignated stock, no par value,
6,000,000 shares authorized, no shares
issued
Common stock, no par value, 24,000,000 shares
authorized, 5,156,392 and 5,154,392 shares
issued and outstanding, respectively 24,626,551 24,622,551
Accumulated deficit (11,310,641) (9,402,309)
------------ -----------
Total shareholders' equity 13,315,910 15,220,242
------------ -----------
$ 21,383,840 $19,282,393
------------ -----------
------------ -----------
See notes to financial statements.
2
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PHOTRAN CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
(AS RESTATED (AS RESTATED (AS RESTATED (AS RESTATED
SEE NOTE 6) SEE NOTE 6) SEE NOTE 6) SEE NOTE 6)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 867,908 $ 803,567 $ 1,435,859 $1,481,026
COST OF SALES 1,084,710 738,609 2,002,442 1,164,316
---------- ---------- ----------- ----------
Gross profit (loss) (216,802) 64,958 (566,583) 316,710
OPERATING EXPENSES:
Process and product development 54,445 86,002 202,170 170,660
General and administrative 492,403 149,525 769,021 314,004
Selling and marketing 89,921 101,567 246,488 173,731
Other nonrecurring charges (note 8) 198,710
---------- ---------- ----------- ----------
Total operating expenses 636,769 337,094 1,416,389 658,395
---------- ---------- ----------- ----------
LOSS FROM OPERATIONS (853,571) (272,136) (1,982,972) (341,685)
INTEREST (INCOME) EXPENSE, net (47,609) 79,593 (53,332) 245,424
OTHER (INCOME) EXPENSE, net (21,308) (21,308)
---------- ---------- ----------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (784,654) (351,729) $(1,908,332) (587,109)
EXTRAORDINARY ITEM - loss on debt
extinguishment 71,990 71,990
---------- ---------- ----------- ----------
NET LOSS $ (784,654) $ (423,719) $(1,908,332) $ (659,099)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
NET LOSS PER COMMON SHARE
Loss before extraordinary item $ (0.15) $ (0.09) $ (0.37) $ (0.18)
Extraordinary item (0.02) (0.02)
---------- ---------- ----------- ----------
$ (0.15) $ (0.11) $ (0.37) $ (0.20)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,156,392 3,689,268 5,156,092 3,352,620
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See notes to financial statements.
3
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PHOTRAN CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
----------------------------
1997 1996
(AS RESTATED (AS RESTATED
SEE NOTE 6) SEE NOTE 6)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary item $(1,908,332) $ (587,109)
Adjustments to reconcile loss before
extraordinary item to cash used in
operating activities:
Depreciation and amortization -
property and equipment 409,927 190,293
Interest expense associated with
amortization of deferred financing
costs 120,000
Changes in current assets and liabilities
that provided (used) cash:
Accounts receivable 116,901 113,692
Inventory 258,926 (116,332)
Equipment held for sale (1,817,973)
Prepaid expenses (38,855) (79,601)
Accounts payable 60,950 (317,059)
Accrued expenses (312,284) (116,571)
Customer advances 500,000
----------- -----------
Cash used in operating activities (1,412,767) (2,110,660)
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (2,262,657) (2,397,419)
Purchases of marketable securities (2,250,000)
----------- -----------
Cash used in investing activities (4,512,657) (2,397,419)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and
long-term debt 4,500,000
Payments of notes payable and
long-term debt (242,887) (7,546,485)
Common stock issued 4,000 18,595,721
----------- -----------
Cash provided by financing activities 4,261,113 11,049,236
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,664,311) 6,541,157
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,038,955 1,532,361
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 374,644 $ 8,073,518
----------- -----------
----------- -----------
See notes to financial statements.
4
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and reflect all
adjustments, consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation. Operating
results for the three- and six-month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
As discussed in Note 6, the accompanying financial statements have been
restated. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1996, filed with the Securities and Exchange Commission (SEC) as part of
the Company's Annual Report on Form 10-KSB/A.
The financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The accompanying financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. As of June 30, 1997, the
Company's principal sources of liquidity included cash and cash
equivalents of $374,644 and net accounts receivable of $427,439. The
Company will require additional debt or equity financing in 1997.
Management is pursuing the possibility of obtaining such additional
capital expansion financing, although there can be no assurance that
such financing will be available or be available on terms acceptable to
the Company. (See Note 7 for subsequent financings obtained and the
related defaults thereon.)
2. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1996
---- ----
Raw materials and supplies $495,646 $754,572
-------- --------
-------- --------
3. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
Common Shares in an initial public offering. Net proceeds to the
Company were $16,025,444 after deducting offering costs, including
underwriting commissions, of $1,974,556.
OVERALLOTMENT OPTION - In connection with the Company's initial public
offering of common stock the company issued an option to the
underwriters to purchase up to 300,000 common shares solely to cover
overallotments. This option was exercised in June 1996 resulting in
additional net proceeds of $2,470,000 after deducting offering costs,
including underwriting commissions, of $230,000.
4. EQUIPMENT HELD FOR SALE
In 1996 the Company entered into an agreement to sell ITO coating equipment
to its largest customer for a total contract price of $2,916,500. The
Company received a down payment of $500,000 which is recorded as a customer
advance at June 30, 1997 and December 31, 1996. During the second quarter
of 1997, the Company reached an agreement with the customer whereby the
Company will keep the equipment and refund the deposit previously received
via credits against
5
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PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
future glass purchases by the customer. The cost of this equipment has
been reclassified to property and equipment as of June 30, 1997.
5. COMMITMENTS AND CONTINGENCIES
During the quarter ended December 31, 1996, the Company was informed by its
Chinese joint venture partner, Shenzhen WABO Group Company Limited (WABO),
of their intention to dissolve the joint venture agreement and cancel the
related equipment purchase contract. In April 1997, the Company received
notice that arbitration proceedings have been commenced against it by WABO
in Shenzhen, China claiming approximately $4.4 million plus legal fees and
costs. See Note 7 for subsequent resolution of this matter.
In connection with the coating equipment that the Company was building for
sale to the joint venture company, known as the Shenzhen Fortune Conductive
Glass Company, Ltd. (Fortune), the Company entered into a contract with a
third party to design and build power supplies to be sold under the
equipment contract, as well as for the Company's own use. The third party
has asserted that the Company is liable to it for various costs incurred in
connection with the production of the power supplies and has demanded
payment of $240,000 in addition to amounts the Company has already paid
under the contract. Due to various defects in the contract as well as the
third party's failure to perform its obligations, the Company has rescinded
the contract and demanded that the third party refund all monies paid to it
by the Company. On or about June 20, 1997, the third party brought an
action against the Company in Duluth County District Court. Management, in
consultation with the Company's legal counsel, is of the opinion that the
Company has valid defenses against the claims asserted by the third party.
However, it is possible that the Company will be liable for amounts in
addition to those already paid under the contract. Such amounts could be
material but the Company is unable to estimate what amounts, if any, will
ultimately be paid. (See Note 7 for subsequent developments.)
The Securities and Exchange Commission (SEC) has informed the Company that
it is conducting a formal investigation with respect to certain financial
and accounting irregularities announced by the Company in March 1997
relating to fiscal 1996. The investigation is in the preliminary stages
and it is impossible to determine what impact, if any, the investigation
will have on the Company's financial condition or results of operations.
(See Note 7 for subsequent developments.)
In May of 1997, the Company was served with two separate lawsuits against
the Company, certain officers and directors of the Company, and the
Company's former president. These lawsuits were filed by certain purchasers
of the Company's common stock alleging that the Company's actions with
respect to the financial and accounting irregularities announced by the
Company in March of 1997 artificially inflated its stock price between May
29, 1996 and March 24, 1997. The plaintiffs in these actions are seeking
class certification.
Both suits were filed in the United States District Court for the District
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 not yet formally responded to this lawsuit, and it is not
possible at this time to determine what impact, if any, this lawsuit will
have on the Company's financial position or results of operations. (See
Note 7 for subsequent developments.)
6
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
6. RESTATEMENT
As a result of an investigation which was reopened in October 1997 and
was completed in January 1998, the Company has restated its previously
issued financial statements. The Company determined that previously
recorded amounts purportedly received in 1991 and 1992 for certain
issuances of common stock to a former officer of the Company were
improper. Also in 1991, 1993 and 1995 certain equipment purchases were
recorded improperly. In addition, the Company determined that in 1995
revenues were recorded for product sales that did not occur.
The Company's financial statements for all affected periods have been
restated to reflect adjustments for these items. The effects of these
adjustments on the financial statements for the three and six month
periods ended June 30, 1997 and 1996 and as of June 30, 1997 are as
follows:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED
1997 JUNE 30, 1997
---------------------------------------------------------
As As
previously As previously As
reported restated reported restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 867,908 $ 867,908 $ 1,391,777 $ 1,435,859
Cost of sales 1,092,506 1,084,710 2,015,578 2,002,442
Gross loss (224,598) (216,802) (623,801) (566,583)
Loss from operations (861,367) (853,571) (2,040,190) (1,982,972)
Net loss (792,450) (784,654) (1,965,550) (1,908,332)
Net loss per share (0.15) (0.15) (0.38) (0.37)
</TABLE>
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED
1996 JUNE 30, 1996
---------------------------------------------------------
As As
previously As previously As
reported restated reported restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 785,648 $ 803,567 $1,463,106 $1,481,026
Cost of sales 741,619 738,609 1,198,911 1,164,316
Gross profit 44,029 64,958 264,195 316,710
Loss from operations (293,065) (272,136) (365,624) (341,685)
Interest expense, net 58,600 79,593 203,438 245,424
Loss before extraordinary
item (351,665) (351,729) (569,062) (587,109)
Net loss (423,655) (423,719) (641,052) (659,099)
Loss per common share before
extraordinary item (0.09) (0.09) (0.17) (0.18)
Net loss per share (0.11) (0.11) (0.19) (0.20)
</TABLE>
7
<PAGE>
PHOTRAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------
As
previously As
reported restated
-------- --------
<S> <C> <C>
Accounts receivable $ 445,517 $ 427,439
Equipment held for sale
Property & equipment, net 18,833,331 17,687,716
Common stock 25,163,921 24,626,551
Accumulated deficit (10,684,318) (11,310,641)
</TABLE>
7. SUBSEQUENT EVENTS
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name which are currently in the
possession of the Company. In October 1997 the Company filed a counterclaim
alleging that Stevenson had committed fraud and had damaged the Company and
that his shares should be awarded to the Company. The Company further
alleged that Stevenson did not provide adequate consideration for such
shares and that therefore they are not properly issued. This suit is in
the early stages of discovery and it is not possible to determine what
impact, if any, its outcome could have on the financial condition or
results of operations of the Company.
In September and October 1997, the Company entered into a loan agreement
with a shareholder, whereby the shareholder loaned the Company a total
of $1.1 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 110,000 shares of the
Company's common stock at a price of $5.00 per share. The warrants are
exercisable between September 1998 and September 2007.
In October 1997, the Company was unable to continue making principal
payments on the shareholder note discussed above and certain of its lease
obligations. The Company is currently in default on the shareholder loan
and two leases, including the $4,500,000 lease financing of the P-1000
line. The Company is currently pursuing additional financing and is
negotiating with its creditors to cure these defaults or otherwise
restructure these obligations. Should these negotiations prove
unsuccessful, the Company could be liable for additional interest and
penalties. Such additional amounts may be material to the results of
operations and financial condition of the Company.
In the fourth quarter of 1997, the third party with whom the Company is
disputing the cancellation of a contract to build power supplies
increased its demand for damages from $240,000 to $1,300,000. The
Company has denied liability and demanded the return of all monies paid
to the third party by the Company. Management, in consultation with the
Company's legal counsel, is of the opinion that the Company has valid
defenses against the claims asserted by the third party. However, it is
possible that the Company will be liable for amounts in addition to
those already paid under the contract. Such amounts could be material
but the Company is unable to estimate what amounts, if any, will
ultimately be paid.
In November 1997, the shareholder lawsuit was amended to make similar
allegations with respect to the disclosures made by the Company in October
1997. The Company has moved the court for an order to dismiss the action;
however, it is not possible at this time to determine what impact, if any,
this matter may have on the Company's financial position or results of
operations.
In the fourth quarter of 1997, the Company was informed by the SEC that
they have expanded their investigation to include certain accounting and
financial reporting irregularities prior to 1996 which the Company
announced in October 1997.
In December 1997, the Company obtained an $833,000 transaction-specific
export working capital line of credit.
The Company and WABO finalized a negotiated settlement in January 1998
subject to final approval by the Chinese arbitration board. Under the
terms of this settlement the Company will pay WABO $1.5 million in cash and
issue 200,000 shares of common stock to settle all claims in connection
with the joint venture contract, the equipment contract, and related
agreements. The total value of this settlement is approximately $2,425,000
based on the market value of the Company's common stock as of January 13,
1998. The Company had previously recorded a liability of $1,735,435 for
amounts due to WABO. The balance of $689,565, will be recorded in the
quarter ended September 30, 1997.
In January 1998, a shareholder agreed to extend the due date on a $200,000
convertible note to January 1999.
8. OTHER NONRECURRING CHARGES
In the fourth quarther of 1996, the company's China joint venture
partner notified the Company of its intention to cancel the joint
venture agreement and a related equipment purchase contract with the
Company. In connection with the cancellation of the equipment purchase
contract, the Company determined that certain equipment which was to
have been sold to the joint venture and equipment that was under
development for the Company's use was no longer economically feasible or
did not fit the Company's current manufacturing needs. This equipment,
which the Company determined had no foreseeable future value, was deemed
to be impaired and costs of $110,788 relating to this equipment that
were incurred during the quarter ended March 31, 1997 were written off.
In addition, the Company determined that as a result of refocusing its
operations, a facility it had been leasing was no longer necessary.
Leasehold improvements of $34,270 were written off in connection with
the termination of the lease agreement. Equipment which was determined
to have no future value to the Company at March 31, 1997 has been
written down to its fair value resulting in an impairment charge of
$53,652.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
THIS FORM 10-QSB/A CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING DEMAND FROM MAJOR CUSTOMERS, EFFECTS OF COMPETITION, CHANGES IN THE
PRODUCT OR CUSTOMER MIX OR REVENUES AND IN THE LEVEL OF OPERATING EXPENSES,
RAPIDLY CHANGING TECHNOLOGIES AND THE COMPANY'S ABILITY TO RESPOND THERETO,
THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, THE TIMELY COMPLETION OF
CONSTRUCTION AND INSTALLATION, AND THE ACTUAL PERFORMANCE OF NEW
MANUFACTURING EQUIPMENT, THE TIMELY COMPLETION, TESTING, ACCEPTANCE AND
SHIPMENT OF EQUIPMENT MANUFACTURED FOR SALE, THE TIMELY DEVELOPMENT AND
ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF PENDING AND THREATENED LITIGATION
AND OTHER FACTORS DISCLOSED THROUGHOUT THIS FORM 10-QSB/A. THE ACTUAL
RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENTS DUE TO SUCH RISKS AND UNCERTAINTIES. THE COMPANY
UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO
REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES
MADE BY THE COMPANY IN THIS REPORT, INCLUDING THE DISCUSSION SET FORTH IN THE
SECTION TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS", AND IN THE COMPANY'S OTHER REGISTRATION STATEMENTS AND REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME THAT
ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT
THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.
Managements' discussion and analysis has been revised to reflect the impact
of the restatement of financial statements discussed in Item 1 above.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. See further discussion at "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
REVENUES
For the quarter ended June 30, 1997 net revenues increased to $ 867,908
from $ 803,568 for the quarter ended June 30, 1996. Revenues consisted
primarily of gross sales of TN grade ITO coated glass. The increase in
revenue is due primarily to strong market demand for the Company's TN grade
ITO coated glass and increased production on the Company's P-1 production
line. Total production for the quarter ended June 30, 1997 increased
approximately 280 % over the quarter ended June 30, 1996. Revenue increases
were not proportional to the increase in production, however, due to a
reduction in the general market price for TN grade ITO coated glass and a
change by the Company's principal customer to a smaller sheet size. The
market price reductions and change in sheet size had the combined effect of
reducing the unit price of the Company's TN grade ITO coated glass by
approximately 50% from the quarter ended June 30, 1996 to the quarter ended
June 30, 1997. In addition, during the first quarter of 1997, the Company's
principal customer began supplying the raw glass and paying only for the
coating applied by the Company. Glass cost had been approximately 35% of the
total unit price. Since the customer is supplying the glass, revenue has
been reduced accordingly.
For the six months ended June 30, 1997 net revenues decreased to
$1,435,859 from $1,481,026 for the six months ended June 30, 1996. Revenues
consisted primarily of gross sales of TN grade ITO coated glass. The
decrease in revenue is due to a combination of a general market price
reduction for TN grade ITO coated glass and a change by the Company's
principal customer to a smaller sheet size. The market price reductions and
change in sheet size had the combined effect of reducing the unit price of
the Company's TN grade ITO coated glass by approximately 50% from the six
months ended June 30, 1996 to the six months ended June 30, 1997. In
addition, during the first quarter of 1997, the Company's principal customer
began supplying the raw glass and paying only for the coating applied by the
Company. Glass cost had been approximately 35% of the total unit price.
Since the customer is supplying the glass, revenue has been reduced
accordingly. The decreases in per unit revenue were partially offset by an
increase in the number of units produced of approximately 120 % during the
six months ended June 30, 1997.
The Company expects the market price for TN grade ITO coated glass will
begin to recover in the second half of 1997. The Company is also pursuing
sales of larger size glass sheets that will provide increased revenue per
unit for substantially the same coating cost per unit. The Company also
expects to continue to expand its productive capacity in 1997 with the
addition of one 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 the
remainder of 1997 following the addition of productive capacity. During the
third quarter, the Company has negotiated a 17% per unit price increase with
its principal customer. During the fourth quarter, the Company negotiated a
50% price increase with this customer.
The Company's largest customer accounted for 85% and 65% of the
Company's revenue for the quarters ended June 30, 1997 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 increase in comparison to historical levels as the Company
increases its production capacity, although no long-term purchase commitments
exist.
GROSS PROFIT (LOSS)
Gross loss was $ 216,802 for the quarter ended June 30, 1997, compared
to gross profit of $ 64,958 for the quarter ended June 30, 1996. The gross
loss was due to a combination of factors, including the shift to a smaller
sheet size by the Company's largest customer, loss of margin on glass
substrates which are now being supplied by the customer, and the market and
unit price decreases discussed above. Target material expense increased by
approximately $ 80,000 because the Company was using reprocessed scrap
material in the second quarter of 1996 which had previously been devalued as
it was
9
<PAGE>
believed to be worthless. Depreciation expense increased by $53,000 due to a
change in estimate used in computing depreciation. In addition, the Company
incurred approximately $120,000 in manufacturing overhead for facilities
which were not included in cost of sales in 1996. Cost of sales consists of
substrate costs, target material costs, labor and overhead related to the
Company's manufacturing operations.
Gross loss was $ 566,583 for the six months ended June 30, 1997,
compared to gross profit of $316,710 for the six months ended June 30, 1996.
The gross loss was due to a combination of factors, including the shift to a
smaller sheet size by the Company's largest customer, loss of margin on glass
substrates which are now being supplied by the customer, and the market and
unit price decreases discussed above. Target material expense increased by
approximately $ 180,000 because the Company was using reprocessed scrap
material in the first and second quarters of 1996. Depreciation expense
increased by $87,000 due to a change in estimate used in computing
depreciation which the Company adopted in the fourth quarter of 1996. In
addition, the Company incurred approximately $200,000 in manufacturing
overhead for facilities which were not included in cost of sales in 1996.
Cost of sales consists of substrate costs, target material costs, labor and
overhead related to the Company's manufacturing operations.
The Company expects that the combination of per unit price increases
negotiated with its largest customer, higher margin orders from new customers
and increased production from its new production line will provide positive
gross margins in the second half of 1997.
PROCESS AND PRODUCT DEVELOPMENT
Process and product development expenses decreased to $ 54,445 for the
quarter ended June 30, 1997 from $ 86,002 for the quarter ended June 30,
1996. These expenses consisted of personnel costs, consulting, testing,
supplies and depreciation expenses. The decrease was due primarily to a
reduction in research personnel associated with projects that did not relate
to the Company's core technology or markets.
Process and product development expenses increased to $ 202,170 for the
six months ended June 30, 1997 from $ 170,660 for the six months ended June 30,
1996. The increase was due primarily to costs of projects that did not relate
to the Company's core technology or markets and were discontinued at the end
of the first quarter of 1997.
The Company expects that product and process development expenditures
for new product research and improvements in its core deposition technology
will continue at approximately their current level during the second half of
1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $492,403 for the
quarter ended June 30, 1997 from $ 149,525 for the quarter ended June 30,
1996. These expenses consist primarily of compensation expenses for
administration, finance, and general management personnel, as well as office
supplies, depreciation, bad debt and professional fees. The increase is
primarily a result of professional fees incurred in connection with the
restatement of the Company's quarterly financial results for 1996 and the
shareholder lawsuits that were filed as a result, as well as the legal fees
related to a dispute with the Company's Chinese joint venture partner.
General and administrative expenses increased to $ 769,021 for the six
months ended June 30, 1997 from $ 314,004 for the six months ended June 30,
1996. The increase is primarily a result of professional fees incurred in
connection with an internal investigation of certain financial and accounting
irregularities, the restatement of the Company's quarterly financial results
for 1996 and the shareholder lawsuits that were filed as a result, as well as
the legal fees related to a dispute with the Company's Chinese joint venture
partner.
Additional professional fees will be incurred in 1997 and 1998
connection with these matters as well as certain litigation described in
Part II, Item 1. Legal Proceedings, and it is possible that such fees could be
material.
SELLING AND MARKETING
Selling and marketing expenses decreased to $89,921 for the quarter
ended June 30, 1997 from $101,567 for the quarter ended June 30, 1996. These
expenses consisted principally of compensation costs for sales personnel,
commissions, travel expenses, trade show expenses, and freight out costs.
The decrease is due to reduction of sales and customer support staff
10
<PAGE>
and decreases in trade show costs, partially offset by increases in sales
commissions paid to independent sales representatives on sales to new
customers.
Selling and marketing expenses increased to $ 246,488 for the six months
ended June 30, 1997 from $173,731 for the six months ended June 30, 1996.
The increase is due primarily to the addition of sales and customer support
staff and increases in trade show, travel and freight costs for the quarter
ended March 31, 1997, some of which were curtailed during the second quarter.
OTHER NONRECURRING CHARGES
In the fourth quarter of 1996, the Company's China joint venture partner
notified the Company of its intention to cancel the joint venture agreement
and a related equipment purchase contract with the Company. In connection
with the cancellation of the equipment purchase contract, the Company
determined that certain equipment which was to have been sold to the joint
venture and equipment that was under development for the Company's use was no
longer economically feasible or did not fit the Company's current
manufacturing needs. This equipment, which the Company determined had no
foreseeable future value, was written off, resulting in additional charges to
the quarter ended March 31, 1997 of $110,788.
In addition, the Company determined that as a result of refocusing its
operations, a facility it had been leasing was no longer necessary.
Leasehold improvements of $34,270 were written off in connection with the
termination of the lease agreement. Equipment, which was determined to have
no future value to the Company at March 31, 1997, was written down to its
fair value, resulting in an impairment charge of $53,652.
NET INTEREST EXPENSE
For the quarter ended June 30, 1997, the Company had net interest income
of $47,609 compared to net interest expense of $79,593 for the quarter ended
June 30, 1996. The change was due to the earnings from the investment of
half of the proceeds from the lease financing on the P-1000 line in the first
quarter of 1997. In addition, the Company retired substantially all of its
outstanding debt in June 1996 after its initial public offering.
For the six months ended June 30, 1997, the Company had net interest
income of $53,332 compared to net interest expense of $245,424 for the six
months ended June 30, 1996. The change was due to the earnings from the
investment of half of the proceeds from the lease financing on the P-1000
line in the first quarter of 1997. In addition, the Company retired
substantially all of its outstanding debt in June 1996 after its initial
public offering.
NET INCOME (LOSS)
The net loss of $784,654 for the quarter ended June 30, 1997 compares to
a net loss of $423,719 for the quarter ended June 30, 1996. The increase was
primarily due to the increased professional fees and the decrease in the
unit revenues discussed above.
The net loss of $1,908,332 for the six months ended June 30, 1997
compares to a net loss of $659,099 for the six months ended June 30, 1996.
The increase was primarily due to the increased professional fees, the
non-recurring charges and the decrease in the unit revenues discussed above.
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.
11
<PAGE>
CHINA JOINT VENTURE
In 1994 the Company entered into a joint venture agreement with the
Shenzhen WABO Group Company Limited ("WABO"), of Shenzhen, China. The joint
venture company, known as the Shenzhen Fortune Conductive Glass Company, Ltd.
("Fortune"), was created to produce TN grade ITO coated glass for the Asian
market.
The Company had agreed to sell to Fortune an ITO glass coating system
and technology limited to the production of TN grade ITO coated glass for
the gross purchase price of $10,145,000. The Company was obligated to
provide 40% of the $11,645,000 total capitalization of the joint venture.
This 40% contribution, totaling $4,658,000, was deducted from the gross
purchase price of the coating system. This was to result in the Company
receiving a net purchase price of $5,487,000 for the equipment sold to the
joint venture.
The equipment was originally scheduled to be shipped by November 6,
1995. The project was delayed for several months. The project schedule was
subsequently extended by mutual agreement between the parties. Further
delays prevented the Company from meeting the extended shipment date, which
triggered certain penalty clauses in the agreement. During the quarter ended
December 31, 1996, the Company was informed by WABO of their intention to
dissolve the joint venture agreement.
The Company will keep the glass coating system, and plans to modify and
install the equipment for its own use. In April 1997, the Company received
notice that arbitration proceedings have been commenced against it by WABO,
claiming damages of or reimbursement of approximately $4.4 million plus legal
fees. The Company and WABO finalized a negotiated settlement in January 1998
subject to final approval by the Chinese arbitration board. Under the terms
of this settlement the Company will pay WABO $1.5 million in cash and issue
200,000 shares of common stock to settle all claims in connection with the
joint venture contract, the equipment contract and related agreements. The
total value of this settlement is approximately $2,425,000 based on the
market value of the Company's common stock as of January 13, 1998. The
Company had previously recorded a liability of $1,735,435 for amounts due to
WABO. The balance of $689,565 will be recorded in the quarter ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $ 374,644 and net accounts receivable
of $427,439. At the date of the original filing of the quarterly report, the
Company believed that its existing sources of liquidity and
anticipated funds from operations and a pending $1 million private debt
placement would satisfy the Company' projected working capital and capital
expenditure requirements for 1997. The Company has reached an agreement in
principle with the chairman of the board of directors to loan the Company $1
million. Management is, however, also investigating the possibility of
obtaining working capital financing, although there can be no assurance that
such financing will be available or be available on terms acceptable to the
Company.
The net cash used in operating activities for the six months ended June 30,
1997 and 1996 was $ 1,412,767 and $2,110,660 respectively. This decrease was
due principally to the $1.8 million in expenditures on equipment held for
sale which is now classified as equipment purchases as the Company will now
keep the machine it was previously holding for sale. This decrease in 1997
is partially offset by a larger net loss than in 1996.
In 1996, the Company entered into an agreement to sell ITO coating
equipment to its largest customer for a total contract price of $2,916,500.
The Company received a down payment of $500,000 in 1996 which is recorded as
a customer advance at June 30, 1997. Delivery of the equipment was
originally scheduled for the fourth quarter of 1996. During the second
quarter of 1997, the Company reached an agreement with the customer whereby
the Company will keep the equipment and refund the deposit previously
received via credits against future glass purchases.
Cash used in investing activities was $ 4,512,657 for the six months
ended June 30, 1997 compared to $ 2,397,419 for the six months ended June 30,
1996. In both periods this cash was used for the purchase of equipment and
leasehold improvements. This increase in 1997 was due to the purchase of
$2,250,000 in restricted investments resulting from the Company's $4,500,000
sale-leaseback of the coating equipment that was originally intended to be
sold to Fortune. These investments are required to be retained by the
Company for the term of the lease. Thus these funds are not available for
use by the Company.
12
<PAGE>
Cash flows from financing activities of $ 4,261,113 for six months
ended June 30, 1997 consisted primarily of $4,500,000 in proceeds from the
Company's sale-leaseback for the coating equipment that was originally
intended to be sold to Fortune. Under the terms of the agreement, which is
accounted for as a financing transaction, the Company received proceeds of
$4,500,000 of which $2,250,000 is restricted and $2,250,000 is available to
the Company.
The Company was subsequently forced to seek additional financing due to
delays in placing its second coating line into production. During the fourth
quarter of 1997, the Company obtained an $833,000 transaction-specific
working capital export line of credit which management believes will satisfy
the Company's projected working capital requirements for 1997. The Company
will require additional debt or equity financing in 1998 to fund the WABO
settlement and complete its capital expansion plans, as well as to cure its
defaults on certain notes payable and leases. Management is pursuing the
possibility of obtaining such additional financing, although there can be no
assurance that such financing will be available or be available on terms
acceptable to the Company.
In October 1997, the Company was unable to continue making principal
payments on the shareholder note discussed above and certain of its lease
obligations. As a result, the Company is in default on the shareholder loan
and two leases, including the $4,500,000 lease financing of the P-1000 line.
The Company is pursuing additional financing and is negotiating with its
creditors to cure these defaults or otherwise restructure these obligations.
Should these negotiations prove unsuccessful, the Company could be liable for
additional interest and penalties. Such additional amounts may be material
to the results of operations and financial condition of the Company.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's future operating results may fluctuate significantly due
to factors such as the timing of new product announcements and introductions
by the Company, its major customer and its competitors, market acceptance of
new or enhanced versions of the Company's products, changes in the product or
customer mix, changes in the level of operating expenses, inventory
obsolescence and asset impairments, competitive pricing pressures, the gain
or loss of significant customers, increased product and process development
costs associated with new product introductions, the timely completion of
construction and installation of new manufacturing equipment, and general
economic conditions. All of the above factors are difficult for the Company
to forecast, and these and other factors may materially adversely affect the
Company's business and operating results for one quarter or a series of
quarters. The Company's current expense levels are based in part on its
expectations regarding future revenues and in the short term are fixed to a
large extent. Therefore, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant decline in demand relative to the Company's
expectations or any material delay of customer orders would have a material
adverse effect on the Company's financial condition and operating results.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company was informed by WABO
of their intention to dissolve the joint venture agreement and cancel the
related equipment purchase contract. In April 1997, the Company received
notice that arbitration proceedings have been commenced against it by WABO in
Shenzhen, China claiming approximately $4.4 million plus legal fees and
costs. The Company and WABO finalized a negotiated settlement in January
1998 subject to final approval by the Chinese arbitration board. Under the
terms of this settlement the Company will pay WABO $1.5 million in cash and
issue 200,000 shares of common stock to settle all claims in connection with
the joint venture contract, the equipment contract and related agreements.
The total value of this settlement is approximately $2,425,000 based on the
market value of the Company's common stock as of January 13, 1998. The
Company had previously recorded a liability of $1,735,435 for amounts due to
WABO. The balance of $689,565 will be recorded in the quarter ended
September 30, 1997.
In connection with the coating equipment that the Company was building
for sale to Fortune, the Company entered into a contract with a third party
to design and build power supplies to be sold under the equipment contract,
as well as for the Company's own use. The third party has asserted that the
Company is liable to it for various costs incurred in connection with the
production of the power supplies and has demanded payment of $240,000 in
addition to amounts the Company has already paid under the contract. On or
about June 20, 1997, the third party brought an action against the Company in
Dakota County District Court. The demand for damages was subsequently
increased to $1.3 million during the fourth quarter of 1997. The Company has
denied liability and demanded that the third-party refund all monies paid to
it by the Company. Management, in consultation with the Company's legal
counsel, is of the opinion that the Company has valid defenses against the
claims asserted by the third party. However, it is possible that the Company
will be liable for amounts in addition to those already paid under the
contract. Such amounts could be material but the Company is unable to
estimate what amounts, if any, will be ultimately paid.
The Securities and Exchange Commission (SEC) has informed the Company
that it is conducting a formal investigation with respect to certain
financial and accounting irregularities announced by the Company in March and
October 1997 relating to fiscal 1996 and prior periods. The investigation is
in the preliminary stages and it is impossible to determine what impact, if
any, the investigation will have on the Company's financial condition or
results of operations.
In May 1997 the Company was served with two separate lawsuits against
the Company, certain officers and directors of the Company, and the Company's
former president. These lawsuits were filed by certain purchasers of the
Company's common stock alleging that the Company's actions with respect to
the financial and accounting irregularities announced by the Company in March
of 1997 artificially inflated its stock price between May 29, 1996 and March
24, 1997. The plaintiffs in these actions are seeking class certification.
Both suits were filed in the United States District Court for the district of
Minnesota. In July of 1997 the court consolidated these lawsuits into a
single action captioned IN RE PHOTRAN CORPORATION SECURITIES LITIGATION. In
November 1997, the shareholder lawsuit was amended to make similar
allegations with respect to certain disclosures made by the Company in
October 1997. The Company has moved the court for an order to dismiss the
action; however, it is not possible at this time to determine what impact, if
any, this matter may have on the Company's financial position or results of
operations.
In August 1997, the Company was served with a lawsuit by its former
president, David E. Stevenson, demanding the return of certain stock
certificates which are registered in his name which are currently in the
possession of the Company. In October 1997 the Company filed a counterclaim
alleging that Stevenson had committed fraud and had damaged the Company and
that his shares should be awarded to the Company. The Company further
alleged that Stevenson did not provide adequate consideration for such shares
and that therefore they are not properly issued. This suit is in the early
stages of discovery and it is not possible to determine what impact, if any,
its outcome could have on the financial condition or results of operations of
the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October of 1997, the Company became unable to make principal and
interest payments on the shareholder loan obtained in the third quarter of
1997. The Company is currently in default on this note in the amount of
approximately $220,000 in principal and interest payments, but was not in
default as of the date of the original filing of this report.
Also in October 1997, the Company was unable to continue making payments
on the $4,500,000 lease financing transaction entered into in the first
quarter of 1997. The Company is currently in default on this obligation in
the amount of approximately $400,000.
14
<PAGE>
ITEM 6.
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 30, 1998 /s/ Paul T. Fink
---------------------------------------
Paul T. Fink, President
Chief Executive Officer, Treasurer,
Secretary and Director
/s/ Judith E. Tucker
---------------------------------------
Judith E. Tucker,
Vice President for Finance and
Administration, Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
27 Financial Data Schedule
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 374,644
<SECURITIES> 0
<RECEIVABLES> 428,863
<ALLOWANCES> (1,424)
<INVENTORY> 495,646
<CURRENT-ASSETS> 1,446,124
<PP&E> 19,215,033
<DEPRECIATION> (1,527,317)
<TOTAL-ASSETS> 21,383,840
<CURRENT-LIABILITIES> 4,264,497
<BONDS> 3,803,433
0
0
<COMMON> 24,626,551
<OTHER-SE> (11,310,641)
<TOTAL-LIABILITY-AND-EQUITY> 21,383,840
<SALES> 1,435,859
<TOTAL-REVENUES> 1,435,859
<CGS> 2,002,442
<TOTAL-COSTS> 2,002,442
<OTHER-EXPENSES> 198,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,332)
<INCOME-PRETAX> (1,908,332)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,908,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,908,332)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
