<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE
ACT.
Commission file number 1-12230
ADVANCED DEPOSITION TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 04-2865714
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
580 Myles Standish Industrial Park, Taunton, Massachusetts 02780
(Address of principal executive offices)
(508) 823-0707
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
As of August 10, 1999, there were 4,278,919 shares of Common Stock, $0.01
par value, of the issuer outstanding.
Transitional Small Business Disclosure Format (check one)
YES [_] NO [X]
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<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets (unaudited): June 30, 1999
and December 31, 1998.............................................. 1-2
Condensed and Consolidated Statements of Operations (unaudited): for
the Three Months and Six Months ended June 30, 1999 and June 30,
1998............................................................... 3
Condensed and Consolidated Statements of Cash Flows (unaudited): for
the Six Months ended June 30, 1999 and June 30, 1998............... 4
Notes to Condensed and Consolidated Financial Statements............ 5-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9-15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 15
</TABLE>
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June
30, December 31,
1999 1998
------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 306 $ 411
Investment in marketable securities................. 24 43
Accounts receivable, net of reserve for doubtful
accounts of $253,000 and $460,000 at June 30, 1999
and December 31, 1998, respectively................ 6,874 5,868
Inventories......................................... 4,165 4,252
Prepaid expenses and other current assets........... 441 274
------- -------
Total current assets.............................. 11,810 10,848
------- -------
Property and equipment, net of accumulated
depreciation......................................... 7,457 7,676
Other assets, net of accumulated amortization......... 4,941 5,426
------- -------
Total assets...................................... $24,208 $23,950
======= =======
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1998, 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)
<TABLE>
<CAPTION>
June
30, December
1999 31, 1998
------- --------
(in thousands,
except share
amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Due to financing institutions.............................. $ 2,973 $ 3,589
Accounts payable........................................... 4,000 4,347
Accrued expenses........................................... 1,037 643
Current maturities of long-term obligations................ 3,013 1,764
------- -------
Total current liabilities................................ 11,023 10,343
------- -------
Long-term obligations
Revolving line of credit................................... 1,336 1,136
Long-term obligations, net of current maturities........... 3,557 4,010
------- -------
Total liabilities........................................ 15,916 15,489
------- -------
Minority interest in consolidated subsidiary................. 998 1,078
------- -------
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, 4,296,560 shares issued, 4,242,950 and
4,253,950 shares outstanding at June 30, 1999 and December
31, 1998, respectively.................................... 43 43
Additional paid-in capital................................. 11,262 11,177
Accumulated deficit........................................ (3,732) (3,848)
Accumulated other comprehensive income (loss).............. (161) 95
------- -------
7,412 7,467
Less treasury stock, 53,610 and 32,610 shares at cost at
June 30, 1999
and December 31, 1998, respectively....................... (118) (84)
------- -------
Total stockholders' equity............................... 7,294 7,383
------- -------
Total liabilities and stockholders' equity............... $24,208 $23,950
======= =======
</TABLE>
The Condensed and Consolidated Balance Sheet at December 31, 1998, 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)
<TABLE>
<CAPTION>
Three Months ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(in thousands, except share and per share
amounts)
<S> <C> <C> <C> <C>
Revenues:
Product sales................ $ 6,271 $ 5,985 $ 12,409 $ 11,939
Royalties, license fees and
other....................... 9 -- 115 --
---------- ---------- ---------- ----------
6,280 5,985 12,524 11,939
Cost of revenues............... 5,025 4,725 9,826 9,513
---------- ---------- ---------- ----------
Gross profit................. 1,255 1,260 2,698 2,426
Selling, general and
administrative expenses....... 939 789 1,956 1,763
Research and development
expenses...................... 69 56 144 135
Amortization expense........... 54 70 108 142
---------- ---------- ---------- ----------
Operating income............. 193 345 490 386
Interest expense, net of
interest income............... 189 179 411 358
Other (expense) income......... 69 (49) 43 (103)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and minority
interest.................... 73 117 122 (75)
Income taxes (benefit)......... (8) 54 5 54
Minority interest in net income
of consolidated subsidiary.... 10 106 9 106
---------- ---------- ---------- ----------
Net income (loss)............ $ 71 $ (43) $ 108 $ (235)
========== ========== ========== ==========
Net income (loss) per share.... $ 0.02 $ ( 0.01) $ 0.03 (0.06)
========== ========== ========== ==========
Weighted average common shares
outstanding................... 4,248,170 4,268,919 4,248,823 4,268,853
========== ========== ========== ==========
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
3
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 108 $ (235)
Other cash provided by (used in) operating activities..... (906) 361
-------- -------
Net cash provided by (used in) operating activities....... $ (798) $ 126
-------- -------
Cash flows from investing activities
Purchases of property and equipment....................... (536) (805)
Decrease in investment in marketable securities........... 19 66
Decrease in other assets.................................. 309 230
-------- -------
Net cash used in investing activities................... (208) (509)
-------- -------
Cash flows from financing activities
Net borrowings under revolving line of credit............. 1,068 694
Net borrowings (repayments) to financial institutions..... 255 (445)
Repayment of long term obligations........................ (389) (260)
Purchase of treasury stock................................ (34) --
Exercise of stock options................................. 20 --
-------- -------
Net cash provided by (used in) financing activities..... 920 (11)
-------- -------
Net effect of exchange rates on cash and cash
equivalents............................................ (19) (12)
-------- -------
Net decrease in cash........................................ (105) (394)
Cash and cash equivalents, beginning of period.............. 411 919
-------- -------
Cash and cash equivalents, end of period.................... $ 306 $ 525
======== =======
</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, 1999
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, 1998, which was filed with the
Securities and Exchange Commission on April 15, 1999.
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, 1999 and June 30, 1998. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials.......................................... $2,416 $2,760
Work in process........................................ 441 303
Finished goods......................................... 2,023 1,905
------ ------
4,881 4,968
Less: Reserves for obsolescence........................ 716 716
------ ------
Total................................................ $4,165 $4,252
====== ======
</TABLE>
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.
5
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--
(Continued)
June 30, 1999
e. Reclassifications
Certain balances in the 1998 financial statements have been reclassified to
conform to the 1999 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 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.
Total comprehensive income (unaudited) is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss)...................................... 108 (235)
Foreign currency translation adjustments............... $ (250) $ 28
Unrealized losses on investments in marketable
securities............................................ (6) --
-------- --------
Total comprehensive loss............................... $ (148) $ (207)
======== ========
</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
unaudited financial information by industry segment as of and for the six
months ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Food Capacitor
Industry Segments Packaging Applications Consolidated
- ----------------- --------- ------------ ------------
<S> <C> <C> <C>
June 30, 1999
Sales...................................... $2,308 $10,216 $ 12,524
------ ------- --------
Operating income (loss) before corporate
expenses, interest and taxes and minority
interest.................................. $ 156 $ 334 490
------ ------- --------
Corporate income........................... 43
Interest................................... (411)
--------
Income before taxes and minority interest.. $ 122
--------
Identifiable assets at June 30, 1999....... $4,443 $16,715 $ 21,158
Corporate assets........................... -- -- 3,050
------ ------- --------
Total assets at June 30, 1999.............. $ 24,208
========
</TABLE>
6
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--
(Continued)
June 30, 1999
Geographic information for 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, 1999 (in thousands):
<TABLE>
<CAPTION>
Geographic Segments United States Spain Malaysia Consolidated
- ------------------- ------------- ------- -------- ------------
<S> <C> <C> <C> <C>
June 30, 1999
Sales.............................. $ 4,311 $ 7,662 $ 551 $12,524
------- ------- ------ -------
Operating income (loss) before
corporate expenses, interest and
taxes and minority interest....... $ (32) $ 546 $ (24) 490
------- ------- ------ -------
Corporate (expense)/income......... 43
Interest........................... (411)
-------
Income before taxes and minority
interest.......................... $ 122
------- ------- ------ -------
Identifiable assets at June 30,
1999.............................. $14,511 $11,864 $1,194 $24,208
======= ======= ====== =======
</TABLE>
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,
1999 1998
-------- ------------
<S> <C> <C>
Cash................................................... $306 $411
</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 June 30, 1999 and December 31, 1998,
investments in marketable securities that are classified as available-for-sale
and are recorded at fair value, consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Marketable Securities................................. $24 $43
</TABLE>
5. Common Stock Purchase Warrants
The Company's Class B Redeemable Common Stock Purchase Warrants (the "IPO
Warrants") expired on July 31, 1998.
6. Acquisitions
Effective October 1, 1998, the Company, through its subsidiary DNA-AD TECH,
S.A. ("DNA-AD TECH"), acquired 80% of the outstanding common stock of Kidamai
SDN, a capacitor assembler and distributor located in Kuala Lumpur, Malaysia,
for approximately $370,000 in the form of the cancellation of amounts due DNA
for product sales. During 1998 the name of Kidamai SDN was changed to DNA-AD
TECH (Asia) Sdn Bhd ("DNA (Asia)").
During the first quarter of 1999, the Company established a joint venture
with Trykko Pack of Denmark and currently owns 82% of a newly formed company
called MICROTECH A/S of Denmark. MICROTECH A/S will be managed by Steen
Pedersen, managing director of Trykko Pack. MICROTECH A/S has one employee
7
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--
(Continued)
June 30, 1999
and a salesman located in England. The purpose of the company will be to: (1)
manage a technology licensing program for Europe of the Company's patented
Safety Susceptor product, (2) educate the European market on the Company's
microwave film products, (3) work with our licensees in Europe and (4) work to
establish Safety Susceptor as a European standard.
7. Certain Relationships and Related Transactions
In December 1997, the Company purchased (the "ABSA Acquisition") 65% of the
capital stock of Alexander Boxall, S.A. ("ABSA"), a corporation organized
under the laws of Spain. ABSA manufactures and distributes AC capacitor
components for lighting and motors. The Company purchased 50% of the capital
stock of ABSA from Pedro Nunez-Barranco Guembe and the remaining 15% from
Alexander Boxall. In connection with this transaction, the Company issued
280,000 shares of its Common Stock to Mr. Boxall in exchange for his 15%
interest in ABSA. As part of the purchase price for his shares, Mr. Nunez-
Barranco Guembe received a $990,000 note from the Company that is payable in
December 1999. If the Company fails to pay Mr. Nunez-Barranco Guembe in 1999,
Mr. Nunez-Barranco Guembe has the option to receive (i) the return of his 50%
interest in DNA, provided he returns $2,800,000 in cash to the Company, less
(ii) liquidated damages of $340,000. Upon the closing of the ABSA Acquisition
in December 1997, Mr. Boxall became a director of the Company and was
subsequently appointed President of the Company in April 1999. ABSA was
subsequently renamed DNA-ADTECH.
In March 1999, the Company entered into an agreement with DNA Export, S.A.
to purchase certain shares of capital stock of DNA-ADTECH held by DNA Export,
S.A. (the "Exchange Agreement"). This transaction was approved by the
Company's Stockholders at the Company's annual meeting of stockholders on
August 11, 1999, and brings the Company's total equity ownership in DNA-ADTECH
to 81%. As consideration for the additional equity position in DNA-ADTECH, the
Company has agreed to issue 598,198 shares of Common Stock to DNA Export, S.A.
Upon consummation of this transaction, Mr. Boxall, the owner of DNA Export,
S.A. will beneficially own a total of 923,348 shares of Common Stock, or
approximately 19% of the Company's Common Stock and will continue to own 19%
of DNA-ADTECH.
In addition, in March 1999, Alexander Boxall and the Company entered into a
Repayment Agreement (the "Repayment Agreement") pursuant to which the parties
agreed that in the event that the Company is unable to pay the amounts
outstanding under the promissory note issued to Pedro Nunez Barranco Guembe in
connection with the previous acquisition of his shares of DNA-ADTECH, on or
before maturity without compromising the Company's plan for growth, Alexander
Boxall will repay the entire balance and will give the Company an additional
period of one year to repay the balance. Mr. Boxall will have the right at any
time after January 1, 2001 through March 1, 2001, to convert all or part of
the outstanding balance into shares of Common Stock at a purchase price per
share equal to the average sales price of the Common Stock for the month of
December 2000, subject to a $3.50 per share minimum. If Mr. Boxall does not
elect to convert the outstanding balance, the Company may elect after January
31, 2001 to redeem such amount for shares of Common Stock at a redemption
price equal to the average sales price of the Common Stock for the twenty
business days preceding the date of redemption.
8
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
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-metalized 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 purchased (the "ABSA Acquisition") 65% of the
capital stock of Alexander Boxall, S.A. ("ABSA"), a corporation organized
under the laws of Spain. ABSA manufactures and distributes AC capacitor
components for lighting and motors. The Company purchased 50% of the capital
stock of ABSA from Pedro Nunez-Barranco Guembe and the remaining 15% from
Alexander Boxall. In connection with this transaction, the Company issued
280,000 shares of its Common Stock to Mr. Boxall in exchange for his 15%
interest in ABSA. As part of the purchase price for his shares, Mr. Nunez-
Barranco Guembe received a $990,000 note from the Company that is payable in
December 1999. If the Company fails to pay Mr. Nunez-Barranco Guembe in 1999,
Mr. Nunez-Barranco Guembe has the option to receive (i) the return of his 50%
interest in DNA, provided he returns $2,800,000 in cash to the Company, less
(ii) liquidated damages of $340,000. Upon the closing of the ABSA Acquisition
in December 1997, Mr. Boxall became a director of the Company and was
subsequently appointed President of the Company in April 1999. ABSA was
subsequently renamed DNA-ADTECH. In March 1999, the Company entered into an
agreement with DNA Export, S.A. to purchase certain shares of capital stock of
DNA-ADTECH held by DNA Export, S.A. (the "Exchange Agreement"). This
transaction was approved by the Company's Stockholders at the Company's annual
meeting of stockholders on August 11, 1999, and brings the Company's total
equity ownership in DNA-ADTECH to 81%. As consideration for the additional
equity position in DNA-ADTECH, the Company has agreed to issue 598,198 shares
of Common Stock to DNA Export, S.A. Upon consummation of this transaction, Mr.
Boxall, the owner of DNA Export, S.A. will beneficially own a total of 923,348
shares of Common Stock, or approximately 19% of the Company's Common Stock and
will continue to own 19% of DNA-ADTECH. In addition, in March 1999, Alexander
Boxall and the Company entered into a Repayment Agreement (the "Repayment
Agreement") pursuant to which the parties agreed that in the event that the
Company is unable to pay the amounts outstanding under the promissory note
issued to Pedro Nunez Barranco Guembe in connection with the previous
acquisition of his shares of DNA-ADTECH, on or before maturity without
compromising the Company's plan for growth, Alexander Boxall will repay the
entire balance and will give the Company an additional period of one year to
repay the balance. Mr. Boxall will have the right at any time after January 1,
2001 through March 1, 2001, to convert all or part of the outstanding balance
into shares of Common Stock at a purchase price per share equal to the average
sales price of the Common Stock for the month of December 2000, subject to a
$3.50 per share minimum. If Mr. Boxall does not elect to convert the
outstanding balance, the Company may elect after January 31, 2001 to redeem
such amount for shares of Common Stock at a redemption price equal to the
average sales price of the Common Stock for the twenty business days preceding
the date of redemption. On October 1, 1998, the Company, through DNA, acquired
80% of the outstanding common stock of Kidamai, SDN of Kuala Lumpur, Malaysia
("DNA (Asia)"). DNA (Asia) is a capacitor assembler and distributor. During
first quarter of 1999, the Company established a joint venture with Trykko
Pack of Denmark and currently owns 82% equity position in the newly formed
company called MICROTECH A/S of Denmark.
The Company's revenue to date has been primarily from sales to the capacitor
and microwave packaging markets.
9
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
Recent Developments
The Company has received a notice of patent allowance from the United States
Patent office for its "High Energy Density Films and Capacitors Thereof" and
has received a favorable response to its European patent application for the
same. We continue to anticipate UL approvals for these new films and capacitor
in late 1999 or early 2000. We expect installation of new production capacity
in the third quarter. Management believes that this will support demand for
the Company's standard capacitor films, microwave films and new HED films. The
Company has also established a filter division in Madrid, Spain. A new patent
application for a microwave vented package was applied for and these products
are now being sold in Europe.
Results of Operations
Three months ended June 30, 1999 compared to Three months ended June 30,
1998
Revenues. Revenues increased to $6,280,000 for the three months ended June
30, 1999, as compared to $5,985,000 for the three months ended June 30, 1998,
an increase of 4.9%. The increase was primarily due to stronger film sales in
the United States.
Cost of Revenues. Cost of revenues increased 6.7% to $5,025,000 (80.1% of
product sales) for the three months ended June 30, 1999, compared to
$4,725,000 (79.0% of product sales) for the three months ended June 30, 1998
on a sales increase of 4.9%. Higher costs associated with the increase in
revenue were due to product mix.
Gross Profit. Gross profit remained basically unchanged at $1,255,000 (20.0%
of product sales) for the three months ended June 30, 1999, compared to
$1,260,000 (21.0% of product sales) for the three months ended June 30, 1998.
The decrease in gross profit was due primarily to product mix.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $939,000 (15.0% of product sales) for the three months
ended June 30, 1999, compared to $789,000 (13.2% of product sales) for the
three months ended June 30, 1998. The second quarter of 1998 did not include
expenses associated with the later acquisitions in Malaysia and Denmark.
Research and Development. Research and development expenses increased to
$69,000 for the three months ended June 30, 1999, compared to $56,000 for the
three months ended June 30, 1998. New product development testing expenses
have increased from 1998.
Amortization. Amortization expenses decreased to $54,000 during the three
months ended June 30, 1999, compared to $70,000 for the three months ended
June 30, 1998. The change was primarily due to the impairment of the license
with Fort James in the fourth quarter of 1998; this resulted in the
elimination of amortization for that long-lived asset.
Operating Income (Loss). The Company generated operating income of $193,000
for the three months ended June 30, 1999, compared to operating income of
$345,000 for the three months ended June 30, 1998.
Net Interest Expense. Net interest expense increased to $189,000 for the
three months ended June 30, 1999, compared to $179,000 for the three months
ended June 30, 1998. The increase was due to increases in debt balances due to
financial institutions.
Other Income (Expense). Other income totaled $69,000 during the three months
ended June 30, 1999, compared to other expense of $49,000 for the three months
ended June 30, 1998. A quality problem with
10
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
materials purchased by DNA Asia, from a related party, resulted in an
insurance claim and related cancellation of accounts payable totaling $78,000,
partially offsetting was foreign exchange transaction expense in 1999. Most of
the 1998 expense was related to amortization of costs associated with
financial arrangements.
Income Taxes. The company had a tax benefit of $8,000 for the three months
ended June 30, 1999, compared to $54,000 tax provision for the six months
ended June 30, 1998. Income tax expense in 1998 was attributable to the
profits generated by DNA-AD TECH.
Minority Interest. Minority interest was $10,000 for the three months ending
June 30, 1999 compared to $106,000 for the three months ending June 30, 1998.
Net Income (Loss). The Company generated net income of $71,000 during the
three months ended June 30, 1999, as compared to net loss of $43,000 for the
three months ended June 30, 1998 as a result of the factors discussed above.
Six months ended June 30, 1999 compared to Six months ended June 30, 1998
Revenues. Revenues increased to $12,524,000 for the six months ended June
30, 1999, as compared to $11,939,000 for the six months ended June 30, 1998,
an increase of 4.9%. The increase was primarily due to stronger film sales in
the United States, consolidation of revenues from the Malaysia subsidiary that
took place in the fourth quarter of 1998 and initial sales from MICROTECH A/S
in Denmark.
Cost of Revenues. Cost of revenues increased 3.3% to $9,826,000 (79.2% of
product sales) for the six months ended June 30, 1999, compared to $9,513,000
(79.7% of product sales) for the six months ended June 30, 1998 on a sales
increase of 4.9%. Higher costs associated with the increase in revenue were
more than offset by reduced manufacturing expenses and reductions in raw
material costs.
Gross Profit. Gross profit increased to $2,698,000 (21.7% of product sales)
for the six months ended June 30, 1999, compared to $2,426,000 (20.3% of
product sales) for the six months ended June 30, 1998. The increase in gross
profit was due to stronger sales, reduced production costs, and initial
technology licensing fees from our MICROTECH A/S acquisition.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1,956,000 (15.8% of product sales) for the six months
ended June 30, 1999, compared to $1,763,000 (14.8% of product sales) for the
six months ended June 30, 1998. Despite staffing and related expense
reductions in the last four months of 1998 in U.S. operations, additional
expenses in Malaysia (acquired 10/98) and Microtech A/S (joint venture
occurred the beginning this year) , and the payment of bank waiver fees
associated with noncompliance of bank covenants at year end 1998, all
contributed to higher selling, general and administration expenses.
Research and Development. Research and development expenses increased
modestly to $144,000 for the six months ended June 30, 1999, compared to
$135,000 for the six months ended June 30, 1998 due to increased new
development testing expense.
Amortization. Amortization expenses decreased to $108,000 during the six
months ended June 30, 1999, compared to $142,000 for the six months ended June
30, 1998. The change was primarily due to the impairment of the license with
Fort James in the fourth quarter of 1998 which resulted in the elimination of
amortization for that long-lived asset.
11
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
Operating Income (Loss). The Company generated operating income of $490,000
for the six months ended June 30, 1999, compared to operating income of
$386,000 for the six months ended June 30, 1998. The increase in operating
income was the result of stronger sales and lower cost of sales, elimination
of amortization expense associated with the Fort James license and general
reductions in spending.
Net Interest Expense. Net interest expense increased to $411,000 for the six
months ended June 30, 1999, compared to $358,000 for the six months ended June
30, 1998. The increase was due to increases in debt balances due to financial
institutions.
Other Income (Expense). Other income totaled $43,000 during the six months
ended June 30, 1999, compared to other expense of $103,000 for the six months
ended June 30, 1998. A key component of the other income in 1999 was
attributed to a product quality insurance claim and the associated
cancellation of accounts payable by a related party doing business with DNA
Asia, partially offset by foreign currency transaction expense. The expense in
1998 included the amortization of cost associated with the financing
arrangements entered into in 1997.
Income Taxes. Income taxes decreased to $5,000 for the six months ended June
30, 1999, compared to $54,000 for the six months ended June 30, 1998. Income
tax expense in 1998 was attributable to the profits generated by DNA-AD TECH.
Minority Interest. Minority interest was $9,000 for the six months ending
June 30, 1999 compared to $106,000 for the six months ending June 30, 1998.
Net Income (Loss). The Company generated net income of $108,000 during the
six months ended June 30, 1999, as compared to net loss of $235,000 for the
six months ended June 30, 1998 as a result of the factors discussed above.
Liquidity and Capital Resources
The Company had working capital of approximately $787,000 at June 30, 1999,
compared to working capital of $505,000 at December 31, 1998. The increase in
working capital primarily reflects stronger sales.
Cash used in operating activities was $798,000 for the six months ended June
30, 1999, compared to cash provided by operating activities of $126,000 during
the six months ended June 30, 1998. Cash used in operations activities for the
six months ended June 30, 1999 resulted primarily from increases in accounts
receivable and inventories, partially offset by non-cash charges to income and
increases in accounts payable.
The Company used $536,000 in cash during the six month period ended June 30,
1999, to purchase property and equipment to add manufacturing capacity and to
increase the efficiency of existing equipment at DNA-AD TECH. This was
partially offset by a reduction in marketable securities in other assets. At
present, the Company has purchase commitments approximating $975,000 for a new
metallizer scheduled now to be delivered in September, 1999 for the United
States operation. The Company expects to finance this equipment purchase
primarily through the Machinery and Equipment Loan described below.
On July 24, 1998, the Company and its principal lender entered into an
amended Credit Agreement (the "Amended Credit Agreement") that restructured
the terms of the Company's existing line-of-credit facility and two term loan
facilities and waived certain defaults thereunder. The Amended Credit
Agreement provides for a
12
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
line-of-credit facility of up to $2,000,000, based on percentages of its
eligible accounts receivable, raw materials and finished goods inventories
(the "Line of Credit"), as well as term loans in the aggregate principal
amount of $3,750,000 (the "Term Loans"). Each of these facilities matures on
July 24, 2001.
The Company uses the Line of Credit for working capital. Borrowings under
the Line of Credit bear interest at a rate per annum equal to the bank's prime
lending rate plus 1%. The Line of Credit was unchanged from the period ending
December 31, 1998 at $1,335,704. The Term Loans are being repaid in monthly
payments of $62,500, commencing January 1999 with a balloon payment of
$1,875,000 in July 2001. Through June 30, 1999, the Company has paid down
$375,000 of the Term Loans. Interest is payable monthly at the bank's prime
rate plus 1.25%.
On September 24, 1998, the Company closed on a line of credit with its
principal lender for the purchase of machinery and equipment (the "M&E Loan").
The M&E Loan allows the Company to borrow up to $2,000,000 for the purchase of
machinery and equipment. Interest is payable monthly at the bank's prime rate
plus 1.25%. The M&E Loan was originally set to be repaid over 60 equal monthly
installments commencing in October, 1999. This was, however, based on delivery
and installment of the machinery by June 1999. The acceptance of the new
machine has been delayed due to due to unforeseen delays caused by the
supplier of the machinery. We now expect to receive the machinery and begin
production in the late third quarter. We have met with our principal lender
and have reached agreement to begin repayment in March, 2000 instead of
October, 1999. The Company had drawn down $480,000 of the M&E Loan as of June
30, 1999.
At year-end 1998, our primary lending institution agreed to waive the events
of default relating to financial covenants until January 1, 2000 at a cost of
$25,000. Management met with the primary lending institution officer and
financial covenants pertaining to the fixed loan agreements and the revolving
line of credit agreement have been redefined. Written execution of this
amendment will be finalized shortly. Our primary lender granted an over-
advance amount of $500,000 on our Revolving Line of Credit that is payable
over 18 months beginning January, 2000. The Line of Credit remains at a
maximum of $2,000,000. This will improve our short term cash flow management.
Management believes that the Company's cash, cash equivalents together with
its credit facilities and expected cash flows from operations, should provide
sufficient funds to meet the Company's current and future cash requirements
and allow the Company to continue its marketing and development efforts. There
can, however, be no assurance that cash flows will improve in an amount
sufficient to allow the Company to fund its current obligations and operating
expense.
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 1998 and the six months of 1999, the Company did not experience any
inflation for raw materials and unit selling prices.
13
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
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 use dates where the date
has been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, 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 addressed the Year 2000 Issue by conducting a review of its
information technology and non-information technology systems to determine the
extent of any Year 2000 problems. As a result of that review, the Company has
determined that its information technology systems as installed, including its
primary operating, manufacturing, procurement and accounting systems,
correctly define the Year 2000. The Company has also determined that several
non-information technology systems do not correctly define the Year 2000. Both
determinations have been independently verified by outside consultants who
have employed standard testing devices. This program is near completion in all
manufacturing sites and we expect full compliance no later than November,
1999.
The Company has projected the cost to rectify the existing non-compliant
systems to be approximately $25,000, representing approximately 10% of the
Company's Information Technology budget for 1999. The Company anticipates that
these systems will be Year 2000 compliant by the end of October 1999. No other
Information Technology projects have been deferred as a result of the Year
2000 project. At this time, the Company cannot accurately assess the risks
associated with the non-compliance of its non-information technology systems.
While it is understood by the Company that such non- compliance could have a
material effect on the Company's business, results of operations or financial
condition, at this time management has not determined the entire potential
level of risk.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include suppliers and customers. The Company has distributed
inquiry letters to its major suppliers and customers, which will be followed
by subsequent internal evaluations of the responses received. Upon learning
that certain third parties are not Year 2000 compliant, the Company may be
required to replace any suppliers who are not able to correct their systems
before the Year 2000. Management does not currently have a plan for dealing
with its customers whose systems are not Year 2000 compliant. This review will
be completed by the end of October, 1999.
While the Company cannot predict what impact the Year 2000 problem may have
on third parties, it does not currently believe that it will incur material
costs in resolving potential Year 2000 problems with its customers and
suppliers.
Until the Company's plan has been completed, the Company cannot accurately
assess the potential risks associated with non-compliance of its external
third parties. While it is understood by the Company that the potential effect
could have a material adverse effect on the Company's business, results of
operations or financial condition, at this time management has not determined
the entire potential level of risk.
At the present time, the Company has not developed a contingency plan. The
Company will continue to monitor the need for a contingency plan based on the
results of its Year 2000 compliance strategic plan.
14
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
June 30, 1999
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 Company's liquidity; (ii) the effect of seasons on its
revenues, (iii) the Company's Year 2000 readiness; (iv) the Company's future
cash requirements; (v) the Company's ability to obtain UL approvals, (vi) the
Company's expectation of receiving new machinery in the third quarter, (vii)
the expected demand for capacitor, microwave and HED films and (viii) the
ability of the new line of credit to improve short-term cash flow management.
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 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, 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.
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports filed on Form 8-K
(a) See Exhibit Index
(b) The Registrant did not file any reports on Form 8-K during the quarter
ended June 30,1999.
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
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Glenn J. Walters Chief Executive Officer August 16, 1999
______________________________________ And Treasurer
Glenn J. Walters
/s/ Joseph P. Keller Controller (principal August 16, 1999
______________________________________ financial and accounting
Joseph P. Keller officer)
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDING JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 306
<SECURITIES> 24
<RECEIVABLES> 7,127
<ALLOWANCES> (253)
<INVENTORY> 4,165
<CURRENT-ASSETS> 11,810
<PP&E> 14,626
<DEPRECIATION> (7,169)
<TOTAL-ASSETS> 24,208
<CURRENT-LIABILITIES> 11,023
<BONDS> 5,321
0
0
<COMMON> 43
<OTHER-SE> 7,251
<TOTAL-LIABILITY-AND-EQUITY> 24,208
<SALES> 12,409
<TOTAL-REVENUES> 12,524
<CGS> 9,826
<TOTAL-COSTS> 9,826
<OTHER-EXPENSES> 2,208
<LOSS-PROVISION> 253
<INTEREST-EXPENSE> 411
<INCOME-PRETAX> 122
<INCOME-TAX> 5
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
