<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-12230
ADVANCED DEPOSITION TECHNOLOGIES, INC.
(Exact name of Small Business Issuer as Specified in its Charter)
DELAWARE 04-2865714
(STATE OF ORGANIZATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
580 MYLES STANDISH INDUSTRIAL PARK, TAUNTON, MASSACHUSETTS 02780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(508) 823-0707
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark wether the issuers (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO
As of July 31, 1998, there were 4,268,950 shares of Common Stock, $0.01 par
value, of the issuer outstanding.
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets (unaudited): 1-2
June 30, 1998 and December 31, 1997
Condensed and Consolidated Statements of Operations 3
(unaudited): for the Three Months and Six Months
ended June 30, 1998 and June 30, 1997
Condensed and Consolidated Statements of Cash Flows 4
(unaudited): for the Six Months ended June 30, 1998
and June 30, 1997
Notes to Condensed and Consolidated Financial 5-7
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15-16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 525 $ 919
Investment in marketable securities 89 155
Accounts receivable, net of reserve for doubtful
accounts of $296 and $380 at June 30, 1998 and
December 31, 1997, respectively 7,089 7,084
Inventories 3,628 3,347
Prepaid expenses and other current assets 95 69
-------- -------
Total current assets 11,426 11,574
PROPERTY AND EQUIPMENT, net 6,682 6,331
OTHER ASSETS, net 5,660 6,038
-------- -------
Total assets $23,768 $23,943
======== =======
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1997, has been
derived from the audited financial statements of the Company at that date.
See Notes to Condensed and Consolidated Financial Statements
1
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Due to financing institutions $ 3,264 $ 3,709
Accounts payable 3,950 4,092
Accrued liabilities 598 543
Current maturities of long-term debt 376 525
Bridge financing -- 1,000
------- -------
Total current liabilities 8,188 9,869
LONG-TERM OBLIGATIONS
Revolving line of credit 503 974
Long-term obligations, net of current maturities 4,372 2,324
------- -------
Total liabilities 13,063 13,169
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 901 795
------- -------
STOCKHOLDERS' EQUITY;
Preferred stock, $0.01 par value
1,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value,
10,000,000 shares authorized, 4,286,560 shares issued,
4,268,950 and 4,262,950 shares outstanding at
June 30, 1998 and December 31, 1997, respectively 43 43
Common stock purchase warrants 1,671 1,594
Additional paid-in capital 9,515 9,581
Retained deficit (1,388) (1,153)
Foreign currency translation adjustment 28 (19)
------- -------
9,869 10,046
Less treasury stock, 17,610 shares at cost (65) (65)
------- -------
Total stockholders' equity 9,804 9,981
------- -------
Total liabilities and stockholders' equity $23,768 $23,943
======= =======
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1997, has been
derived from the audited financial statements of the Company at that date.
See Notes to Condensed and Consolidated Financial Statements
2
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 5,985 $ 3,146 $ 11,939 $ 6,272
Royalties, license fees and other -- 400 -- 400
--------- --------- --------- ---------
5,985 3,546 11,939 6,672
COST OF REVENUES 4,725 2,605 9,513 4,909
--------- --------- --------- ---------
Gross Profit 1,260 941 2,426 1,763
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 789 442 1,763 827
RESEARCH AND DEVELOPMENT EXPENSES 56 141 135 283
AMORTIZATION EXPENSE 70 18 142 37
--------- --------- --------- ---------
Operating income 345 340 386 616
INTEREST EXPENSE, NET OF
INTEREST INCOME 179 41 358 73
OTHER EXPENSE 49 12 103 26
--------- --------- --------- ---------
Income (loss) before income taxes and minority 117 287 (75) 517
interest
INCOME TAXES 54 -- 54 --
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY 106 -- 106 --
--------- --------- --------- ---------
Net income (loss) $ (43) $ 287 $ (235) $ 517
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE $(0.01) $0.07 $(0.06) $0.13
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,268,919 4,074,873 4,268,853 4,102,174
========= ========= ========= =========
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
3
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1998 1997
---- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 126 $ (151)
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (805) (311)
Decrease in investment in marketable securities 66 292
Decrease (increase) in other assets 230 (44)
----- ------
Net cash used in investing activities (509) (63)
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving line of credit 694 24
Net repayments to financial institutions (445) --
Repayment of long term obligations (260) (264)
Proceeds from redemption of common stock purchase warrants -- 184
----- ------
Net cash used in financing activities (11) (56)
----- ------
NET DECREASE IN CASH (394) (270)
CASH AND CASH EQUIVALENTS, beginning of period 919 1,170
----- ------
CASH AND CASH EQUIVALENTS, end of period $ 525 $ 900
===== ======
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
4
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
1.) GENERAL
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and with the instructions to Form 10-QSB and
Item 310 (b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Reference should be made to the financial
statements and related notes included in the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1997, which was filed with the Securities
and Exchange Commission on April 6, 1998.
In the opinion of the management of the Company, the accompanying financial
statements reflect all adjustments that were of a normal recurring nature
necessary for a fair presentation of the Company's results of operations and
changes in financial position for the three and six month periods ended June 30,
1998 and June 30, 1997. Operating results for the three and six month periods
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
2.) SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed and consolidated financial statements reflect
the application of certain significant accounting policies, including those
described below.
a. Principals of consolidation
The accompanying condensed and consolidated financial statements include
the Company and its majority owned and wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
b. Revenue recognition
The Company recognizes revenues on its product sales upon shipment and
royalties and license fees as earned.
c. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Raw materials $1,476 $1,812
Work in process and finished goods 2,530 1,913
------ ------
4,006 3,725
Less: Reserves for obsolescence 378 378
------ ------
Total $3,628 $3,347
====== ======
</TABLE>
5
<PAGE>
d. Net Income (Loss) per Common Share
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"). The new
accounting standard established standards for computing and presenting earnings
per share. The Company has restated 1997 income per share to conform to the new
standards.
e. Reclassifications
Certain balances in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
f. Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income", ("SFAS 130"),
which requires that all components of comprehensive and total comprehensive
income income be reported on one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
stockholders equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity except those due to investment by owners
(changes in paid in capital) and distributions to owners (dividends). For
interim reporting purposes, SFAS 130 requires disclosure of total comprehensive
income.
<TABLE>
<CAPTION>
For the three months ended For the six months
June 30, ended June 30,
1998 1997 1998 1997
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ (43) $ 287 $(235) $ 517
Foreign currency translation adjustment 59 -- 28 --
----- ----- ----- -----
Total comprehensive income $ 16 $ 287 $(207) $ 517
===== ===== ====== ======
</TABLE>
g. Industry and geographic segments
The Company's operations are classified into two business segments: food
packaging applications and electronic capacitor operations.
The following table shows sales, operating income (loss) and other
financial information by industry segment as of and for the six months ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Adjustments
Food Capacitor and
Packaging Applications Corporate Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
June 30, 1998
Sales $ 2,024 $10,742 $ -- $(827) $11,939
------- ------- ------ ----- -------
Operating income (loss) $ (225) $ 268 $ (50) $ (68) $ (75)
======= ======= ====== ===== =======
Capital expenditures $ 180 $ 600 $ 25 $ -- $ 805
Depreciation and amortization 135 319 -- 68 522
Identifiable assets at
June 30, 1998 $ 3,390 $16,963 $3,415 $ -- $23,768
======= ======= ====== ===== =======
June 30, 1997
Sales $ 4,054 $ 2,618 $ -- $ -- $ 6,672
------- ------- ------ ----- -------
Operating income (loss) $ 436 $ 305 $ (125) $ -- $ 616
======= ======= ====== ===== =======
Capital expenditures $ 50 $ 261 $ -- $ -- $ 311
Depreciation and amortization 90 195 -- -- 285
Identifiable assets at
June 30, 1997 $ 3,200 $ 8,131 $1,848 $ -- $13,179
======= ======= ====== ===== =======
</TABLE>
The Company operates in the United States and Spain in 1998 and in the
United States only for the six months ended June 30, 1997. Geographic
information for following table shows sales, operating income (loss) and other
financial information by industry segment as of and for the six months ended
June 30, 1998.
<TABLE>
<CAPTION>
Adjustments
United and
States Spain Corporate Eliminations Total
<S> <C> <C> <C> <C> <C>
Sales $ 4,906 $ 7,860 $ -- $(827) $11,939
------- ------- ------ ----- -------
Operating income (loss) $ (359) $ 402 $ (50) $ (68) $ (75)
======= ======= ====== ===== =======
Capital expenditures $ 450 $ 355 $ -- $ -- $ 805
Depreciation and amortization 324 130 -- 68 522
Identifiable assets at
June 30, 1998 $11,351 $ 9,616 $3,415 $(614) $23,768
======= ======= ====== ===== =======
</TABLE>
Total comprehensive income is as follows (in thousands):
3.) 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>
June 30, December 31,
1998 1997
-------- -------------
<S> <C> <C>
Cash $ 525 $919
----- ----
Total $ 525 $919
===== ====
</TABLE>
4.) INVESTMENT IN MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Investments", ("SFAS
115"), effective January 1, 1994. As of
6
<PAGE>
June 30, 1998 and December 31, 1997, investments in marketable securities that
are classified as available-for-sale and were recorded at fair value (which
approximated cost), consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
<S> <C> <C>
Equity instruments $ 89 $ 155
---- -----
Total $ 89 $ 155
==== =====
</TABLE>
5.) COMMON STOCK PURCHASE WARRANTS
The Company's Redeemable Common Stock Purchase Warrants (the "IPO
Warrants") expired on March 8, 1997. Approximately 78,000 IPO Warrants were
exercised during the first quarter of 1997, resulting in net proceeds to the
Company of approximately $183,000.
In May 1998, the Company reduced the conversion price of the Class B
Common Stock Redeemable Warrants (the " B Warrants") from $5.00 per share to
$3.75 per share. In addition, the Company extended the expiration date of the B
Warrants from May 12, 1998 to July 31, 1998 and increased the number of warrants
required to purchase one share of Common Stock from one B Warrant to two B
Warrants. The B Warrants expired on July 31, 1998.
6.) ACQUISITION
In December 1997, the Company acquired 65% of the outstanding common stock
of Alexander Boxall, S.A. ("ABSA"), located in Madrid, Spain for $2,884,688 in
cash, a secured note of $990,000 and 280,000 shares of the Company's common
stock having a fair value of $1,034,000. The acquisition was recorded under the
purchase method whereby the net assets acquired were recorded at their fair
market values and the excess of cost over the fair value of the net assets
acquired of approximately $3,415,000 was allocated to goodwill and is being
amortized over 25 years.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Advanced Deposition Technologies, Inc. (the "Company" or "A. D. TECH"), is
a technology leader in developing and manufacturing high-resolution, patterned,
vacuum-metallized coatings for a variety of energy management applications for
use in industrial, commercial and consumer products. Included among these are
product offerings for electronic capacitors, microwave and standard food
packaging, security holograms, retroreflective films, barrier packaging,
electronic article surveillance (EAS), and electric static discharge (ESD). In
December, 1997, the Company acquired 65% of the common stock of Alexander
Boxall, S.A. of Madrid, Spain ("ABSA"), a manufacturer of electronic capacitors
used for lighting and motor run applications. The Company's revenue to date has
been primarily from sales to the capacitor and microwave packaging markets.
RECENT DEVELOPMENTS
- -------------------
As a result of the operating losses experienced during the first quarter
due to the sharply reduced demand for BROWN & CRISP bags, the Company instituted
a cost containment and reduction program which resulted in salary reductions,
layoffs, organizational restructuring and formal cost cutting programs. The
results of these initiatives, in addition to improved performance of ABSA
resulted in an improvement in the Company's quarterly results. It is expected
that as production levels increase, the Company will be better positioned to
generate consistent profits. Although the Company has taken orders for BROWN &
CRISP bags, it does not expect that that 1998 sales of BROWN & CRISP bags will
match the amount sold in 1997.
On July 27, 1998, the Company closed on its debt restructuring with its
bank. Under the new financing arrangement, the Company's existing Bridge Loan
and a portion of the balance on it revolving line of credit will be repaid over
3 years.
The Company continues its progress towards consummating its acquisition of
the majority of the common stock of Kidamai SDN of Malaysia ("Kidamai"), a
capacitor assembly company with 1997 sales of less than $1,000,000. The Company
has discovered some financing possibilities not initially contemplated which
could enhance the value of the acquisition but which has also extended the
closing date. The agreement to purchase remains in tact, and all parties remain
committed to consummating the deal as soon as possible.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Revenues increased to $5,985,000 for the three months ended
June 30, 1998, as compared to $3,546,000 for the three months ended June 30,
1997, an increase of 69%. The increase is due to the effect of the consolidation
of the sales of ABSA. Excluding the effect of the consolidation of ABSA, sales
for the three months ended June 30, 1998 decreased by 31% due to lower sales of
BROWN & CRISP bags and the non-recurrence of $400,000 in revenue related to a
technology licensing agreement. Product sales unrelated to BROWN & CRISP or the
ABSA acquisition increased by 20% due to higher unit shipments of metalized film
to the standard microwave food packaging market.
Cost of Revenues. Cost of revenues totaled $4,725,000 (78.9% of
product sales) for the three months ended June 30, 1998, compared to $2,605,000
(82.8% of product sales) for the three months ended June 30, 1997. The increase
in cost of revenues was primarily due to the effect of the consolidation of
8
<PAGE>
ABSA. Excluding the effect of the consolidation of ABSA, cost of revenues
decreased due to reduced sales of BROWN & CRISP bags, partially offset by higher
shipments of metalized film to the standard microwave food packaging market. The
decrease in cost of revenues as a percentage of product sales was the result of
the effect of the consolidation of higher margin ABSA products partially offset
by the reduction in shipments of BROWN & CRISP bags.
Gross Profit. Gross profit increased to $1,260,000 (21.1% of product sales)
for the three months ended June 30, 1998, compared to $941,000 (30.0% of product
sales) for the three months ended June 30, 1997. The increase in gross profit
was due to the effect of the consolidation of ABSA, partially offset by the non-
recurrence of technology licensing revenue and reduced shipments of BROWN&CRISP
bags. Gross profit as a percentage of product sales decreased due to the non-
recurrence of technology licensing revenue and lower sales of BROWN&CCRISP bags,
partially offset by the effect of the consolidation of relatively higher margin
ABSA products sales.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $789,000 for the three months ended June 30, 1998 (13.2%
of product sales) from approximately $442,000 (14.0% of product sales) for the
three months ended June 30, 1997. This increase was primarily due to the effect
of the consolidation of ABSA. Higher payroll expenses and professional fees also
contributed to the increase.
Research and Development. Research and development expenses decreased to
$56,000 for the three months ended June 30, 1998, from approximately $141,000
for the three months ended June 30, 1997, Research and development expenditures
were higher in 1997 due to the costs associated with developing High Energy
Density materials, among other reasons, which is now past the research stage.
Amortization. .Amortization expenses increased to $70,000 during the three
months ended June 30, 1998 compared to $18,000 for the three months ended June
30, 1997 due to the additional amortization of the goodwill recognized in the
ABSA purchase.
Operating Income. The Company generated operating income of $345,000 for
the three months ended June 30, 1998, compared to operating income of $340,000
for the three months ended June 30, 1997. The increase is primarily the result
of profits generated by ABSA, partially offset by the reduced sales of
BROWN&CRISP bags, the non-recurrence of technology licensing revenue and higher
overhead expenses.
Net Interest Expense. Net interest expense increased to $179,000 for
the three months ended June 30, 1998 compared to $41,000 for the three months
ended June 30, 1997. The increase is due to the effects of consolidating ABSA,
the cost of financing the ABSA purchase, and higher debt balances as a result of
operating losses and equipment purchases.
Other Expense. Other expense increased to $49,000 during the three
months ended June 30, 1998, compared to $12,000 for the three months ended June
30, 1997. Other expense includes, among other items, the amortization of costs
associated with the new financing arrangement entered into during 1997.
Income Taxes. Income taxes increased to $54,000 for the three months ended
June 30, 1998 compared to an insignificant amount for the three months ended
June 30, 1997. Income tax expense was attributable to the profits generated by
ABSA.
Minority Interest. Minority interest totaled $106,000 for the three months
ended June 30, 1998, resulting from the net income after taxes of ABSA
attributable to minority shareholders.
9
<PAGE>
Net Income (loss). The Company generated a net loss of $43,000 during the
three months ended June 30, 1998 as compared to net income of $287,000 for the
three months ended June 30, 1997 as a result of the factors discussed above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Net revenues increased to $11,939,000 for the six months
ended June 30, 1998, as compared to $6,672,000 for the six months ended June 30,
1997, a increase of 79%, due to the effect of the consolidation of the sales of
ABSA. Excluding the effect of the consolidation of ABSA, revenues decreased by
26% due to reduced demand for BROWN&CRISP bags and the non-recurrence of
technology licensing revenue. Product sales unrelated to BROWN&CRISP or the ABSA
acquisition increased by 26% due to higher unit shipments of metalized film to
the standard microwave food packaging market.
Cost of Revenues. Cost of revenues increased to $9,513,000 (79.7% of
product sales) for the six months ended June 30, 1998, compared to $4,909,000
(78.3% of product sales) for the six months ended June 30, 1997 primarily due to
the effect of the consolidation of ABSA. Excluding the effects of the
consolidation of ABSA, cost of revenues decreased due to lower demand for BROWN
& CRISP bags, partially offset by higher shipments of metalized film to the
standard microwave food packaging industry. Cost of revenues as a percentage of
product sales for the six months ended June 30, 1998 increased slightly compared
to the six months ended June 30, 1997 due to lower shipments of BROWN & CRISP
bags, partially offset by the effect of consolidating relatively higher margin
ABSA products.
Gross Profit. Gross profit increased to $2,426,000 (20.3% of product
sales) for the six months ended June 30, 1998, compared to $1,763,000 (28.1% of
product sales) for the six months ended June 30, 1997. The increase in gross
profit resulted from the effect of the consolidation of ABSA, partially offset
by the reduced shipments of BROWN&CRISP bags and the non-recurrence of
technology licensing revenue. Gross profit as a percentage of product sales
decreased due to the non-recurrence of technology licensing revenue and reduced
shipments demand for higher margin BROWN&CRISP bags, partially offset by the
consolidation of relatively higher margin shipments of ABSA products
Selling, General and Administrative. Selling, general and
administrative expenses increased to $1,763,000 for the six months ended June
30, 1998 (14.7% of product sales) from approximately $827,000 for the six months
ended June 30, 1997 (13.2% of product sales). This increase was primarily due to
the consolidation of ABSA combined with higher payroll expenses and professional
fees.
Research and Development. Research and development expenses decreased
to $135,000 for the six months ended June 30, 1998, from approximately $283,000
for the six months ended June 30, 1997. Research and development expenditures
were higher in 1997 due to the costs associated with developing High Energy
Density materials, among other reasons, which is now past the research stage.
Amortization. .Amortization expense increased to $142,000 during the
six months ended June 30, 1998 compared to $37,000 for the six months ended June
30, 1997 due to the amortization of the goodwill recognized in the ABSA
purchase.
Operating Income. The Company generated operating income of $386,000 for
the six months ended June 30, 1998, compared to operating income of $616,000 for
the six months ended June 30, 1997. The decrease resulted from reduced demand
for BROWN&CRISP bags, the non-recurrence of technology licensing revenue and
higher overhead expenses, partially offset by the effect of consolidating the
operating profits generated by ABSA.
10
<PAGE>
Net Interest Expense. Net interest expense increased to $358,000 for
the six months ended June 30, 1998, compared to $73,000 for the six months ended
June 30, 1997. The increase is due to the effects of consolidating ABSA, the
cost of financing the ABSA purchase, and higher debt balances as a result of
operating losses and equipment purchases.
Other Expense. Other expense was $103,000 during the six months ended
June 30, 1998, compared to $26,000 for the six months ended June 30, 1997. Other
expense includes the amortization of costs associated with the financing
arrangement entered into during 1997.
Income Taxes. Income taxes were $54,000 for the six months ended June 30,
1998 compared to an insignificant amount for the six months ended June 30, 1997.
Income tax expense was attributable to the profits generated by ABSA.
Minority Interest. Minority interest totaled $106,000 for the
six months ended June 30, 1998 resulting from the net income after taxes of
ABSA attributable to the minority shareholder.
Net Income (Loss). The Company generated a net loss of $235,000 for
the six months ended June 30, 1998, compared to net income of $517,000 for the
six months ended June 30, 1997, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of approximately $3,238,000 at June
30, 1998, compared to working capital of $1,705,000 at December 31, 1997. The
increase in working capital primarily reflects the reclassification of the
existing Bridge Note balance of $1,000,000 from a current liability to a non-
current liability and the reduction in the current maturities of term debt as a
result of the Company's restructuring of its financing arrangement with its bank
on July 24, 1998 and to a lesser extent, cash flow from operations.
Cash provided by operating activities for the six months ended June
30, 1998, was $126,000 compared to cash used by operating activities during the
six months ended June 30, 1997, of $151,000. Cash flow from operations resulted
primarily from non-cash charges to income partially offset by increases in
inventory.
In the six-month period ended June 30, 1998, the Company expended
$805,000 in capital investments. The investments during 1998 were primarily for
adding manufacturing capacity and increasing the efficiency of existing
equipment. At present, the Company has purchase commitments totaling $1,500,000
for equipment scheduled to be delivered in the first quarter of 1999. The
Company expects to finance this equipment purchase through additional bank debt
On July 24, 1998, the Company restructured its existing financing
agreements with its bank that, among other things, extends the term of its
existing line of credit, bridge loan and term loan facilities (the "New Credit
Facilities"). The new line of credit facility allows the Company to borrow up to
$2,000,000 based on percentages of its eligible accounts receivable, raw
materials and finished goods inventories. This new line of credit facility
expires July 24, 2001. Borrowings under the line of credit bear interest at a
rate per annum equal to the bank's prime lending rate plus 1%. The Company had
drawn down approximately $503,000 on the new line of credit at the time of
closing. The new financing arrangement also provided the Company with a term
debt facility of $3,750,000 to be repaid in 29 monthly payments of $62,500
commencing January 1999, with a balloon payment of $ 1,875,000 in July 2001.
Interest at the banks prime right plus 1.25% is due monthly. The new term debt
facility allowed the Company to repay the bridge note balance of $1,000,000 and
move approximately $1,165,000 of its previous revolving line of credit balance
into a term note structure.
11
<PAGE>
The New Credit Facilities require the Company to maintain certain financial
ratios and tangible net worth levels, among others. The Company is in compliance
with all covenants.
Management believes that the Company's cash, cash equivalents, and
short-term investments, together with anticipated cash flows from operations,
will provide sufficient funds to meet the Company's current cash requirements
and allow the Company to continue its marketing and product development efforts.
SEASONAL REVENUES
- -----------------
Historically, the Company has experienced lower sales to the
electronic capacitor market during the third quarter, particularly in July.
Based on market research conducted by the Company, it believes that demand for
the Company's other products, including microwave food packaging, does not
experience similarly timed seasonal variations and could, in the future, offset
lower third quarter sales in the electronic capacitor market.
INFLATION
- ---------
During 1997 and 1998, supplies of raw materials used by the Company
have been adequate to meet demand and prices for these raw materials have been
softened slightly. The Company does not foresee any near-term changes in either
the supply or prices of its raw materials.
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that uses dates where the date
has been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, or
any clock or date recording mechanism incorporating date sensitive software that
uses only two digits to represent the year may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar business activities.
The Company has conducted a review of its internal information systems to
determine the extent of any Year 2000 problem. Based on such a review, the
Company does not currently believe that its has material Exposure to the Year
2000 Issue with respect to its own information systems, since its existing
systems correctly define the Year 2000.
BUSINESS FACTORS
- ----------------
This report may contain certain forward-looking statements that are
subject to certain risks and uncertainties. These statements include statements
regarding (i) the expected effects of the ABSA acquisition by the Company; (ii)
the Company's ability to realize economies of scale and to expand its sales and
production capacity; (iii) the possibility and the expected effect of the
Kidamai acquisition; and (iv) the Company's liquidity. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. The Company cautions investors that
there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following; uncertainties regarding the performance advantages of the Company's
PMP products and products in development, market responses to pricing actions,
continued competitive factors and pricing pressures, the
12
<PAGE>
timely acceptance of new products, inventory risk due to shifts in market
demand, the development of competing or superior technologies or products from
other manufacturers, many of which have substantially greater financial,
technical and other resources than the Company, the Company's ability to close
the Kidamai acquisition on favorable terms; dependence on key personnel, the
variation in the Company's operating results, technological change, the
Company's ability to develop and protect proprietary products and technologies,
the availability of additional capital on acceptable terms, if at all, to fund
expansion, and general economic conditions. For further information, refer to
the more specific risks and uncertainties discussed throughout this report.
13
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
In May 1998, the Company reduced the conversion price of the Class B
Common Stock Redeemable Warrants (the "B Warrants") from $5.00 per share to
$3.75 per share. In addition, the Company extended the expiration date of the B
Warrants from May 12, 1998 to July 31, 1998 and increased the number of B
Warrants required to purchase one share of Common Stock from one B Warrant to
two B Warrants. The B Warrants expired on July 31, 1998. No B Warrants were
exercised.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 21, 1998, the Company held its Annual Meeting of Stockholders
(the "Annual Meeting") to vote on the following proposals:
1. To elect two Class II Directors, the nominees being Dr. Charles R.
Buffler and Mr. Robert M. Pozzo ("Proposal 1").
2. To ratify the appointment of BDO Seidman, LLP as independent accountants
for the Company for the fiscal year ending December 31, 1998 ("Proposal 2").
Of the total of 4,268,919 shares of the Company's Common Stock of record as
of April 10, 1998, able to vote at the Annual Meeting, a total of
approximately 3,324,064 shares were voted, or approximately 78% of the
Company's issued and outstanding shares of Common Stock entitled to vote on
these matters.
Each of the proposals was adopted, with the vote totals as follows:
Proposal 1:
<TABLE>
<CAPTION>
Election of Directors
- ---------------------
For Against
--- -------
<S> <C> <C>
Dr, Charles R. Buffler 3,299,987 (99.28%) 24,077 (0.72%)
Mr. Robert M. Pozzo 3,303,487 (99.38%) 20,577 (0.62%)
</TABLE>
In addition to the election of Dr. Buffler and Mr. Pozzo, the following
individuals continue serving as Directors of the Company: Glenn J. Walters, John
J. Moroney, Alex P. Boxall, and Mark R. Thomas.
Proposal 2: To ratify the appointment of BDO Seidman, LLP as independent
accountants for the Company for the fiscal year ending December 31, 1998.
For Against Abstain
--- ------- -------
3,285,935 (98.85%) 8,242 (0.25%) 29,887 (0.90%)
Item 5. Other Information
-----------------
Stockholders who wish to have their proposals presented at the 1999 Annual
Meeting of the Stockholders must deliver such proposals in writing to the
Secretary of the Company at the Company's principal executive offices no later
than December 23, 1998 for inclusion in the Company's proxy statement
14
<PAGE>
and form of proxy meeting relating to that meeting. Stockholders who do not wish
to include their proposals in such proxy statements and form of proxy but who
wish to present such proposals at the Company's 1999 Annual Meeting of
Stockholders must notify the Secretary of the Company in writing at the
Company's principal executive offices no later than March 10, 1999 in order for
their proposals to be considered timely for purposes of Rule 14a-4 under the
Securities Exchange Act of 1934, as amended.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) See Exhibit Index.
(b) Reports on Form 8-K. On May 11, 1998, the Company filed a Form 8-K in
connection with extending the expiration date of the Company's the
Class B Common Stock Redeemable Warrants (the "B Warrants") from May
12, 1998 to July 31, 1998 and with respect to amending the terms of
the B Warrants such that the exercise of every two B Warrants
entitles the Warrant holder to purchase one share of the Company's
Common Stock at a per share exercise price of $3.75. On May 11, 1998,
the Company filed a Form 8-K/A in connection with its acquisition of
65% of the capital stock of Alexander Boxall, S.A.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Advanced Deposition Technologies, Inc.
--------------------------------------
Registrant
August 4, 1998 /s/ Glenn J. Walters
- --------------- --------------------------------------
Glenn J. Walters
President
August 4, 1998 /s/ Mark R. Thomas
- --------------- -------------------------------------
Mark R. Thomas
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-KSB FILED
ON APRIL 6, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 525,000
<SECURITIES> 89,000
<RECEIVABLES> 7,089,000
<ALLOWANCES> 296,000
<INVENTORY> 3,628,000
<CURRENT-ASSETS> 11,426,000
<PP&E> 10,251,000
<DEPRECIATION> 3,569,000
<TOTAL-ASSETS> 23,768,000
<CURRENT-LIABILITIES> 8,188,000
<BONDS> 0
0
0
<COMMON> 9,558,000
<OTHER-SE> 246,000
<TOTAL-LIABILITY-AND-EQUITY> 23,768,000
<SALES> 11,939,000
<TOTAL-REVENUES> 11,939,000
<CGS> 9,513,000
<TOTAL-COSTS> 9,513,000
<OTHER-EXPENSES> 2,040,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 358,000
<INCOME-PRETAX> (75,00)
<INCOME-TAX> 54,000
<INCOME-CONTINUING> (235,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (235,000)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
