SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File number 1-12230
September 30, 1996
ADVANCED DEPOSITION TECHNOLOGIES, INC.
--------------------------------------
(Exact name of Small Business Issuer as
Specified in its Charter)
Delaware 04-2865714
-------- ----------
State of Organization) (I.R.S. Employer
Identification Number)
580 Myles Standish Blvd., Taunton, Massachusetts 02780
------------------------------------------------------
(Address of principal executive offices, Zip Code)
(508) 823-0707
--------------
(Issuer's telephone number, including area code)
Indicate by check mark wether the issuers (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of November 14, 1996, there were 3,915,084 shares of Common Stock,
$0.01 par value, of the issuer outstanding.
ADVANCED DEPOSITION TECHNOLOGIES, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets: 1
September 30, 1996 (Unaudited) and December 31, 1995
Condensed and Consolidated Statements of Operations: 2
(Unaudited) for the Three and Nine Months
ended September 30, 1996 and September 30, 1995
Condensed and Consolidated Statements of Cash Flows: 3
(Unaudited) for the Nine Months ended September 30, 1996
and September 30, 1995
Notes to Condensed and Consolidated Financial 4-6
Statements
Item 2. Management's' Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,828 $ 98
Restricted cash -- 500
Amounts due from Printpack Enterprises, Inc. (Note 4) -- 1,321
Accounts receivable, net of reserve for doubtful accounts of $137
at September 31, 1996 and December 31, 1995 1,756 1,451
Inventories 1,862 1,492
Prepaid expenses and other current assets 68 16
------- ------
Total current assets 6,514 4,878
PROPERTY AND EQUIPMENT, net 5,060 5,279
OTHER ASSETS, net 806 177
------- -------
$12,380 $10,334
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 110 $1,499
Current maturities of long-term debt 526 1,069
Amounts due to Printpack Enterprises, Inc. (Note 4) -- 1,225
Accounts payable 1,174 2,366
Accrued liabilities 151 100
------- -------
Total current liabilities 1,961 6,259
LONG-TERM OBLIGATIONS, net of current maturities 2,004 17
STOCKHOLDERS' EQUITY;
Preferred stock, $0.01 par value
1,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value,
10,000,000 shares authorized, 4,222,694 shares issued,
3,915,084 and 3,142,828 shares outstanding at
September 30, 1996, and December 31, 1995, respectively 42 32
Common stock purchase warrants 78 78
Additional paid-in capital 10,814 6.068
Retained deficit (1,392) (2,088)
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9,542 4,090
Less treasury stock, 307,610 shares at cost 1,127 32
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Total stockholders' equity 8,415 4,058
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$12,380 $10,334
======= =======
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1995, has been
derived from the audited financial statements of the Company at that date.
See Notes to Condensed and Consolidated Financial Statements
1
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
September 30 September 30
----------------------- ---------------------
1996 1995 1996 1995
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
SALES:
Product sales $ 1,728 $ 2,571 $ 6,126 $ 6.396
Royalties, license & other 800 260 1,350 394
--------- --------- -------- --------
Net sales 2,528 2,831 7,476 6,790
COST OF PRODUCTS SOLD 1,706 2,298 5,559 5,878
--------- --------- -------- --------
Gross profit 822 533 1,917 912
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 357 372 943 903
RESEARCH AND DEVELOPMENT EXPENSES 47 54 98 136
ACCU-CRISP(R) DEVELOPMENT EXPENSES -- 10 -- 42
--------- --------- -------- --------
Operating income (loss) 418 97 876 (169)
INTEREST EXPENSE, NET OF INTEREST
INCOME 65 42 180 189
--------- --------- -------- --------
Net income (loss) $ 353 $ 55 $ 696 $ (358)
========== ======== ========= ========
NET INCOME (LOSS) PER SHARE $ 0.09 $ 0.02 $ 0.20 $ (0.11)
========== ======== ========= ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,948,933 3,239,954 3.508,188 3,126,151
========== ========= ========= =========
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
2
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1996 1995
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(1,360) $(319)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (190) (297)
Decrease in investments in marketable securities -- 1,133
Increase in other assets (60) (47)
-------- ------
Net cash provided by (used in) investing activities (250) 789
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving line of credit 110 130
Repayment of long term obligations (203) (192)
Refinancing of long term debt:
Original demand note payable (1,499) --
Original long term obligation (954) --
Issuance of term debt 2,600 --
Purchase of treasury stock (1,000) (32)
Proceeds from redemption of common stock purchase warrants 4,775 --
Exercise of stock options 11 2
-------- ------
Net cash provided by (used in) financing activities 3,840 (92)
NET INCREASE IN CASH 2,230 378
CASH AND CASH EQUIVALENTS, beginning of period 598 177
-------- ------
CASH AND CASH EQUIVALENTS, end of period $ 2,828 $ 555
======== ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING AND FINANCING ACTIVITIES:
Acquisition of Technology Licenses applied against Revenue
from assignment of Patents $ 550 $ --
Settlement of net amount due to Printpack Enterprises, Inc.
(Note 4) 96 --
-------- ------
$ 646 $ --
======== ======
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
3
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
1.) GENERAL
The accompanying unaudited condensed and consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and with the instructions to Form
10-QSB and Item 310 (b) of Regulation SB-2. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Reference should be made to the
financial statements and related notes included the Company's Annual Report on
Form 10-KSB, which was filed with the Securities and Exchange Commission on
April 16, 1996.
In the opinion of the management of the Company, the accompanying
financial statements reflect all adjustments that were of a normal recurring
nature necessary for a fair presentation of the Company's results of operations
and changes in financial position for the three and nine month periods ended
September 30, 1996, and September 30, 1995. Operating results for the three
month and nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31,1996.
2.) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of
certain significant accounting policies, including those described below.
a. Principals of consolidation
The accompanying consolidated financial statements include the Company
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
b. Revenue recognition
The Company recognizes revenues on its product sales upon shipment and
royalties and license fees as earned.
c. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
September 30, December 31,
1996 1995
-------------- ------------
Raw materials $1,484 $1,234
Work in process and finished goods 378 258
----- -----
Total $1,862 $1,492
===== =====
4
d. Net Income (Loss) per Common Share
Net income (loss) per common share has been determined by dividing net
income (loss) by the weighted average common shares outstanding during the
period. Common stock equivalents have been calculated in accordance with the
treasury stock method and are included for all periods where their effect is
dilutive.
3.) CASH EQUIVALENTS AND INVESTMENT IN MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Investments" (SFAS
No 115) effective January 1, 1994. As of September 30, 1996, the Company's
investments consist entirely of money market funds, which are included in cash
and restricted cash in the accompanying balance sheets.
4.) TERMINATION OF AGREEMENTS WITH PRINTPACK ENTERPRISES, INC.
In September 1992, the Company entered into three agreements
(collectively "the Agreements") with Printpack, a flexible packaging supplier to
food companies. Under the Securities Purchase Agreement, the Company sold
297,610 shares of its common stock to Printpack for $250,000. Under the Purchase
and Tolling Agreement, the Company granted Printpack the exclusive right to
purchase and sell certain flexible microwave packaging products within North
America for five years. Under the Equipment Lease Agreement, Printpack leased a
vacuum metallizer to the Company. The Company accounted for this lease as a
capital lease. On July 15, 1996, the Company and Printpack consummated a new
agreement under which Printpack relinquished its exclusive purchase rights to
certain of the Company's patented products for microwave applications;
transferred to the Company title to the new metallizer it had been leasing to
the Company; and returned to the Company 297,610 shares of the Company's common
stock it had purchased as part of the Agreements. The Company paid Printpack
$1,000,000; granted Printpack warrants to purchase 200,000 shares of the
Company's common stock at $4.00 per share; and agreed not to pursue any claims
the Company may have had pursuant to the terms of the Agreements, including
claims for the payment of $1,308,000 of cost recovery billings invoiced to
Printpack in 1995.
The Company accounted for the termination of the Equipment Lease
Agreement in accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS No 13"). SFAS No 13 states that the termination
of a lease that results in the acquisition of the leased asset shall be
accounted for as if it were a renewal of the capital lease whereby a loss only
is recognized to the extent that the carrying value of the asset exceeds the
purchase price. The carrying value of the leased metallizer did not exceed the
purchase price, therefore no loss was recognized.
The specific accounting transactions required to record the effect of
the termination of the Agreements and the transactions of the new agreement were
to record the cash payment to Printpack of $1,000,000: to eliminate the balances
in the accounts for the amounts due from Printpack ($1,321,000) and the amounts
due to Printpack ($1,225,000); to transfer the net book value of the metalizer
($1,400,000) from equipment under lease to the Machinery & Equipment account;
and to record the purchase of 297,610 shares of Treasury Stock valued, net of
the market value of the common stock
5
purchase warrants granted, at $1,096,000 ($3.68 per share). The market value of
the Company's common stock on March 25, 1996, was $6.00 per share.
5.) EXERCISE OF COMMON STOCK PURCHASE WARRANTS
In the third quarter of 1995, the Company reduced the exercise price of
the Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants") from
$7.00 per share to $5.00 per share. In addition, effective March 8, 1996, the
expiration of the Redeemable Warrants was extended for one year from March 8,
1996, to March 8, 1997, and the price at which the Company's Common Stock must
trade for ten (10) consecutive days in order for the Company to be permitted to
redeem the Redeemable Warrants was reduced from $9.00 to $7.00 per share.
For the period May 13, 1996 through July 10, 1996, the Company reduced
the number of Redeemable Warrants required to purchase one (1) share of Common
Stock from two (2) Redeemable Warrants to one (1) Redeemable Warrant. In
addition, any holder who exercised one Redeemable Warrant during this period
also received a Class B Warrant which allows the holder to purchase one (1)
share of Common Stock at $5.00 through May 12, 1998. The Company realized net
proceeds of approximately $4,775,000 upon the exercise of approximately
1,050,000 Warrants on July 10, 1996.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Advanced Deposition Technologies, Inc. (the "Company" or "A.D. TECH" ),
is a technology leader in developing and manufacturing high-resolution,
patterned, vacuum-metallized coatings for a variety of energy management
applications for use in industrial, commercial and consumer products. Included
among these are products offerings for electronic capacitors, microwave and
non-microwave food packaging, security holograms, retroreflective films, barrier
packaging, electronic article surveillance (EAS), and electric static discharge
(ESD). The Company's revenue to date has been primarily from sales to the
capacitor and packaging markets.
RECENT DEVELOPMENTS
During July 1996, the Company raised approximately $4,775,000 in net
proceeds through the exercise of approximately 1,050,000 Redeemable Common Stock
Purchase Warrants ("the Redeemable Warrants") at $5.00 per share and entered
into a new banking relationship that resulted in an increase in its available
line of credit. In June, 1996, the Company also entered into an agreement
involving the assignment of certain of its patented materials which includes a
multi-year supply agreement for certain of the Company's products and, in
addition, the Company became a licensee for the assigned patents as well as for
26 other patents owned by the assignee related to microwave and non-microwave
packaging materials. The Company has also filed several patent applications for
hologram products that are designed to increase the security and reduce the
counterfeiting of compact discs (CD's), digital videodisks (DVD's), bank checks
and bank notes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Net Sales. Net sales decreased to approximately $2,528,000 for the
three months ended September 30, 1996 from approximately $2,831,000 for the
three months ended September 30, 1995. Product sales to the capacitor industry
increased by approximately 3% over 1995 due to slightly higher unit prices.
Microwave food packaging product sales, including the ACCU-CRISP(R) product
line, declined by approximately 40% in 1996 due to the non-reorder of
ACCU-CRISP(R) Bags from the Company's direct response retailer. Product sales to
new applications markets increased by approximately 10% in 1996. Sales in this
category during 1996 were primarily to the retroreflective materials industry
where the Company's propriatary Pattern Metalized Printing ("PMP") process is
used to increase the retroreflectivity of material used on, among other things,
safety related items such as reflective clothing and highway equipment. Product
sales to the standard food packaging market declined by approximately 84% in
1996 due to the termination of the Company's Agreements with Printpack
Enterprises, Inc. ("Printpack"), which called for certain minimum purchase
requirements. The Company does not expect that standard food packaging product
sales to Printpack will return to the amounts realized in 1995. Royalties,
license fees and other revenue increased in 1996 to approximately $800,000 from
approximately $260,000 in 1995. Revenue recognized during 1996 resulted from the
Company's entering into an agreement involving the assignment of certain of its
patented materials related to microwave packaging. Under the agreement, the
Company was granted a license for the patents it had assigned as well as for 26
other patents related to microwave and standard packaging. A portion of the
revenue recognized under this agreement reflects the estimated value of this
license.
Cost of Products Sold. Cost of products sold totaled approximately
$1,706,000 for the three months ended September 30, 1996, compared to $2,298,000
for the three months ended September 30, 1995. This decrease resulted primarily
from the large decrease in standard packaging sales. The cost of
7
product sales in 1996 as a percentage of product sales was 98.7% compared to
89.4% for 1995. The increase was the result of higher manufacturing costs,
primarily depreciation expense, relative to product sales volume. Partially
offsetting this were lower raw material costs and increased manufacturing
efficiencies.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to approximately $357,000 for the three months
ended September 30, 1996, (14.1% of total revenue) from approximately $372,000
for the three months ended September 30, 1995, (13.1% of total revenue).
Selling, general and administrative expenses during the third quarter of 1995
included sales commission expenses related to sales ACCU-CRISP(R) Bags and
additional reserves for bad debt, which were not repeated during the third
quarter of 1996.
Research and Development. Research and development costs decreased to
approximately $47,000 for the three months ended September 30, 1996, from
approximately $54,000 for the three months ended September 30, 1995. Research
and development expenses have been primarily related to the development of the
Company's PMP process as well as the development of its microwave food packaging
materials. The developmental stage of both of programs is substantially
complete: the Company is now directing its resources to the marketing and
distribution of these and other patented materials.
Development expenses for the Company's consumer retail product, the
ACCU-CRISP(R) Browning and Crisping Bag ("the ACCU-CRISP(R) Bag"), were
insignificant for the three months ended September 30, 1996 as compared to
approximately $10,000 for the three months ended September 30, 1995. The Company
does not expect any further significant development expenditures for
ACCU-CRISP(R) Bag. In December 1995, the Company entered into an exclusive
agreement with the Media Group to market and distribute ACCU-CRISP(R) Bags to
the consumer market. Because of the nature of this marketing program, the
Company can not predict future sales levels of the ACCU-CRISP(R) Bag.
Operating Income (Loss). The Company generated operating income of
approximately $418,000 for the three months ended September 30, 1996, compared
to operating income of $97,000 for the three months ended September 30, 1995.
The increased income was primarily due to higher royalties and license fees.
Net Interest Expense. Net interest expense increased to approximately
$65,000 for the three month period ended September 30, 1996, from $42,000 for
the three month period ended September 30, 1995. The increase was primarily the
result of non-recurring charges associated with the Company's refinancing of its
bank debt.
Net Income (Loss). The Company generated net income of approximately
$353,000 for the three months ended September 30, 1996 compared to net income of
approximately $55,000 for the three months ended September 30, 1995, as a result
of the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net Sales. Net sales increased to approximately $7,476,000 for the nine
months ended September 30, 1996, from approximately $6,790,000 for the nine
months ended September 30, 1995. Product sales to the capacitor market increased
by approximately 27% in 1996 due to increased volumes and slightly higher unit
prices. Product sales to the microwave food packaging market, including the
ACCU-CRISP(R) Bag, increased by approximately 76% in 1996 due primarily to
greater market penetration of the Company's Safety Susceptor(TM) film. Product
sales to new applications markets increased by approximately 68% in 1996 . Sales
in this category during 1996 were primarily to the retroreflective materials
industry where the Company's PMP process is used to increase the
retroreflectivity of material used on, among other things, safety related items
such as
8
reflective clothing and highway equipment. Product sales to the standard
packaging market decreased by approximately 84% in 1996 due to the Company's
termination of its Agreements with Printpack. The Company does not expect that
standard packaging product sales to Printpack will return to the amounts
realized in 1995. Royalties, license fees and other revenue increased to
approximately $1,350,000 for the nine months ended September 30, 1996, as
compared to approximately $394,000 for the nine months ended September 30, 1995.
Revenue recognized during 1996 resulted from the Company's entering into an
agreement involving the assignment of certain of its patents relating to
microwave packaging .Under the agreement, the Company was granted a license for
the patents it had assigned as well as for 26 other patents related to microwave
and standard packaging. A portion of the revenue recognized under this agreement
reflects the estimated value of this license.
Cost of Products Sold. Cost of products sold totaled approximately
$5,559,000 for the nine months ended September 30, 1996 as compared to
approximately $5,878,000 for the nine months ended September 30, 1995. This
decrease resulted primarily from the large decrease in standard packaging sales.
Partially offsetting these were increases in manufacturing supplies, overhead
expenses and labor costs. As a percentage of product sales, cost of products
sold decreased to 90.7% in the nine months ended September 30, 1996, from 91.9%
for the nine months ended September 30, 1995 This decrease resulted primarily
from a favorable change in product mix and lower raw material costs. Partially
offsetting these were higher manufacturing costs, primarily depreciation
expense, relative to product sales volume.
Selling General and Administrative. Selling, general and administrative
expenses increased to approximately $943,000 (12.6% of total revenue) for the
nine months ended September 30, 1996, from approximately $903,000 (13.2% of
total revenue) for the nine months ended September 30, 1995, due to increased
selling expenses, payroll expense and professional fees.
Research and Development. Research and development expenses decreased
to approximately $98,000 for the nine months ended September 30, 1996, from
approximately $136,000 for the nine months ended September 30, 1995. Research
and development expenses during 1996 have been primarily related to the
development of the Company's PMP process as well as the development of its
microwave food packaging materials. The developmental stage of both of programs
is substantially complete: the Company is now directing its resources to the
marketing and distribution of these and other patented materials.
Development expenses for the Company's consumer retail product, the
ACCU-CRISP(R) Bag, were insignificant for the nine months ended September 30,
1996 as compared to approximately $42,000 for the nine months ended September
30, 1995. The Company does not expect any further significant development
expenditures for ACCU-CRISP(R). In December 1995, the Company entered into an
exclusive agreement with the Media Group to market and distribute ACCU-CRISP(R)
Bags to the consumer market. Because of the nature of this marketing programs,
the Company can not predict future sales of the ACCU-CRISP(R) Bag.
Operating Income (Loss). The Company generated operating income of
approximately $876,000 for the nine months ended September 30, 1996, as compared
to an operating loss of $169,000 for the nine months ended September 30, 1995.
The increased profits were primarily the result of higher royalties and license
fees.
Net interest expense. Net interest expense decreased to approximately
$180,000 for the nine months ended September 30, 1996, from approximately
$189,000 for the nine months ended September 30, 1995. Net interest expense for
the nine months ended September 30, 1995, included a loss on the liquidation of
investment securities, which was the primary reason for the decrease.
9
Net Income (Loss). The Company generated net income of approximately
$696,000 for the nine months ended September 30, 1996, as compared to a net loss
of approximately $358,000 for the nine months ended September 30, 1995, as a
result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $4,553,000 at
September 30, 1996, compared to working capital deficit of $1,381,000 at
December 31, 1995. The increase in working capital is primarily the result of
the exercise of approximately 1,050,000 Common Stock Purchase Warrants from
which the Company realized net proceeds of approximately $4,775,000. In
addition, the Company refinanced its term debt and revolving line of credit
(discussed below) which reduced its current liabilities.
Cash used in operating activities for the nine months ended September
30, 1996, was approximately $1,360,000 compared to cash used in operating
activities during the nine months ended September 30, 1995, of $319,000.
Negative cash flow from operations was primarily the result of a decrease in
accounts payable due to a decrease in days outstanding and also to increases in
inventory, due to material purchase requirements related to the supply
agreement, and in accounts receivable, due to relatively higher end-of-period
sales.
In the nine month period ending September 30, 1996, the Company
expended $99,000 in capital investments. The investments during 1996 were
primarily for increasing the capacity and efficiency of existing equipment. As
of September 30, 1996, the Company had no material commitments for additional
capital purchases.
The Company's revolving line of credit with a former bank expired on
December 31, 1995. Under the terms of the line of credit agreement, the
Company's term note with the same bank also became due. The balance outstanding
on the term note was classified as a current liability on the December 31, 1995
balance sheet. The balances outstanding on the term debt and the line of credit
on December 31, 1995, were $1,062,500 and $1,499,000, respectively.
On July 14, 1996, the Company refinanced its revolving term debt and
line of credit of credit with another bank. The replacement term debt and
revolving line of credit financing from the new bank allowed the Company to
repay all amounts due the Company's former bank and to Printpack, described
below. The new financing agreement provided the Company with a term debt
facility of $2,600,000 to be repaid in 35 monthly installments of approximately
$43,000, plus interest at the bank's prime rate of interest (8.25% on September
30, 1996) plus 1%, with a balloon payment of approximately $1,083,000 due in
July 1989. The revolving line of credit allows the Company to borrow up to
$3,000,000 based on percentages of its eligible accounts receivable, raw
materials and finished goods inventories. Borrowings under the line of credit
will bear interest at the bank's prime rate of interest plus 3/4%. The Company
had drawn down approximately $110,000 on the line of credit as of September 30,
1996. The Company's replacement term debt and revolving line of credit financing
agreements require the Company to maintain certain financial ratios and tangible
net worth levels, among others.
In September 1992, the Company entered into three agreements
(collectively "the Agreements") with Printpack, a flexible packaging supplier to
food companies. Under the Securities Purchase Agreement, the Company sold
297,610 shares of its common stock to Printpack for $250,000. Under the Purchase
and Tolling Agreement, the Company granted Printpack the exclusive right to
purchase and sell certain flexible microwave packaging products within North
America for five years. Under the Equipment Lease Agreement, Printpack leased a
vacuum metalizer to the Company. The Company accounted for this lease as a
capitalized lease. On July 15, 1996, the Company and Printpack consummated a new
agreement under which Printpack relinquished its exclusive purchase rights to
certain of the Company's patented products for microwave applications;
transferred to the Company title to the new metallizer it had been leasing to
10
the Company; and returned to the Company 297,610 shares of the Company's common
stock it had purchased as part of the Agreements. In addition, under the new
agreement, the Company paid Printpack $1,000,000; granted warrants to purchase
200,000 shares of the Company's Common Stock at $4.00 per share; and agreed not
to pursue any claims the Company may have had pursuant to the terms of the
Agreements, including claims for the payment of $1,308,000 of cost recovery
billings invoiced to Printpack in 1995 (see Note 4 to Notes to Condensed and
Consolidated Financial Statements).
For the period May 13, 1996 through July 10, 1996, the Company
temporarily reduced the number of Redeemable Warrants required to purchase one
share of Common Stock from two Redeemable Warrants to one Redeemable Warrant. In
addition, any holder who exercised one Redeemable Warrant during this period
also received a Class B Common Stock Redeemable Purchase Warrant which allows
the holder to purchase one share of Common Stock at $5.00 through May 12, 1998.
On July 10, 1996, the Company realized net proceeds of approximately $4,775,000
upon the conversion of approximately 1,050,000 Redeemable Warrants (see Note 5
of Notes to Condensed and Consolidated Financial Statements).
Management believes that the Company's cash and cash equivalents
together with anticipated cash flows from operations will provide sufficient
funds to meet the Company's current cash requirements and allow the Company to
continue its marketing and product development efforts.
SEASONAL REVENUES
Historically, the Company has experienced lower sales to the electronic
capacitor market during the third quarter, particularly in July. Based on market
research conducted by the Company, it believes that demand for the Company's
other products, including microwave food packaging, does not experience
similarly timed seasonal variations and could, in the future, offset lower third
quarter sales in the electronic capacitor market.
INFLATION
Several times during the last two years, suppliers of the film used in
the Company's products experienced problems meeting demand that led to shortages
and price increases. In late 1995, the shortages began to ease and prices have
begun to decrease.
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PART II - OTHER INFORMATION
ITEMS 1 THROUGH 5: Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) No Exhibits.
(b) Reports on From 8-K On August 12, 1996, the Company filed Form 8-K
related to its change in accountants. In that filing it was reported that, by
mutual understanding with the Company, Arthur Andersen LLP ("Arthur Andersen")
would no longer serve as the Company's auditors.
Arthur Andersen's reports on the financial statements for the years
ended December 31, 1995 and December 31, 1994, did not contain an adverse
opinion or a disclaimer of opinion, and were not modified as to uncertainty,
audit scope, or accounting principles.
Arthur Andersen disagreed with the Company's accounting for the
termination of an exclusivity agreement contained in the Company's Form 10-Q
filed for the quarter ended March 30, 1996. In response, the Company filed an
amended Form 10-Q for such quarter in which it restated its consolidated
financial statements to reverse the gain recorded on the termination of the
exclusivity agreement. Accordingly, Arthur Andersen no longer disagrees with the
Company's accounting for the terminated exclusivity agreement
Neither the Board of Directors, nor any other committee, discussed the
disagreement with Arthur Andersen. The change in auditors was approved by the
Board of Directors.
The Company has authorized Arthur Andersen to respond fully to the
successor accountant on any inquiries concerning the foregoing
12
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 of the
undersigned thereunto duly authorized.
Advanced Deposition Technologies, Inc.
Registrant
November 14, 1996 /s/ Glenn J. Walters
- ----------------- --------------------
(Signature)
Glenn J. Walters
President
November 14, 1996 /s/ Mark R. Thomas
- ----------------- ---------------------
(Signature)
Mark R. Thomas
Chief Financial Officer
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