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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-12230
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ADVANCED DEPOSITION TECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-2865714
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
580 MYLES STANDISH INDUSTRIAL PARK
TAUNTON, MASSACHUSETTS 02780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(508) 823-0707
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock......................................................... Boston Stock Exchange
Redeemable Common Stock Purchase Warrants............................ Boston Stock Exchange
Class B Redeemable Common Stock Purchase Warrants.................... Boston Stock Exchange
</TABLE>
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: NONE
Check whether the issuer (1) has filed all reports required to be filed
under Section 13 or 15(d) of the Securities Exchange Act of 1934 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 60 days.
YES X NO
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form. [_]
The Registrant had revenue of approximately $10,523,000 in its most recent
fiscal year. The aggregate market value of the voting stock held by non-
affiliates of the registrant based on the average closing bid and asked prices
was approximately $12,720,000 on March 21, 1997. As of March 21, 1997,
3,955,976 shares of Common Stock, $.01 par value per share, of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the annual meeting of Stockholders for
the year ended December 31, 1996, to be filed pursuant to Regulation AA, is
incorporated by reference in Part III of this Form 10-KSB.
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This report contains forward-looking statements regarding anticipated
increases in revenues, renewals or extensions of financing arrangements,
marketing of products and other matters. These statements, in addition to
statements made in conjunction with the words "estimate" and similar
expressions, are forward looking statements that involve a number of risks and
uncertainties. The following is a list of factors, among others, that could
cause actual results to differ materially from the forward looking statements:
business conditions and growth in certain market segments and the general
economy, increases in competition and quality control, and increased or
continued market acceptance of the Company's products and proposed products.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Advanced Deposition Technologies, Inc. (the "Company") develops,
manufactures, markets and sells standard and proprietary metallized films for
energy management applications, primarily within the electronics and microwave
food packaging industries. The Company produces metallized films by applying
an ultra-thin layer or layers of vaporized metal onto different types of
polymer films. The Company's products may be incorporated into a wide variety
of end-use applications, including capacitors used in fluorescent lights and
electrical appliances and packaging for microwave popcorn, pizza and other
foods. The primary source of the Company's revenue to date have been from
sales to the electronic capacitor market. While the Company expects that its
sales to the electronic capacitor market will continue to account for a
significant part of its business, the Company believes that sales of metalized
film to the microwave food packaging market and to other markets will account
for a substantial portion of its anticipated future growth in revenues.
The Company began operations in 1985 as a Massachusetts corporation to
supply metallized film to the electronic capacitor industry. In 1989, the
Company developed and introduced films metallized in patterns for use in
microwave food packaging applications. In July 1993, the Company was
reincorporated as a Delaware corporation. Since 1993, the Company has actively
pursued the development of new products for the food and other industries
based on its proprietary Pattern Metallized Printing ("PMP") process used for
metalizing film in high resolution patterns. In 1994, the Company introduced a
microwave browning and crisping bag (the "ACCU-CRISP(R) Bag") made with a
patented fuse susceptor metallized film, which it currently sells through
retail channels. The Company has also developed and manufactured, on a limited
basis for evaluation purposes, other products using the Company's PMP
technology, such as authentication holograms, electronic article surveillance
tags, electrostatic discharge materials, retroreflective films, and solar
protective films. Most recently, the Company filed a patent application for a
patterned metallized film under the name "High Energy Density Films and
Capacitors Thereof". The Company's executive offices and manufacturing
operations are located at 580 Myles Standish Industrial Park, Taunton,
Massachusetts, 02780. Its telephone number is (508) 823-0707.
MARKETS AND PRODUCTS
Since the Company's inception, the majority of the Company's sales have been
to the electronic and alternating current ("AC") capacitor market. In 1989,
the Company decided to find new product areas and has focused on establishing
itself as a technology and market leader for providing film used in microwave
food packaging. In connection with this effort, the Company developed the
ACCU-CRISP(R) Bag in 1994, a consumer product that has been sold over cable
television channels. See "Products and Processes Under Development."
ELECTRONIC CAPACITORS
Electronic capacitors store and transmit energy in electronic and electric
devices present in a wide variety of items such as computers, appliances,
light ballasts, automotive engines, air conditioners, audio equipment and many
others. Metallized film, such as the Company's, allows electronic capacitor
functions in these products. The Company currently supplies film to many of
the major, technically advanced manufacturers of capacitors and is one of four
major suppliers of metalized film for these applications in the United States.
Using the
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Company's PMP process, the Company has introduced new products to the
capacitor market for high energy, self-protected capacitors, also known as
segmented electrode materials. In addition, in 1997, the Company introduced a
high-density metallized film that is designed to allow capacitors to provide
up to twice the capacity without a significant increase in size or cost. See
"Products and Processes Under Development."
MICROWAVE FOOD PACKAGING
Microwave food packaging can be active or passive. Active packaging produces
heat by interaction with microwaves generated from a microwave oven, thereby
increasing the cooking temperature for purposes of browning and crisping.
Passive packaging does not produce heat. The Company can produce metallized
film for use in active packaging in two of the currently available formats:
flexible and rigid paperboard. Flexible packaging is typically wrapped around
food to conduct heat to the whole exterior of the food product within the
package. Rigid paperboard is typically placed within a package to conduct heat
to a particular portion of the food.
In 1994, the Company developed and patented a fuse susceptor film based on
proprietary technology, which it markets under the name Safety Susceptor(TM).
Safety Susceptor(TM) metallized film is designed to be used in active flexible
and rigid microwave food packaging to heat food more evenly, crisp the outside
of food, and reduce the occurrence of cold spots. It is also designed to
reduce the occurrence of package charring and the possibility of burning if a
package is overheated due to human error when setting cooking time or
otherwise. The Company incorporates Safety Susceptor(TM) film in its ACCU-
CRISP(R) Bags. During 1996, the Company established its position within the
microwave food packaging industry as a result of entering into a patent
assignment and licensing agreement with James River Corporation ("James
River"). The licensing agreement allowed the Company to market, produce, and
sell certain products, such as ACCU-CRISP bags in quantities not previously
attained. Prior to the granting of the licenses, sales of such products
exposed the Company and its customers to possible patent infringement
litigation from James River, thereby constraining such products' acceptance in
the market. In 1996, the Company assigned its rights to 3 patents related to
Safety Susceptor(TM) and other microwave food packaging products to the James
River in exchange for a cash payment of $1,200,000 and a licensing
arrangement, pursuant to which the Company became a licensee of products to 27
patents, including the patent for the Safety Susceptor(TM). Under this
arrangement, the Company retained an exclusive, royalty-free license for sales
of certain consumer products, such as ACCU-CRISP(R) Bags. Also under this
arrangement, the Company received an agreement from James River to purchase
certain quantities of microwave packaging film from the Company for a five-
year period, subject to certain quality control and other conditions. See
"Marketing and Distribution."
The Company has developed other proprietary metallized films for microwave
food packaging that it intends to market to food packaging converters. The
Company also sells standard metallized film for microwave packaging
applications. Standard film is produced with a continuous layer of thin metal
deposited onto polymer film and may be incorporated in microwave packaging to
brown and crisp the exterior of food. Except with respect to the Company's
consumer products, the Company generally sells metallized film packed in rolls
to converters that incorporate the film into final food packages.
In 1994, the Company introduced ACCU-CRISP(R) Bags, the Company's first
consumer product, which has been sold on the QVC and Home Shopping Network
cable television channels, as well as through infomercials. In 1996, the
Company signed an exclusive sales and marketing agreement with a
manufacturers' representative for the retail distribution of ACCU-CRISP(R)
Bags that is subject to certain volume purchase requirements. The ACCU-
CRISP(R) Bag and the BROWN & CRISP(R) microwave cooking bag, which is
distributed by the Media Group Inc., are made using Safety Susceptor(TM) film.
NON-MICROWAVE FOOD PACKAGING
Metallized film also acts as an effective barrier to oxygen, water and
ultraviolet light, and is used to package non-microwavable food as a means to
maintain freshness in products such as snack foods, coffee, and juice. In
1996, the Company began to de-emphasize the marketing of non-microwave food
packaging due to the low margins associated with this product and the
termination of the Company's purchase agreement with the Printpack
Enterprises, Inc. ("Printpack"), described below.
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In 1995, the Company and Printpack agreed in principle to terminate certain
agreements (the "Agreements"). On July 8, 1996, the Company and Printpack
consummated a new agreement under which Printpack (i) relinquished its
exclusive purchase rights to certain of the Company's patented products for
microwave applications; (ii) transferred to the Company title of a high-
capacity metalizer that the Company had been leasing from Printpack; and (iii)
returned to the Company 297,610 shares of the Company's common stock it had
purchased as part of the original Agreements. In return, the Company paid
$1,000,000 to Printpack; 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 $1,308,000 of cost recovery
billings invoiced to Printpack in 1995 for overhead and other expenses
incurred by the Company in support of certain minimum purchases by Printpack
called for under the Agreements. As a result of the termination of the
Agreements, the Company and Printpack released each other from the terms and
conditions of the Agreements.
The Company has also developed and manufactured, on a limited basis for
evaluation purposes, other products using the Company's PMP technology, such
as authentication holograms, electronic article surveillance tags,
electrostatic discharge materials, retroreflective films, and solar protective
films using the Company's proprietary metalization process. See "Products and
Processes Under Development."
MARKETING AND DISTRIBUTION
The Company markets and sells its films for capacitor applications through
direct factory contacts with its major customers. The Company markets and
sells its microwave film products through manufacturer's representatives,
technical presentations, advertising and participation in industry trade shows
and conferences. In addition, the Company has entered into an exclusive
management agreement with The Media Group, Inc. to market and sell the
Company's ACCU-CRISP(R) Bags through retail channels. The Company may in the
future enter into additional exclusive arrangements for the supply of its
products to specific markets within defined territories.
Two customers accounted for approximately 15% and 13% of the Company's total
product sales in the year ended December 31, 1996. If sales to any of these
customers were significantly reduced, it could have a material adverse effect
on the Company's business and results of operations. During 1996, the Company
established its position within the microwave food packaging industry as a
result of entering into a patent assignment and licensing agreement with James
River. The licensing agreement allowed the Company to market, produce, and
sell certain products, such as ACCU-CRISP bags in quantities not previously
attained. Prior to the granting of the licenses, sales of such products
exposed the Company and its customers to possible patent infringement
litigation from James River, thereby constraining such products' acceptance in
the market. In addition, in 1996, the Company recognized revenue of
approximately $2,750,000 or 26% of the Company's total revenue, in connection
with the assignment of certain patents to James River, described above. Since
the Company's inception, it has sold technology in concert with strategic
partnership agreements when such technology could be brought to market more
quickly by others. The same criterion will be used for any future technology
sales by the Company.
In 1995, the Company and Printpack agreed in principle to terminate certain
agreements ("the Agreements"). On July 8, 1996, the Company and Printpack
consummated a new agreement under which Printpack (i) relinquished its
exclusive purchase rights to certain of the Company's patented products for
microwave applications; (ii) transferred to the Company title of a high-
capacity metalizer that the Company had been leasing from Printpack; and (iii)
returned to the Company 297,610 shares of the Company's common stock it had
purchased as part of the original Agreements. In return, the Company paid
$1,000,000 to Printpack; 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 $1,308,000 of cost recovery
billings invoiced to Printpack in 1995 for overhead and other expenses
incurred by the Company in support of certain minimum purchases by Printpack
called for under the Agreements. As a result of the termination of the
Agreements, the Company and Printpack released each other from the terms and
conditions of the Agreements. As a result, sales to Printpack declined
significantly in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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PRODUCTS AND PROCESSES UNDER DEVELOPMENT
The Company's research and development activities are focused on the
development of new proprietary processes and patented products and on
enhancements to its production equipment. Company-funded research and
development expenditures totaled approximately $203,000, $185,000 and $450,000
or 1.9%, 1.9% and 7.1% of total revenues during 1996, 1995 and 1994,
respectively. The higher research and development expenses in 1994 were
primarily due to the development of the Company's PMP process. In 1994, the
Company also incurred costs of approximately $519,000 in connection with the
research, development and marketing of the Company's ACCU-CRISP(R) Bags. In
1994 the research and development stage of the ACCU-CRISP(R) Bag was
substantially completed.
The Company continues to improve its pattern metalization process. This
effort led to the introduction of Safety Susceptor(TM) film in 1994. In
addition, in 1995, the Company further enhanced its proprietary metalization
process to enable high-resolution deposition (up to 130 dots per inch) of
metals onto polymer film. Using this PMP process, the Company can produce film
with metallized patterns of logos and/or figures. This enhanced metalization
process has resulted in the manufacture of new products such as authentication
holograms, which the Company has sold on a limited basis for evaluation
purposes.
Authenticity holograms are used to detect counterfeiting of licenses,
passports, and other important identification documents. Holograms are also
used to reduce copyright and product piracy. The Company has four patents
pending related to proposed products with a high resolution pattern of vapor
deposited metal to create holographic images. The Company believes that these
products can improve the security feature of certain holograms at lower costs
of production. The Company's sales of authenticity holograms were immaterial
during 1996 and 1995.
In 1996, the Company developed a high capacity metallized film using the
Company's PMP process that is designed to double the capacity of electronic
capacitors without a proportional increase in size or cost. In January 1997,
the Company filed a patent application for this film under the name "High
Energy Density Films and Capacitors Thereof". The Company began marketing this
new product in 1997. Although new products introduced by the Company must
undergo extensive quality and performance testing by the Company's customers,
the Company believes that it will begin to sell this product during the fourth
quarter of 1997.
TECHNOLOGY AND MANUFACTURING PROCESS
The Company currently operates three vacuum metallizers, the primary pieces
of production equipment used in its manufacturing process, to metallize film
used in all of its products and products under development. The Company has
enhanced all of its vacuum metallizers with proprietary improvements to enable
them to deposit vaporized metal onto plastic film in single or multiple
coatings and in patterns. Variations in metal thickness and patterns will
influence and modify different energy spectrums. See "Markets and Products."
Within a vacuum metallizer, rolls of plastic film are fed through a vacuum
chamber where a metal vapor, usually aluminum or zinc, is deposited onto the
film. After cooling, the film is cut to customer specifications using
automated slitters, and then packaged and shipped to customers in the form of
boxed rolls of film. The Company has implemented automated computer processes
and quality control checks throughout its production process. With respect to
the Company's ACCU-CRISP(R) Bags, the Company has subcontracted printing and
laminating functions to unaffiliated third parties, who complete the
manufacture of the bags using the Company's metallized film.
The Company relies on management's know-how to engineer its machine
enhancements and protects this information by restricting access to its
production facilities and by requiring all employees to sign confidentiality
agreements. The Company believes that its patents, in addition to the
proprietary enhancements to its vacuum metallizers, described above, give the
Company a competitive advantage in the marketplace. See "Patents and
Proprietary Technology."
SOURCES OF SUPPLY
There are multiple suppliers of polymer film and metal raw materials. The
Company seeks to maintain inventories and close working relationships with its
suppliers to ensure timely and reliable delivery. In 1994 and 1995, suppliers
of polymer film used in the Company's products experienced capacity problems
which led to
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film shortages and price increases. These shortages began to abate in late
1995. Supplies of polymer film are currently available in sufficient
quantities and acceptable prices. In 1996, the Company increased its purchases
of polymer film from alternative suppliers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has been granted 9 patents and has 9 patent applications pending
in the U.S. Patent and Trademark Office. Most of the patents and patent
applications pertain to vaporized metals deposited onto substrates and
products, such as the Company's ACCU-CRISP(R) Bags and security holograms. The
Company also has 2 patent disclosures for which patent applications are in
process. In addition, the Company has pending patent applications in Europe
and Japan. The Company's patent and trade secret rights are of material
importance to the Company and its future prospects. To date, no legal action
has been initiated against the Company for infringement of patents. The
Company also relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees, consultants and other
parties.
INSURANCE
The Company maintains coverage for the customary risks inherent in the
operation of a manufacturing facility and business in general. In response to
increased sales of home-use products, the Company has doubled its liability
coverage.
COMPETITION
The electronic capacitor market is highly competitive in respect to quality,
delivery time and price. The Company believes that it competes effectively
with respect to each of these factors. The Company's competitors have
substantially greater financial, marketing, technical and other resources than
the Company. In addition, the Company's primary competitors in the capacitor
market produce their own polymer film. In the capacitor market, the Company's
primary competitors are Steinerfilm, Inc., Bolmet, Inc., a subsidiary of
Bollore of France, and Toray Plastics, Inc. See "Sources of Supply."
The microwave food packaging industry is also highly competitive and subject
to changes in the types of food products requiring packaging, food
preparation, and methods of preparing and cooking food. The Company will
depend on its ability to provide high quality, cost-effective metallized film
for packaging, to establish continuing relationships with food packaging
companies and packaging distributors and to respond to the changing needs of
the marketplace in order to compete successfully in this industry. The Company
competes with numerous local, regional and national providers of food
packaging and food packaging supplies. Competition in this industry is based
upon quality of metallized film, technological improvement, service and price.
The Company believes it competes effectively with respect to each of these
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EMPLOYEES
As of March 1, 1997, the Company had 43 full-time employees, of which four
were executive officers, two of whom also perform research and development and
marketing functions. A total of seven employees were involved with
administration and the remaining were involved with manufacturing. None of the
Company's employees are represented by a labor union. The Company considers
its relationships with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company maintains its principal executive offices and manufacturing
operations in an approximate 30,000 square foot facility in Taunton,
Massachusetts. The Company pays rent of approximately $17,000 per
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month, pursuant to its lease which expires on March 31, 2004, plus real estate
taxes, which combined currently amounts to approximately $22,000 per month,
and utilities.
The Company believes that its facilities are adequate for its current needs
and that adequate facilities for expansion, if required, are available at
competitive rates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security-holders through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the over-the-counter market
through the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since September 10, 1993. The Company's Common Stock is also
traded on the Boston Stock Exchange (the "BSE"). On March 27 1997, the closing
bid and ask prices for the Common Stock as reported by NASDAQ were $4.3125 and
$4.50, respectively, per share. The Company's Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants) have been traded on the NASDAQ and
the BSE since July, 1996. On March 27, 1997, the closing bid and ask prices
for the Class B Warrants were $0.7813 and $1.00 respectively.
For the periods indicated, the following table sets forth the range of high
and low bid prices for the Common Stock as reported by NASDAQ from January 1,
1995. These prices reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
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COMMON STOCK CLASS B
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HIGH LOW HIGH LOW
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1995
First Quarter................................. $ 4.125 $ 2.25 -- --
Second Quarter................................ $ 3.50 $ 1.75 -- --
Third Quarter................................. $ 3.375 $ 2.00 -- --
Fourth Quarter................................ $ 3.375 $ 2.375 -- --
1996
First Quarter................................. $ 6.625 $ 2.375 -- --
Second Quarter................................ $ 6.375 $ 4.625 -- --
Third Quarter................................. $ 5.50 $ 4.25 $1.5625 $ 0.875
Fourth Quarter................................ $4.8125 $ 2.875 $ 1.25 $ 0.50
1997
First Quarter................................. $ 6.125 $3.5625 $ 1.75 $0.6875
</TABLE>
DIVIDENDS
The Company has never paid cash dividends. The Company currently expects to
retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's financing arrangement with a bank prohibits the payment of cash
dividends by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During 1996, the Company established its position within the microwave food
packaging industry as a result of entering into a patent assignment and
licensing agreement with James River. The licensing agreement allowed the
Company to market, produce, and sell certain products, such as ACCU-CRISP bags
in quantities not previously attained. Prior to the granting of the licenses,
sales of such products exposed the Company and its customers to possible
patent infringement litigation from James River, thereby constraining such
products' acceptance in the market. In 1996, the Company continued its efforts
to develop its process capabilities in order to produce higher value-added
products utilizing its proprietary technology. In 1996, the Company assigned
its rights under certain patents to James River in return for (1) $1,200,000
in cash, (2) becoming a licensee for the use of 27 patents, including an
exclusive license for certain home-use products employing the Safety
Susceptor(TM) patent, and (3) entering into a supply arrangement which calls
for certain minimum purchases from the Company subject to quality and other
conditions. The Company also expanded its marketing efforts of ACCU-CRISP(R)
Bags through an exclusive distributorship with a third party retail
distributor who began airing an infomercial for this product in late 1996 in
order to generate sales and begin selling to retail mass merchandisers.
In May 1996, the Company temporarily modified the terms of its outstanding
redeemable common stock purchase warrants (the "IPO Warrants") during a
special exercise period such that each IPO Warrant enabled the holder to
purchase one share of Common Stock at $5.00 per share and receive one Class B
Redeemable Common Stock Purchase Warrant (a "Class B Warrant") for no
additional consideration. Each Class B Warrant entitles the holder to purchase
one share of Common Stock at an exercise price of $5.00 per share until May
12, 1998. In July 1996, the Company received approximately $4,738,000 in net
proceeds from exercises of the IPO Warrants during this special exercise
period.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total Revenue. Total revenue increased by 10.3% during 1996 to $10,523,000
compared to $9,541,000 in 1995. Product sales during 1996 were approximately
$7,773,000 compared to $8,208,000 in 1995, a 5.3% decrease. Total revenue in
1996 included $2,750,000 related to the assignment of certain of the Company's
patents to James River. Included in the revenue recognized under the
assignment of the patents to James River was $1,550,000 representing the value
of certain licenses received and $1,200,000 in cash received during 1996.
Total revenue in 1995 included $1,308,000 of cost recovery billings to
Printpack for overhead and other expenses incurred by the Company in support
of certain minimum purchase requirements called for under an agreement. As
expected, these cost recovery billings were discontinued in 1996 due to the
termination of the Agreements between the Company and Printpack.
Product sales to the capacitor industry totaled $5,650,000 during 1996
compared to $5,120,000 in 1995, 10.4% increase, due to higher unit shipments
and slightly higher unit prices. Product sales to the standard food packaging
industry totaled $505,000 during 1996 compared to $2,076,000 in 1995, a 75.7%
decrease, due to the termination of the Company's Agreements with Printpack,
the Company's primary customer in this product area. The Company has de-
emphasized its marketing efforts in this market due to the relatively low
margins associated with this market. Product sales of microwave food packaging
products, including sales of ACCU-CRISP(R) Bags, totaled $1,275,000 in 1996
compared to $661,000 in 1995, a 92.9% increase, due to increased volumes of
sales , partially offset by lower prices resulting from a change in product
mix. Product sales to new applications markets, such as hologram,
retroreflective materials and anti-theft devices, among others, totaled
$343,000 in 1996 compared to $351,000 in 1995, a decrease of 2.3%.
Cost of Revenues. Cost of revenues decreased to $7,387,000 in 1996 (95.0% of
product sales) in 1996 from $7,857,000 (95.7% of product sales) in 1995. The
decrease in cost of revenues is primarily the result of the
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large decline in sales of standard packaging materials from 1996 as compared
to 1995, partially offset by increased shipments to the capacitor and
microwave markets. The decrease in sales of relatively lower margin standard
food packaging products combined with higher unit prices in the capacitor
industry, partially offset by additional inventory reserves, led to a decrease
in cost of revenues as a percentage of product sales.
Gross Profit. Gross profit increased to $3,136,000 (29.8% of total revenue)
in 1996 from $1,684,000 (17.7% of total revenue) in 1995 due primarily to the
revenue generated by the assignment of certain patents to James River,
partially offset by the non-recurrence of billings to Printpack for the
recovery of overhead and other costs incurred by the Company in support of the
Agreements. Gross profit from product sales increased to $386,000 (5.0% of
product sales) in 1996 from $376,000 (4.6% of product sales) in 1995 due to
higher prices and increase volume for capacitor products partially offset by
increased reserves for excess and obsolete inventory.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1,378,000 (17.7% of product sales) in 1996 from
$1,196,000 (14.6% of product sales) in 1995 due to a non-cash charge of
approximately $95,000 recognized in connection with the issue of certain
common stock purchase warrants, payroll expenses and professional fees.
ACCU-CRISP(R) Development. ACCU-CRISP(R) development expenses were
immaterial in 1996 compared to $46,000 in 1995. Development of the ACCU-
CRISP(R) Bag was substantially completed in 1994. Expenses incurred in 1995
and 1996 related primarily to the identification of distribution channels, and
for marketing and product refinements.
Research and Development. Research and development expenses increased to
$203,000 (2.6% of product sales) in 1996 from $185,000 (2.3% of product sales)
in 1995 due to additional amortization expenses related to the acquisition of
the James River licenses. The Company presently anticipates that it will
amortize the value of the licenses received over periods ranging from 5 to 15
years. Research and development programs, primarily related to the Company's
PMP process, were largely completed during 1994. During 1995 and 1996, the
Company directed its R&D efforts at expanding its technical capacity to
produce higher resolution metallized patterns at higher volumes for
electronic, security, holographics, retroreflective and microwave materials.
Operating Income. The Company generated operating income of $1,555,000 in
1996 compared to $257,000 in 1995. The increase in operating income is
primarily the result of revenue recognized under the assignment of certain
patents to James River and to a lesser extent, increased sales volume to the
capacitor and microwave food packaging industries, partially offset by the
non-recurrence of billings to Printpack for overhead and other costs, and to
higher selling, general and administrative expenses.
Interest Income (Expense). Interest income increased to $72,000 in 1996 from
$14,000 in 1995 due to higher cash balances available for investment. Interest
expense totaled $266,000 in 1996 compared to $265,000 in 1995.
Other Expense. Other expense was $61,000 during 1996 compared to an
insignificant amount in 1995. Other expense is primarily attributable to the
amortization of the costs associated with the new financing arrangement with a
bank and the write-down of capitalized patent costs associated with the
assignment of certain patents to James River. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
Net income. Net income increased to $1,300,000 in 1996 from $6,000 in 1995
as a result of the factors set forth above.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total Revenue. Total revenue increased to $9,541,000 in 1995 from
$6,314,000, a 51.1% increase. Product sales totaled $8,208,000 in 1995
compared to $6,142,000 in 1994, a 33.6% increase. In 1995, the Company
9
<PAGE>
recognized revenues of approximately $1,308,000 related to billable costs
under the Agreements with Printpack, representing cost recovery billings for
overhead and other expenses incurred by the Company in support of specified
minimum purchases from Printpack called for under the Agreements.
Product sales to the capacitor industry totaled $5,120,000 during 1995
compared to $4,379,000 during 1994, a 16.9%, increase due to greater sales
volume and, to a lesser extent, increases in unit prices. Sales of standard
food packaging materials totaled $2,076,000 during 1995 compared to $1,067,000
during 1994, a 94.6% increase. Standard food packaging product sales to the
Company's major customer, Printpack, were approximately $1,553,000 in 1995
compared to $1,067,000 in 1994, a 45.5% increase. Sales of microwave products
totaled $661,000 during 1995 compared to $696,000 during 1994, a 5.0%
decrease. The decrease was due to two large orders from "direct response"
retailers for ACCU-CRISP(R) Bags during the third quarter of 1994 as compared
to only one large order during 1995. Product sales to new application markets,
such as hologram, retroreflective materials and anti-theft devices, among
others, totaled $351,000 in 1995 compared to an insignificant amount during
1994. In 1994 the Company had royalty and other income of $172,000 derived
from sales of ACCU-CRISP(R) Bags through a distributor.
Cost of Revenues. Cost of revenues increased to $7,857,000 (95.7% of product
sales) in 1995 from $5,861,000 (95.4% of product sales) in 1994. Cost of
revenues during 1995 and 1994 include approximately $617,000 and $695,000,
respectively, of overhead and other costs incurred by the Company in support
of specified minimum purchases from Printpack called for under the Agreements.
The termination of the Agreements did not cause any reduction of these costs
and accordingly, the Company must generate sufficient revenues in future
periods to cover these costs. The increase in cost of revenues is attributable
to greater volume, and additional overhead in the form of additional staffing,
facilities and depreciation expenses. Cost of revenues as a percentage of
product sales increased slightly due to higher material process relative to
sales prices, primarily for the capacitor market, partially offset by reduced
fixed expenses as a percentage of product sales.
Gross Profit. Gross profit increased to $1,684,000 (17.7% of total revenue)
in 1995 from $453,000 (7.2% of total revenue) in 1994 due to the billings to
Printpack for recovery of overhead and other expenses incurred by the Company
in support of specified minimum purchases from Printpack called for under the
Agreements. Gross profit from product sales increased to $351,000 (4.3% of
product sales) in 1995 from $281,000 (4.6% of product sales) in 1994 due to
additional product sales to the capacitor and packaging markets, partially
offset by higher material costs.
Selling, General and Administrative. Selling, general and administrative
expenses declined to $1,196,000 (14.6% of product sales) in 1995 from
$1,369,000 (22.3% of product sales) in 1994. Expenses during 1994 included
increased write-offs of unrealizable patents and increases to allowance for
doubtful accounts, which were not repeated during 1995. Also contributing to
the reduction in expenses was a salary cost reduction program begun in the
fourth quarter of 1994.
ACCU-CRISP(R) Development. ACCU-CRISP(R) development expenses declined to
$46,000 in 1995 from $519,000 in 1994. Development of the ACCU-CRISP(R) Bag
was substantially completed during 1994. Expenses during 1995 related
primarily to the identification of distribution channels, and for marketing
and product refinements.
Research and Development. Research and development expenses declined to
$185,000 (2.3% of product sales) in 1995 from $450,000 (7.3% of product sales
) in 1994. Research and development programs, primarily relating to the
Company's PMP process, were substantially completed during 1994. During 1995,
the Company directed its research and development efforts primarily at
expanding its technical capacity to produce higher resolution metallized
patterns for electronics, security, holographics, retroreflective and
microwave materials.
Operating Income (Loss). The Company generated an operating income of
$257,000 in 1995 compared to an operating loss of $1,885,000 during 1994. The
increase in operating income was the result of billings to Printpack for
overhead and other costs incurred in support of certain minimum purchases from
Printpack called
10
<PAGE>
for under the Agreements, greater product sales volume, reduced research and
development expenses and reduced selling, general and administrative expenses.
Interest Income (Expense). Interest income declined to $14,000 in 1995 from
$100,000 in 1994 as a result of lower cash balances available for investment.
Interest expense increased to $265,000 in 1995 from $257,000 as a result of
additional borrowings under the Company's line of credit.
Net Income (Loss). Net income increased to $6,000 from a net loss of
$1,809,000 as a result of the items set forth above, partially offset by lower
interest income and the elimination of benefit from provision for income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $4,032,000 at December 31, 1996 compared
to a working capital deficit of $1,381,000 at December 31, 1995. The working
capital deficit at December 31, 1995 reflected the short-term classification
of $1,225,000 due under an equipment lease with Printpack and $1,062,500 due
under a term note agreement with a bank. The change in working capital
position resulted from: the exercise of approximately 1,044,000 IPO Warrants
in July 1996 resulting in net proceeds to the Company of approximately
$4,738,000; the completion of the Company's bank refinancing which resulted in
the reclassification of certain of the Company's indebtedness from current to
non-current; and income from operations. Investments in marketable securities
were $1,240,000 at December 31, 1996.
Net cash used in operations of $1,421,000 in 1996 increased from net cash
used in operations in 1995 of $224,000 due primarily to a reduction in
accounts payable, the non-cash revenue recognized in connection with the
assignment of certain patents to James River, and to increases in inventories
and prepaid expenses. Capital expenditures totaled $398,000 in 1996 compared
to $327,000 in 1995. Expenditures in 1996 continued to be primarily for
upgrades to the productive capacity of existing equipment. The Company at
present has no material commitments for additional purchases of capital
equipment
On July 8, 1996, the Company refinanced its term debt and revolving line of
credit with a 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 Company's new
revolving line of credit bears interest at the bank's prime rate of interest
plus 3/4% and is secured by substantially all of the Company's assets. This
revolving line of credit facility provides for borrowings up to a maximum of
$3,000,000 based on the Company's eligible accounts receivable and inventory,
and expires on July 8, 1999. As of December 31, 1996, the revolving line of
credit had an outstanding balance of approximately $180,000 and bore interest
at 9.0% per annum. The Company has a term loan with the same bank loan that
bears interest at the bank's prime rate of interest plus 1%, is secured by
substantially all of the Company's assets and matures on July 8, 1999. The
term loan agreement calls for monthly principal payments of $43,333 plus
accrued interest and a balloon payment of $1,083,333 on the maturity date. The
term loan had a balance of approximately $2,365,000 on December 31, 1996 and
bore interest at the rate of 9.25% per annum. At year-end, the Company was not
in compliance with one of the covenants of the bank loans. The bank has agreed
to waive that covenant until January 1, 1998.
In May 1996, the Company commenced a special exercise period during which it
temporarily reduced the number of redeemable common stock purchase warrants
(the "IPO Warrants") required to purchase one share of Common Stock from two
IPO Warrants to one IPO Warrant. In addition, any holder who exercised an IPO
Warrant during the special exercise period also received one Class B Warrant
for no additional consideration. Each Class B Warrant is exercisable at $5.00
per share until May 12, 1998. After the special exercise period, two IPO
Warrants were again required to purchase one share of common stock. In July
1996, the Company received approximately $4,738,000 in net proceeds from
exercises of approximately 1,044,000 IPO Warrants during this special exercise
period.
11
<PAGE>
On March 25, 1996, the Company and Printpack entered into a written
agreement which set forth the terms of the termination of the Agreements and
the resolution of the outstanding billings totaling $1,308,000 for overhead
and other expenses incurred by the Company in support of certain minimum
purchases from Printpack called for in the Agreements. On July 8, 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
of a high-capacity metallizer which the Company had been leasing from
Printpack; and returned to the Company 297,610 shares of the Company's common
stock it had purchased as part of the original Agreements. The Company paid
$1,000,000 to Printpack; 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 $1,308,000 of cost recovery
billings invoiced to Printpack in 1995.
Management believes that its reserves of cash and cash equivalents and
short-term investments, together with its working capital credit facilities
and anticipated cash flows from operations, are sufficient to meet the
Company's current cash requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 ("SFAS No. 121"), "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed of". This standard
establishes new guidelines regarding when impairment losses on long-lived
assets, which include property and equipment, certain identifiable intangible
assets and goodwill, should be recognized and how impairment should be
measured. The Company assesses the recoverability of long-lived assets by
determining the estimated future undiscounted cash flows from the related
assets. The effect of the implementation of SFAS 121 did not materially impact
the Company's 1996 financial statements.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation". SFAS No. 123 allows the Company to account for its stock-based
compensation plans based upon either a fair value method or the intrinsic
value method previously followed by the Company. The Company has retained the
intrinsic value method of accounting for stock-based compensation plans, and
therefore, the adoption of SFAS No. 123 had no material impact on the
Company's financial position or results of operations. As required by SFAS No.
123, the Company has disclosed the effects of applying the fair value method
on net income and earnings per share on a pro forma basis (see Note 7 to the
Consolidated Financial Statements).
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share" is effective for fiscal years ending after December 15,
1997. SFAS No. 128 establishes new standards for computing and presenting
earnings per share. The effect of adopting SFAS No. 128 has not been
estimated. The Company does not expect the adoption of SFAS No. 128 to have a
material effect on its financial statements.
SEASONAL REVENUES
Historically, the Company 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 third quarter seasonal lower sales to the capacitor market.
INFLATION
Several times during the last thirty-six months, suppliers of film used in
the Company's products have experienced problems meeting demand that led to
shortages and price increases. During 1996 supplies of film increased in
quantities sufficient to meet demand and price increases abated.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13 below and the index therein for a listing of the financial
statements and supplementary data as filed as part of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has previously reported information relating to this item on
Forms 8-K filed with the Securities and Exchange Commission on August 19, 1996
and February 20, 1997.
13
<PAGE>
PART III
Items 9 through 12 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. The consolidated financial statements required
to be filed in Item 8 herewith are as follows:
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Certified Public Accountants BDO Seidman,
L.L.P......................................................... F-2
Report of Independent Public Accountants Arthur Andersen,
L.L.P......................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995... F-4
Consolidated Statements of Operations for the years ended De-
cember 31, 1996, 1995 and 1994................................ F-5
Cosolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994........................ F-6
Consolidated Statements of Cash Flows for the years ended De-
cember 31, 1996, 1995 and 1994................................ F-7
Notes to Consolidated Financial Statements..................... F-8 to F-18
</TABLE>
(a) (2) The following exhibits are incorporated by references herein:
(i) The following exhibit was filed as part of the Company's S-3
Registration Statement 33-98400) declared effective by the Securities and
Exchange Commission on May 13, 1996, and is incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <S>
4a Form of Warrant Agreement between the Company and American Securities
Transfer, Incorporated with description of Warrant Certificate in-
cluded
</TABLE>
(ii) The following exhibits, required by Item 601 of Regulation S-B, were
filed with the Company's 10-KSB for the years ended December 31, 1994, and
are herein incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <S>
*10gg 1994 Formula Stock Option Plan
10hh Security Agreement with Eastern Bank dated April 3, 1995
</TABLE>
14
<PAGE>
(iii) The following exhibits were filed as part of the Company's SB-2
Registration Statement (33-66324-B) declared effective by the Securities
and Exchange Commission on September 10, 1993, and are incorporated by
reference herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <S>
3a Certificate of Incorporation.
3b Bylaws.
3b(1) Revised Bylaws.
3c Certificate of Agreement of Merger between Advanced Dielectric
Technologies, Inc., a Massachusetts corporation ("Advanced
Dielectric") and the Company, date July 15, 1993.
4a Included in Exhibits 3a and 3b.
4c Form of Representative's Warrant Agreement with the Form of Warrant
attached thereto.
4d Form of Warrant Agreement between the Company and American Securities
Transfer, Incorporated (includes Specimen Warrant Certificate)
*10q Form of Employment Agreement between the Company and Glenn J. Walters.
*10r Form of Consulting Agreement between the Company and Gordon E.
Walters.
10s Form of Employee Secrecy , Invention and Non-Competition Agreement
between Advanced Dielectric Technologies, Inc. and certain employees.
*10t 1993 Stock Option Plan
*10u Collaboration Agreement between Advanced Dielectric Technologies, Inc.
and Officine Galileo, S.p.A. ("Galilieo"), dated December 19, 1986 and
amended May 31, 1988.
10u(1) Collaboration Agreement between Advanced Dielectric Technologies, Inc.
("Galilieo"), dated August 3, 1992.
10v Transfer of Technology Agreement between Advanced Dielectric and
Centro Tecnologie Del Vuoto, dated June 18, 1993.
10w Securities Purchase Agreement between Advanced Dielectric, Glenn J.
Walters, Printpack Enterprises, Inc. ("Printpack") and Gordon E.
Walters, dated September 1992.
10x New Metallizer Agreement between Advanced Dielectric and Printpack,
dated September 1992
10y Purchase and Tolling Agreement between Advanced Dielectric and
Printpack date September 1992
10z Lease between Advanced Dielectric and Condyne Realty Inc., f/k/a/ CD-
Tech Realty Trust, Dated September 4, 1985 and modified June 28, 1991.
10dd Demand Loan and Security Agreement between the Company and Eastern
Bank, dated July 29, 1993.
10ee Supplemental Loan and Security Agreement between the Company and
Eastern Bank, dated July 29, 1993.
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <S>
10ff Secured Term Note in the Original Principal Amount of $1,500,000
between the Company and Eastern Bank dated July 29, 1993.
28a Form of Agreement between the Representative and the Company's
officers, directors and Stockholders with respect to the
transferability of shares.
28b Form of Financial Advisory and Consulting Agreement between the
Company and the Representative.
</TABLE>
- --------
* These reports relate to a management control or compensatory plan or
arrangement.
(b) Reports on Form 8-K: Not applicable.
15
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Advanced Deposition Technologies,
Inc.
/s/ Glenn J. Walters
By: _________________________________
GLENN J. WALTERS
PRESIDENT
Date: March 31, 1997
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NAME CAPACITY DATE
/s/ Gordon E. Walters Chairman of the March 31, 1997
- ------------------------------------- Board of Directors
GORDON E. WALTERS
/s/ Glenn J. Walters President and Chief March 31, 1997
- ------------------------------------- Executive Officer
GLENN J. WALTERS
/s/ Charles R. Buffler Director March 31, 1997
- -------------------------------------
CHARLES R. BUFFLER
/s/ Robert M. Pozzo Director March 31, 1997
- -------------------------------------
ROBERT M. POZZO
/s/ John J. Moroney Director March 31, 1997
- -------------------------------------
JOHN J. MORONEY
/s/ Salvatore D'Amato Director March 31, 1997
- -------------------------------------
SALVATORE D'AMATO
/s/ Mark R. Thomas Chief Financial March 31, 1997
- ------------------------------------- Officer
MARK R. THOMAS
16
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants--BDO Seidman,
LLP.............................................................. F-2
Report of Independent Public Accountants--Arthur Andersen, LLP.... F-3
Consolidated Financial Statements:
Balance sheets.................................................. F-4
Statements of operations........................................ F-5
Statements of stockholders' equity.............................. F-6
Statements of cash flows........................................ F-7
Notes to financial statements................................... F-8 to F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Advanced Deposition
Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Deposition Technologies, Inc. and subsidiary as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit 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
from 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Deposition Technologies, Inc. and subsidiary at December 31, 1996, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
February 14, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Advanced Deposition
Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Advanced
Deposition Technologies, Inc. and subsidiary (a Delaware corporation) as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
procedures. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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 the
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for an opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Deposition Technologies, Inc. and subsidiary as of December 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 26, 1996 (except with respect
to the matters discussed in Note 3, as to
which the date is July 8, 1996)
F-3
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS (NOTE 3)
Current assets:
Cash and cash equivalents (Note 2(c))............ $ 1,170 $ 98
Restricted cash (Notes 2(d) and 3)............... -- 500
Investment in marketable securities (Note 2(e)).. 1,240 --
Amounts receivable from Printpack Enterprises,
Inc. (Note 5)................................... -- 1,321
Accounts receivable, net of allowance for doubt-
ful accounts of $136 and $137 in 1996 and 1995,
respectively.................................... 1,453 1,451
Inventories (Note 2(f)).......................... 1,667 1,492
Prepaid expenses and other....................... 123 16
------------ ------------
Total current assets........................... 5,653 4,878
------------ ------------
Property and equipment, at cost (Note 2(g)):
Machinery and equipment.......................... 7,256 5,419
Furniture and fixtures........................... 320 338
Equipment under capital lease obligations........ 30 1,526
Leasehold improvements........................... 264 257
------------ ------------
7,870 7,540
Less--accumulated depreciation and amortization.. 2,681 2,261
------------ ------------
Net property and equipment..................... 5,189 5,279
------------ ------------
Other assets, net of accumulated amortization
(Notes 2(h) and 6)................................ 1,740 177
------------ ------------
Total assets................................... $ 12,582 $ 10,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit (Note 3)................ $ 180 $ 1,499
Amount due Printpack Enterprises, Inc. (Note 5).. -- 1,225
Accounts payable................................. 802 2,366
Accrued expenses................................. 113 100
Current maturities of long-term obligations (Note
3).............................................. 526 1,069
------------ ------------
Total current liabilities...................... 1,621 6,259
------------ ------------
Long-term obligations, net of current maturities
(Note 3).......................................... 1,854 17
------------ ------------
Commitments (Note 4)
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock, $.01 par value, authorized--
1,000,000 shares, issued and outstanding--none.. -- --
Common stock, $.01 par value, authorized--
10,000,000 and 5,500,000 shares, issued--
4,226,910 and 3,152,828, outstanding--3,919,300
and 3,142,828 in 1996 and 1995, respectively.... 42 32
Common stock purchase warrants................... 1,691 78
Additional paid-in capital....................... 9,289 6,068
Accumulated deficit.............................. (788) (2,088)
------------ ------------
10,234 4,090
Less treasury stock, 307,610 and 10,000 shares,
respectively.................................... (1,127) (32)
------------ ------------
Total stockholders' equity..................... 9,107 4,058
------------ ------------
Total liabilities and stockholders' equity..... $ 12,582 $ 10,334
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues (Notes 2(k) and 10):
Product sales........................... $ 7,773 $ 8,208 $ 6,142
Royalties, license and other (Note 6)... 2,750 25 172
Billable costs under Printpack agree-
ments (Note 5)......................... -- 1,308 --
---------- ---------- ----------
Total revenues........................ 10,523 9,541 6,314
Cost of revenues.......................... 7,387 7,857 5,861
---------- ---------- ----------
Gross profit.......................... 3,136 1,684 453
Selling, general and administrative ex-
penses................................... 1,378 1,196 1,369
Accucrisp development expenses............ -- 46 519
Research and development expenses (Note
2(l)).................................... 203 185 450
---------- ---------- ----------
Operating income (loss)............... 1,555 257 (1,885)
Interest income........................... 72 14 100
Interest expense.......................... (266) (265) (257)
Other expense, net........................ (61) -- --
---------- ---------- ----------
Income (loss) before benefit from in-
come taxes........................... 1,300 6 (2,042)
Benefit from income taxes (Notes 2(i) and
8)....................................... -- -- 233
---------- ---------- ----------
Net income (loss)..................... $ 1,300 $ 6 $ (1,809)
========== ========== ==========
Income (loss) per common share (Note
2(m)).................................... $ 0.37 $ 0.00 $ (0.59)
========== ========== ==========
Weighted average common shares outstanding
(Note 2(m)).............................. 3,519,025 3,205,566 3,071,530
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 5 AND 7)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK COMMON
-------------------- STOCK ADDITIONAL ACCUMU- TOTAL
NUMBER OF $.01 PURCHASE PAID-IN LATED TREASURY STOCKHOLDERS'
SHARES PAR VALUE WARRANTS CAPITAL DEFICIT STOCK EQUITY
--------- --------- -------- ---------- ------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 3,051,874 $ 31 $ 78 $6,063 $ (285) $ -- $ 5,887
Exercise of stock
options.............. 79,715 -- -- -- -- -- --
Net loss.............. -- -- -- -- (1,809) -- (1,809)
--------- ---- ------ ------ ------- ------- -------
Balance, December 31,
1994................... 3,131,589 31 78 6,063 (2,094) -- 4,078
Exercise of stock
options.............. 21,239 1 -- 5 -- -- 6
Purchase of treasury
stock................ (10,000) -- -- -- -- (32) (32)
Net income............ -- -- -- -- 6 -- 6
--------- ---- ------ ------ ------- ------- -------
Balance, December 31,
1995................... 3,142,828 32 78 6,068 (2,088) (32) 4,058
Issuance of common
stock purchase war-
rants................ -- -- 1,613 (1,518) -- -- 95
Exercise of common
stock purchase war-
rants................ 1,044,425 10 -- 4,728 -- -- 4,738
Exercise of stock
options.............. 29,657 -- -- 11 -- -- 11
Purchase of treasury
stock................ (297,610) -- -- -- -- (1,095) (1,095)
Net income............ -- -- -- -- 1,300 -- 1,300
--------- ---- ------ ------ ------- ------- -------
Balance, December 31,
1996................... 3,919,300 $ 42 $1,691 $9,289 $ (788) $(1,127) $ 9,107
========= ==== ====== ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 11)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 1,300 $ 6 $ (1,809)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Income recognized under James River Corporation
Agreements.................................... (1,550) -- --
Compensation expense relating to issuance of
common stock purchase warrants................ 95 -- --
Billable costs under Printpack Agreements...... -- (1,308) --
Depreciation and amortization.................. 569 501 405
Deferred income taxes.......................... -- -- (233)
Changes in assets and liabilities:
Accounts receivable........................... (2) 43 (347)
Inventories................................... (175) (388) (466)
Prepaid expenses and other.................... (107) 7 (23)
Accounts payable.............................. (1,564) 935 255
Accrued expenses.............................. 13 (20) 65
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. (1,421) (224) (2,153)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (398) (327) (700)
(Increase) decrease in investment in marketable
securities..................................... (1,240) 1,133 1,770
(Increase) decrease in other assets............. (94) (73) 63
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. (1,732) 733 1,133
-------- -------- --------
Cash flows from financing activities:
Net proceeds (repayments) under demand note
payable to a bank.............................. (1,319) 130 1,119
Borrowings (repayments) of long-term
obligations.................................... 1,294 (192) (192)
Proceeds from exercise of common stock purchase
warrants, net of expenses...................... 4,738 -- --
Proceeds from exercise of common stock options.. 11 6 --
Purchase of treasury stock...................... (999) (32) --
-------- -------- --------
Net cash provided by (used in) financing ac-
tivities.................................... 3,725 (88) 927
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 572 421 (93)
Cash and cash equivalents, beginning of year..... 598 177 270
-------- -------- --------
Cash and cash equivalents, end of year........... $ 1,170 $ 598 $ 177
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Advanced Deposition Technologies, Inc. (the "Company") is engaged in the
business of manufacturing metalized films primarily for the electronics and
food packaging industries.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, including those described below.
(a) Estimates and Assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures 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.
(b) Principles 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.
(c) Cash and Cash Equivalents
The Company considers all investments purchased with original maturities of
less than three months to be cash equivalents.
Cash and cash equivalents consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Cash........................................................... $ 218 $ 98
Cash equivalents............................................... 952 --
------- ----
$ 1,170 $ 98
======= ====
</TABLE>
(d) Restricted Cash
At December 31, 1995, the Company had pledged $500,000 of cash as collateral
against its revolving line of credit (see Note 3).
(e) Investment in Marketable Securities
Effective in 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which requires that debt and marketable equity securities
be classified as trading, available-for-sale or held-to-maturity. Available-
for-sale securities are reported in the balance sheet at fair value with
unrealized gains or losses included in a separate component of stockholders'
equity. Realized gains and losses are recognized in the results of operations.
As of December 31, 1996 and 1995, investments in marketable securities,
which are classified as available-for-sale and recorded at fair value which
approximates cost, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Obligations of the United States Government..................... $1,143 $--
Corporate obligations........................................... 97 --
------ ----
$1,240 $--
====== ====
</TABLE>
F-8
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the Company's investments in debt securities mature within one year.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Raw materials................................................. $1,283 $1,234
Work in process and finished goods............................ 751 525
------ ------
2,034 1,759
Less: Reserve for obsolescence 367 267
------ ------
Total....................................................... $1,667 $1,492
====== ======
</TABLE>
Work in process and finished goods include materials, labor and
manufacturing overhead.
(g) Property and Equipment
Property and equipment is stated at cost. The Company provides for
depreciation and amortization by charges to operations over the estimated
useful lives of property and equipment using the straight-line and units-of-
production methods as follows:
<TABLE>
<CAPTION>
ESTIMATED
CLASSIFICATION USEFUL LIFE
-------------- --------------
<S> <C>
Machinery and equipment....................................... 15 years
Furniture and fixtures........................................ 5 years
Equipment under capital leases................................ Terms of lease
Leasehold improvements........................................ Terms of lease
</TABLE>
(h) Licenses, Patents and Trademarks
During 1996, the Company acquired several licenses which allow the Company
to manufacture and market products under certain patents (see Note 6). The
Company capitalizes the costs of obtaining patents and trademarks and is
amortizing such costs over a five-year period. As described in Note 6, certain
license agreements are being amortized over 14 years, the remaining life of
the patents which underly such licenses. Licenses, patent and trademark costs,
net of accumulated amortization of $179 and $163, are included in other assets
in the accompanying consolidated balance sheets at December 31, 1996 and 1995,
respectively.
(i) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the liability method specified by SFAS
No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted rates assumed to be in effect when
these differences reverse.
(j) Postretirement Benefits
The Company does not have any obligations for postretirement benefits under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," as it does not currently offer such benefits.
F-9
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(k) Revenue Recognition
The Company recognizes revenues on its product sales upon shipment and on
royalties and license fees as earned. Revenues were recognized for cost
recovery billings under the Printpack Agreements in 1995 when Printpack agreed
in principle to compensate the Company for these billings (Note 5).
(l) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
(m) Income (Loss) Per Common Share
Income (loss) per common share has been determined by dividing net income
(loss) by the weighted average common shares outstanding during the year.
Common stock equivalents have been calculated in accordance with the
treasury stock method and are included for all periods where their effect is
dilutive.
(n) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include marketable securities, accounts receivable, accounts payable, and
notes payable approximates their carrying value.
(o) New Accounting Pronouncements
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include property and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company assesses the recoverability
of long-lived assets by determining the estimated future undiscounted cash
flows from the related assets. The effect of the implementation of SFAS No.
121 was not material to the Company's 1996 financial statements.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 allows the Company to account for its
stock-based compensation plans based upon either a fair value method or the
intrinsic value method previously followed by the Company. The Company has
retained the intrinsic value method of accounting for stock-based compensation
plans, and therefore, the adoption of SFAS No. 123 had no impact on the
Company's financial position or results of operations. As required by SFAS No.
123, the Company has disclosed the effects of applying the fair value method
on net income and earnings per share on a pro forma basis (see Note 7).
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
issued by the Financial Accounting Standards Board is effective for financial
statements for fiscal years ending after December 15, 1997. The new standard
establishes standards for computing and presenting earnings per share. The
Company does not expect the adoption of this standard to have a material
effect on its financial statements.
The effect of adopting Statement of Financial Accounting Standards No. 128
("FAS No. 128") has not been estimated. The Company is required to adopt the
disclosure requirements of FAS No. 128 during the year ended December 31,
1997.
3. REVOLVING LINE OF CREDIT AND LONG TERM OBLIGATIONS
The Company's previous revolving line of credit facility (the "Previous Line
of Credit") expired on December 31, 1995. Under the terms of the Previous Line
of Credit agreement, the Company's previous term
F-10
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
note (the "Previous Term Note") with the same bank also became due. The bank
had agreed to allow the Company until June 30, 1996 to repay its indebtedness
to the bank. The balances outstanding on December 31, 1995 on the Previous
Line of Credit and Previous Term Note were $1,499,000 and $1,062,500,
respectively, and were classified as current liabilities in the accompanying
consolidated balance sheet. The Company had $500,000 of cash pledged as
collateral against the Previous Line of Credit. The Company had been seeking
new debt and equity financing to provide sufficient funds to repay all amounts
due to the bank and to Printpack (see Note 5).
On July 8, 1996, the Company entered into a new financing agreement (the
"New Financing Agreement") which includes a line of credit (the "New Line of
Credit") and a term note (the "New Term Note").
The New Line of Credit allows the Company to borrow up to the lesser of
$3,000,000 or the borrowing base as defined in the New Financing Agreement and
bears interest at a rate of .75% above the lender's prime lending rate (9.0%
at December 31, 1996). As of December 31, 1996, borrowings under the New Line
of Credit were approximately $180,000.
The Company borrowed $2,600,000 under the New Term Note which bears interest
at a rate of 1% above the lender's prime lending rate (9.25% at December 31,
1996). The New Term Note is payable in thirty-five monthly principal payments
of $43,333 plus interest with the final principal payment of $1,083,333 due on
the maturity date. As of December 31, 1996, the balance due on the New Term
Note was $2,365,333.
The New Financing Arrangement includes certain financial covenants which
must be maintained by the Company. Such financial covenants include a minimum
tangible net worth, a maximum debt to equity ratio, and a minimum level of
working capital. As of December 31, 1996, the Company is in default of the
minimum tangible net worth covenant. The Company has received written
notificiation from the lender which waives the event of default through
January 1, 1998.
The New Line of Credit and the New Term Loan are secured by all of the
Company's assets and mature on July 8, 1999.
The Company has also leased certain equipment under a capital lease. As of
December 31, 1996, the Company's outstanding obligation under the lease is
$15,349, of which $6,508 is classified as current.
4. COMMITMENTS
The Company leases its facilities, vehicles and other equipment under
operating leases that expire through March 2004. The Company has an option to
purchase the land and facility at fair market value should the lessor offer
the facility for sale. Future minimum lease payments as of December 31, 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1997.................................................................. $ 223
1998.................................................................. 217
1999.................................................................. 214
2000.................................................................. 207
2001.................................................................. 207
Thereafter............................................................ 465
------
Total............................................................... $1,533
======
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations is approximately $237, $231 and $168 for 1996, 1995 and 1994,
respectively.
F-11
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. AGREEMENTS WITH PRINTPACK ENTERPRISES, INC.
In September 1992, the Company entered into three agreements (collectively
"the Agreements") with Printpack Enterprises, Inc. ("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.
The Purchase and Tolling Agreement also set forth specified minimum purchase
requirements and pricing terms for product sales. Under the Equipment Lease
Agreement, Printpack leased a vacuum metalizer to the Company. The Company
accounted for this lease as a capital lease. Printpack did not meet the
specified minimum purchase requirements called for under the Agreements, and
as a result, in 1995, the Company billed Printpack $1,308,000 for overhead and
other costs incurred to support the specified minimum purchases from Printpack
called for under the Agreements. In 1995, the Company and Printpack agreed in
principle to terminate the Agreements. On March 25, 1996, the Company and
Printpack entered into a written agreement setting forth the terms of the
termination of the Agreements. The new agreement called for Printpack to
relinquish its exclusive purchase rights to certain of the Company's patented
products for microwave applications; to transfer to the Company, title to the
new metalizer it had been leasing to the Company; and to return to the Company
297,610 shares of the Company's common stock it had purchased as part of the
Agreements. The Company paid to Printpack $1,000,000; granted 200,000 options
to Printpack to purchase the Company's stock at $4.00 per share; and agreed
not to pursue any claims the Company may have had pursuant to the terms of the
Agreement, including the $1,308,000 of cost recovery billings for overhead and
other expenses incurred by the Company to support the specified minimum
purchases requirements from Printpack called for under the Agreements. As a
result of the Agreements, the Company removed the amount due from Printpack of
$1,321,000 and the amount due to Printpack of $1,225,000 from its balance
sheet. In addition, the Company recorded the approximate market value of the
297,610 shares acquired and 200,000 options issued of $1,095,000 as a
reduction of the Company's stockholders' equity. The Company did not recognize
any gain or loss in its statement of operations as a result of these
Agreements.
6. AGREEMENT WITH JAMES RIVER CORPORATION
During 1996, the Company was notified by James River that the Company's Fuse
Susceptor patents, used in the development of microwave food packaging
products, were potentially infringing upon James River's Seiferth patents. So
as to avoid potential patent infringement litigation, the Company entered into
a Patent Assignment, Licensing and Supply Agreement (the "James River
Agreement") with James River during 1996. Under the James River Agreement, the
Company assigned its rights under certain patents related to microwave
products (the "Assigned Patents") to James River. In return, James River (1)
paid $1,200,000 in cash to the Company, (2) granted to the Company licenses to
utilize 27 patents, and (3) entered into a supply agreement whereby James
River agreed to purchase specified minimum quantities of metalized film from
the Company, subject to certain quality standards and other conditions, for a
period of five years. Pursuant to the patent assignment, James River will
remit to the Company a portion of the royalties it collects from licensees who
produce products covered under the assigned Patents. The Company will pay a
royalty for its sales of products covered under patents included in the James
River Agreement, except for products covered under the Assigned Patents. The
James River Agreement also grants to the Company the exclusive right to sell
home use products covered under the Assigned Patents. The Company relied on an
independent appraiser of intellectual properties to determine the financial
value of the licenses granted to it under the James River Agreement. The
licenses were valued at $1,550,000 and are being amortized over 14 years, the
remaining life of the underlying patents.
F-12
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan (the "Plan") under which employees,
including Directors who are employees, may be granted options to purchase
shares of the Company's common stock at not less than fair market value on the
date of the grant, as determined by the Board of Directors. The Plan also
allows for the issuance of nonqualified stock options to employees and
nonemployees at prices that are less than fair market value. Options granted
under the Plan are exercisable for up to a 10-year period from the date of
grant. During 1996, the Company increased the number of shares reserved for
issuance under the Plan from 300,000 to 800,000.
The Company accounts for its stock-based compensation plans using the
intrinsic value method. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock options been determined based on
the fair value method, using an option pricing model, in accordance with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net income (loss) (in thousands):
As reported................................................. $1,300 $ 6
Pro forma................................................... 1,276 (33)
Income per common share:
As reported................................................. $ 0.37 $ 0.00
Pro forma................................................... 0.36 (0.01)
</TABLE>
The Company's weighted-average assumptions used in the pricing model and
resulting fair values were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Risk free rate............................................... 6.44% 6.34%
Expected dividend yield...................................... -- --
Expected option life (in years).............................. 7.00 7.86
Expected stock price volatility.............................. 35.00% 35.00%
Grant date value............................................. $ 2.52 $ 1.25
</TABLE>
F-13
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock options activity of the Company, including activity under the Plan,
for the years ended December 31, 1994, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE
NUMBER OF PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at December
31, 1993................. 273,217 $ 0.27--5.00 $1.66
Granted................. 141,500 3.50--5.44 3.65
Exercised............... (90,000) 0.80 0.80
Canceled................ (37,000) 3.00--5.00 3.65
------- ------------- -----
Outstanding at December
31, 1994................. 287,717 0.27--5.44 2.16
Granted................. 68,000 2.00--2.75 2.40
Exercised............... (21,239) 0.27--0.53 0.30
Canceled................ (54,300) 2.00--4.07 3.82
------- ------------- -----
Outstanding at December
31, 1995................. 280,178 0.27--5.44 2.04
Granted................. 10,000 4.47 4.47
Exercised............... (31,230) 0.53 0.53
Canceled................ (6,400) 0.53--2.75 1.02
------- ------------- -----
Outstanding at December
31, 1996................. 252,548 $ 0.27--5.44 $2.35
======= ============= =====
<CAPTION>
EXERCISABLE
OPTIONS EXERCISABLE NUMBER OF PRICE RANGE WEIGHTED
AT YEAR-END SHARES PER SHARE AVERAGE PRICE
------------------- --------- ------------- ----------------
<S> <C> <C> <C>
1994.................... 133,619 $0.27 - $5.44 $2.05
1995.................... 150,778 $0.27 - $5.44 $1.88
1996.................... 178,448 $0.27 - $5.44 $2.25
======= ============= =====
</TABLE>
As of December 31, 1996, 1995 and 1994, the Company had 547,452; 19,822; and
12,286 shares available for future grants of options under the Plan.
All options, granted under the Plan during 1996 and 1995, were granted with
exercise prices equal to the fair market vlaue of the Company's common stock
on the date of the grant.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<S> <C> <C> <C>
Range of Exercise Prices: $0.27 $2.08 $4.07
to to to
$2.00 $2.88 $5.44
------- ------ ------
Outstanding options:
Number outstanding at December 31, 1996........... 169,748 56,300 26,500
Weighted average remaining contractual life
(years)........................................... 6.5 6.3 4.2
Weighted average exercise price.................... $1.96 $2.46 $4.30
Exercisable options:
Number outstanding at December 31, 1996........... 129,748 29,700 19,000
Weighted average remaining contractual life
(years)........................................... 6.4 5.0 3.2
Weighted average exercise price.................... $1.95 $2.27 $4.23
======= ====== ======
</TABLE>
On October 31, 1994, the President of the Company exercised options to
purchase 90,000 shares of common stock by tendering 10,285 previously
purchased shares of common stock to the Company. The 10,285 shares were
retired by the Company.
F-14
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, an employee of the Company exercised options to purchase 10,149
shares of common stock by tendering 1,573 previously purchased shares of
common stock to the Company. The 1,573 shares were then retired by the
Company.
As of December 31, 1995 the Company had 1,150,000 redeemable common stock
purchase warrants (The "IPO Warrants") outstanding. Two IPO Warrants entitled
the holder to purchase one share of common stock at $7.00 per share. In 1995,
the exercise price of the IPO Warrants was reduced to $5.00 per share. In May
1996, the Company commenced a special exercise period during which each IPO
Warrant entitled the holder to purchase one share of common stock and to
receive one additional warrant (The "Class B Warrants") at no additional cost.
The Company received approximately $4,738,000 in net proceeds during the
special exercise period which ended in July 1996. As of December 31, 1996 the
Company had 132,084 IPO Warrants outstanding. Each IPO Warrant is exercisable
at $5.00 per share and expires on March 8, 1997. Also as of December 31, 1996,
the Company had 1,044,425 Class B Warrants outstanding. Each Class B Warrant
entitles the holder to one share of common stock at $5.00 per share and
expires on May 12, 1998.
During 1996, the Company entered into a consulting agreement with an
unrelated party. As part of the compensation paid, the Company issued 66,670
common stock purchase warrants. Each warrant allows the holder to acquire one
share of common stock at $3.375 per share and is exercisable through March,
1998. The value of these warrants of approximately $95,000 is included within
the accompanying consolidated statement of operations and consolidated
statement of stockholders' equity for the year ended December 31, 1996.
8. BENEFIT FROM INCOME TAXES
The benefit from income taxes for the years ended December 31, 1996, 1995
and 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Deferred tax benefit:
Federal...................................................... $ -- $ -- $139
State........................................................ -- -- 94
----- ----- ----
$ -- $ -- $233
===== ===== ====
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward which gives rise to the Company's deferred tax (liability) asset
as of December 31, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED (LIABILITY) ASSET
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Depreciation................................. $ (1,216) $ (1,053)
Net operating loss and tax credit
carryforwards............................... 1,181 1,437
Inventory and other reserves................. 173 159
Other........................................ 55 46
Valuation reserve............................ (193) (589)
------------- -------------
$ -- $ --
============= =============
</TABLE>
At December 31, 1996, the Company had Federal and state income tax
carryforwards for income tax purposes of $2,714,000 and $1,087,000,
respectively. The Company also has tax credit carryforwards of $155,000,
expiring at various dates through 2010. The Tax Reform Act of 1986 contains
provisions that limit the net operating loss carryforwards available to be
used in any given year in the event of certain changes in ownership.
F-15
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between income taxes provided at the Company's effective tax
rate and the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate................. $ 442 $ 2 $(694)
Change in valuation reserve............................. (396) -- --
Other................................................... (46) -- --
Utilization of net operating losses..................... -- (2) --
Losses without tax benefit.............................. -- -- 461
----- ---- -----
$ -- $-- $ 233
===== ==== =====
</TABLE>
9. TECHNOLOGY LICENSE AGREEMENT WITH A RELATED PARTY
The Company has licensed the design specifications and operational
technology of certain machinery to a stockholder for the purpose of
manufacturing and selling the machinery to authorized purchasers, as defined.
The agreement has automatic one-year renewal periods until terminated by
either party. There were no recognized revenues under this agreement in 1996,
1995 or 1994.
10. CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," requires disclosure
of any significant off-balance-sheet and credit risk concentrations. Although
collateral is not required, the Company periodically reviews its accounts and
provides estimated reserves for potential credit losses.
(a) Significant Customers
Product sales to significant customers for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PRODUCT
SALES
---------------------------
CUSTOMER 1996 1995 1994
-------- ------- ------- -------
<S> <C> <C> <C>
A.............................................. 15% 7% 16%
B.............................................. 13 4 14
C.............................................. 6 11 8
Printpack...................................... 1 19 17
</TABLE>
(b) Export Sales
Export sales as a percentage of revenues were made to the following
geographic regions in 1996, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
REGION 1996 1995 1994
------ ---- ---- ----
<S> <C> <C> <C>
Europe...................................................... 5% 11% -- %
Central America............................................. 5 4 6
Far East.................................................... 2 4 --
South America............................................... 1 3 8
Australia................................................... 1 -- --
</TABLE>
F-16
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Interest.................................................... $ 243 $ 255 $172
Income taxes................................................ $ -- $ -- $ 10
</TABLE>
The accompanying consolidated financial statements include the following
noncash investing and financing activities (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Termination of agreements with Printpack Enterprises,
Inc.:
Amounts receivable from Printpack................... $ 1,321 $ -- $ --
Amounts due Printpack............................... (1,225) -- --
Acquisition of treasury stock....................... (96) -- --
======= ===== =====
Product credits and account receivable applied against
capital lease obligations............................ $ -- $ 247 $ --
======= ===== =====
Licenses acquired in connection with agreement with
James River Corporation.............................. $(1,550) $ -- $ --
======= ===== =====
Value of warrants issued in connection with consulting
agreement............................................ $ 95 $ -- $ --
======= ===== =====
</TABLE>
12. VALUATION ACCOUNTS
The following table sets forth the activity in the Company's valuation
accounts for the years 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGES
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31,
1994:
Allowances for doubtful ac-
counts...................... $ 3 $ 97 $ -- $100
Reserve for inventory excess
and obsolescence............ 127 176 -- 303
For the year ended December 31,
1995:
Allowances for doubtful
accounts.................... 100 83 (46) 137
Reserve for inventory excess
and obsolescence............ 303 -- (36) 267
For the year ended December 31,
1996:
Allowances for doubtful
accounts.................... 137 -- (1) 136
Reserve for inventory excess
and obsolescence............ 267 100 -- 367
</TABLE>
F-17
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 QUARTER ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31(1)
-------- ------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues...................... $2,314 $2,634 $2,528 $3,047
Cost of revenues.............. 2,112 1,741 1,706 1,828
Gross profit.................. 202 893 822 1,219
Selling, general and
administrative expense....... 314 272 357 435
Research and development
expense...................... 21 30 47 105
------ ------ ------ ------
Operating income (loss)....... (133) 591 418 679
------ ------ ------ ------
Interest and other expense,
net.......................... 61 54 65 75
------ ------ ------ ------
Net income (loss)............. $ (194) $ 537 $ 353 $ 604
====== ====== ====== ======
Net income (loss) per share... $ (.06) $ .16 $ .09 $ .18
====== ====== ====== ======
</TABLE>
- --------
(1) During the fourth quarter of 1996, the Company recorded an adjustment of
$1,550 which represents the carrying amounts of the assets acquired in the
James River Corporation transaction resulting from the appraisal discussed
in Note 6.
F-18
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 10-KSB of our report dated March 26, 1996 (except with respect to the
matters discussed in Note 3, as to which the date is July 8, 1996). It should
be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1995 or performed any audit procedures subsequent
to the date of our report.
Arthur Andersen LLP
Boston, Massachusetts
April 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,170
<SECURITIES> 1,240
<RECEIVABLES> 1,589
<ALLOWANCES> 136
<INVENTORY> 1,667
<CURRENT-ASSETS> 5,653
<PP&E> 7,870
<DEPRECIATION> 2,681
<TOTAL-ASSETS> 12,582
<CURRENT-LIABILITIES> 1,621
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 10,192
<TOTAL-LIABILITY-AND-EQUITY> 12,582
<SALES> 7,773
<TOTAL-REVENUES> 10,523
<CGS> 7,387
<TOTAL-COSTS> 7,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266
<INCOME-PRETAX> 1,300
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,300
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
