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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
--------------------------------------]-----------
[ ] Transition report under section 13 or 15(d) of the Exchange Act.
COMMISSION FILE NUMBER 1-12230
ADVANCED DEPOSITION TECHNOLOGIES, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2865714
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
580 Myles Standish Industrial Park, Taunton, Massachusetts 02780
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(508) 823-0707
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(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
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As of November 5, 1999, there were 4,894,727 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
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets (unaudited):
September 30, 1999 and December 31, 1998 1-2
Condensed and Consolidated Statements of Operations
(unaudited): for the Three Months and Nine Months
ended September 30, 1999 and September 30, 1998 3
Condensed and Consolidated Statements of Cash Flows
(unaudited): for the Nine Months ended September 30, 1999
and September 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 9-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16-17
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
================= =================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 233 $ 411
Investment in marketable securities 22 43
Accounts receivable, net of reserve for doubtful accounts of
$219,000 and $460,000 at September 30, 1999 and
December 31, 1998, respectively 6,241 5,868
Inventories 4,509 4,252
Prepaid expenses and other current assets 628 274
----------------- -----------------
Total current assets 11,633 10,848
----------------- -----------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 7,954 7,676
OTHER ASSETS, net of accumulated amortization 5,151 5,426
----------------- -----------------
Total assets $ 24,738 $ 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)
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
================ ===============
<S> <C> <C>
CURRENT LIABILITIES
Due to financing institutions $ 2,827 $ 3,589
Accounts payable 4,275 4,347
Accrued expenses 775 643
Current maturities of long-term obligations 2,102 1,764
---------------- ---------------
Total current liabilities 9,979 10,343
---------------- ---------------
LONG-TERM OBLIGATIONS
Revolving line of credit 1,626 1,136
Long-term obligations, net of current maturities 4,866 4,010
---------------- ---------------
Total liabilities 16,471 15,489
---------------- ---------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 599 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, 4,894,758 shares issued,
4,830,648 and 4,253,950 shares outstanding at
September 30, 1999 and December 31, 1998, respectively 49 43
Additional paid-in capital 11,900 11,177
Accumulated deficit (3,989) (3,848)
Accumulated other comprehensive income (loss) (161) 95
---------------- ---------------
7,799 7,467
Less treasury stock, 64,110 and 32,610 shares at cost at
September 30, 1999 and December 31, 1998, respectively (131) (84)
---------------- ---------------
Total stockholders' equity 7,668 7,383
---------------- ---------------
Total liabilities and stockholders' equity $ 24,738 $ 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)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 6,023 $ 6,346 $ 18,432 $ 18,285
Royalties, license fees and other 126 500 241 500
--------- --------- --------- ---------
6,149 6,846 18,673 18,785
COST OF REVENUES 5,192 5,612 15,018 15,125
--------- --------- --------- ---------
Gross Profit 957 1,234 3,655 3,660
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 759 625 2,716 2,388
RESEARCH AND DEVELOPMENT EXPENSES 99 42 244 177
AMORTIZATION EXPENSE 54 73 161 215
--------- --------- --------- ---------
Operating income 44 494 534 880
INTEREST EXPENSE, NET OF INTEREST INCOME 231 208 642 566
OTHER (EXPENSE) INCOME (37) 67 7 (36)
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (224) 353 (101) 278
INCOME TAXES (BENEFIT) (12) 177 (6) 231
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY 44 44 53 150
--------- --------- --------- ---------
Net income (loss) $ (255) $ 132 $ (148) $ (103)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE $ (0.06) $ 0.03 $ (0.03) $ (0.02)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,305,219 4,264,476 4,267,600 4,267,394
========= ========= ========= =========
</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>
Nine months ended September 30,
1999 1998
=============== ===============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss) $ (148) $ (103)
Other cash provided by (used in) operating activities (338) 252
--------------- ---------------
Net cash provided by (used in) operating activities $ (486) $ 149
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,186) (1,590)
Decrease in investment in marketable securities 21 78
Decrease in other assets 170 (113)
--------------- ---------------
Net cash used in investing activities (995) (1,625)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings / (repayments) under revolving line of
credit 1,097 (261)
Net repayments to financial institutions (671) (557)
Net borrowings of long term obligations 904 2,347
Repayment of bridge financing -- (1,000)
Purchase of treasury stock (48) (19)
Exercise of stock options 20 11
--------------- ---------------
Net cash provided by financing activities 1,302 521
--------------- ---------------
Net effect of exchange rates on cash and cash
equivalents 1 155
--------------- ---------------
NET DECREASE IN CASH (178) (800)
CASH AND CASH EQUIVALENTS, beginning of period 411 919
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 233 $ 119
=============== ===============
</TABLE>
See Notes to Condensed and Consolidated Financial Statements
4
<PAGE>
ADVANCED DEPOSITION TECHNOLOGIES, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 nine month periods ended
September 30, 1999 and September 30, 1998. Operating results for the three and
nine month periods ended September 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):
September 30, December 31,
1999 1998
================= ================
Raw materials /Supplies $ 3,011 $ 2,760
Work in process 332 303
Finished goods 1,783 1,905
----------------- ----------------
5,126 4,968
Less: Reserves for obsolescence 617 716
----------------- ----------------
Total $ 4,509 $ 4,252
================= ================
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.
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>
Nine Months ended
September 30,
1999 1998
=========== ===========
<S> <C> <C>
Net income (loss) $ (148) $ (103)
Foreign currency translation adjustments (254) 155
Unrealized loss on investments in marketable securities (2) (44)
=========== ===========
Total Comprehensive income /(loss) $ (404) $ 8
=========== ===========
</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 nine
months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS
- ----------------- Food Capacitor
Packaging Applications Consolidated
================= ================ ================= == =================
September 30, 1999
<S> <C> <C> <C>
Sales $ 3,343 $ 15,330 $ 18,673
----------------- ---------------- ----------------- -- -----------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS(Cont.)
- ------------------------ Food Capacitor
Packaging Applications Consolidated
================= ================ ================= == =================
September 30, 1999
<S> <C> <C> <C>
Operating income (loss) before corporate
expenses, interest and taxes and minority
interest $ 160 $ 374 534
----------------- ---------------- ----------------- -- -----------------
Corporate income 7
Interest (642)
-----------------
Income before taxes and minority interest $ (101)
================= ================ ================= =================
Identifiable assets at September 30, 1999 $ 4,552 $ 17,126 $ 21,678
Corporate assets -- -- 3,060
----------------- ---------------- ----------------- -----------------
Total assets at September 30, 1999 $ 24,738
=================
</TABLE>
Geographic information for the following table shows sales, operating
income (loss) and other financial information by industry segment as of and for
the nine months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
GEOGRAPHIC SEGMENTS
United States Spain Malaysia Consolidated
================ ================= ================== == =================
September 30, 1999
<S> <C> <C> <C> <C>
Sales $ 7,061 $10,667 $ 945 $18,673
---------------- ----------------- ------------------ -- -----------------
Operating income (loss) before corporate
expenses, interest and taxes and minority
interest $ (310) $ 767 $ 77 534
---------------- ----------------- ------------------ -- -----------------
Corporate income 7
Interest (642)
-----------------
Income before taxes and minority interest $ (101)
================ ================= ================== =================
Identifiable assets at September 30, 1999 $14,676 $ 8,896 $ 1,166 $24,738
================ ================= ================== =================
</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):
September 30, December 31,
1999 1998
================= ================
Cash $ 233 $ 411
7
<PAGE>
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 September 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):
September 30, December 31,
1999 1998
================= ================
Marketable Securities $ 22 $ 43
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-ADTECH,
S.A. ("DNA-ADTECH"), 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 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
8
<PAGE>
81%. As consideration for the additional equity position in DNA-ADTECH, the
Company issued 598,198 shares of its Common Stock to DNA Export, S.A. As a
result of this transaction, Mr. Boxall, the owner of DNA Export, S.A.
beneficially owns a total of 923,348 shares of the Company's Common Stock which
represents approximately 19% of the Company's Common Stock and continues to own
the remaining 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.
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 issued 598,198 shares of Common Stock to DNA Export, S.A. The
transaction was consummated on September 20, 1999 and as a result thereof, Mr.
Boxall, the owner of DNA Export, S.A. beneficially owns a total of 923,348
shares of Common Stock, or
9
<PAGE>
approximately 19% of the Company's Common Stock and continues 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.
As of September 30, 1999 the $990,000 note payable to Mr.
Nunez-Barranco Guembe has been reclassified to long term status since the
Repayment Agreement with Alexander Boxall, mentioned above, moves the repayment
date to January 1, 2001. Additionally, the balance sheet in this report reflects
the recording of the issuance of 598,198 shares of the Company's Common Stock to
DNA Export, S.A. at a market price of $1.09 resulting in additional goodwill of
$170,000 to be amortized over 23 years.
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 United States Patent and Trademark Office informed the Company that
is has received U.S. Pat No. 5,953,202 entitled, "High Energy Density Capacitor
Films and Capacitors made therefrom". The Company received a favorable response
to its European patent application for the same. A new patent application for a
microwave vented package was applied for and these products are now being sold
in the United Kingdom and Europe. The Company expects these products will also
generate new revenues with United States customers in the year 2000. In Europe,
the Company was granted a patent for its Safety Susceptor which is becoming the
industry standard in several countries. The Company expanded its licensing
agreement with FCP in Bremen, Germany to include flexible microwave applications
in addition to the license the Company sold to FCP in late 1998.
We anticipate UL approvals for capacitors in late 1999 or early 2000.
New production equipment arrived in Taunton in October of 1999 and has been
fully installed. Commissioning of the machine and training of production staff
is commencing. Management believes that this addition will support demand for
the Company's standard capacitor films, microwave films and new HED films. The
Company has also established an electronic capacitor division in Madrid, Spain.
The Company also expanded some of our web presence by improving our
primary web site (www.adtc.net) and we added two new web sites specifically for
e-commerce transactions of consumer microwave products, (www.microwavecook.com)
and (www.microheatnserve.com) in the beginning of the fourth quarter. These web
e-commerce activities will be expanded upon in the year 2000.
The Company's revenue to date has been primarily from sales to the
capacitor and microwave packaging markets.
RESULTS OF OPERATIONS
- ---------------------
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. Revenues decreased to $6,149,000 for the three months ended
September 30, 1999, as compared to $6,846,000 for the three months ended
September 30, 1998, a decrease of 10.2%. The primary reasons for the sales
shortfall include a decline in license sales from 1998 and lower output caused
by the necessary shutdown of certain machines in our Taunton facility in order
to prepare for the installation of a new metallizer. Revenues from our Spain
capacitor operation were 1% lower than the same quarter in 1998 mainly due to
the three week vacation shutdown as compared to two weeks in 1998. Increased
production in the remaining period offset the greater part of this loss in
Spain.
COST OF REVENUES. Cost of revenues decreased 7.5% to $5,192,000 (86.2%
of product sales) for the three months ended September 30, 1999, compared to
$5,612,000 (88.4% of product sales) for the three months ended September 30,
1998 due to a product sales decrease of 10.2% caused primarily by the factors
described in "Revenues" above.
GROSS PROFIT. Gross profit decreased 22.4% to $957,000 (15.9% of
product sales) for the three months ended September 30, 1999, compared to
$1,234,000 (19.4% of product sales) for the three months ended September 30,
1998. The decrease in gross profit was due primarily to the changes in the
Taunton facility described in the above section titled "Revenues".
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 21.4% to $759,000 (12.6% of product sales) for
the three months ended September 30, 1999, compared to $625,000 (9.8% of product
sales) for the three months ended September 30, 1998. The primary reason for the
increase was the inclusion of incremental expenses for 1999 associated with
subsidiaries in Malaysia and Denmark that were not part of the Company in these
same periods in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
136% to $99,000 for the three months ended September 30, 1999, compared to
$42,000 for the three months ended September 30, 1998. Development expenses in
1999 have increased primarily due to increased demand by prospective customers
for product samples from the Taunton facility. We remain optimistic that this
investment will result in increased future revenue.
AMORTIZATION. Amortization expenses decreased 26% to $54,000 during the
three months ended September 30, 1999, compared to $73,000 for the three months
ended September 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.
OPERATING INCOME (LOSS). The Company generated operating income of
$44,000 for the three months ended September 30, 1999, compared to operating
income of $494,000 for the three months ended September 30, 1998. The decrease
was primarily caused by the decline in license sales and the necessary shutdown
of certain machines in our Taunton facility as explained in "Revenues" above.
NET INTEREST EXPENSE. Net interest expense increased 11% to $231,000
for the three months ended September 30, 1999, compared to $208,000 for the
three months ended September 30, 1998. The increase was attributed to increases
in debt balances due to financial institutions and a higher prime lending rate.
OTHER INCOME (EXPENSE). Other expense totaled $37,000 during the three
months ended September 30, 1999, compared to other income of $67,000 for the
three months ended September 30, 1998. The other income in 1998 generated was
derived primarily from insurance settlements.
11
<PAGE>
INCOME TAXES. The company had a tax benefit of $12,000 for the three
months ended September 30, 1999, compared to $177,000 tax provision for the nine
months ended September 30, 1998. Income tax expense in 1998 was attributable to
the profits generated by DNA-ADTECH.
MINORITY INTEREST. Minority interest was unchanged at $44,000 for the
three months ending September 30, 1999 compared to the three months ending
September 30, 1998.
NET INCOME (LOSS). The Company generated a net loss of $255,000 during
the three months ended September 30, 1999, as compared to a net gain of $132,000
for the three months ended September 30, 1998. This decrease was the result of
the lower licensing income and revenue decrease, primarily for the reasons
described in "Revenues" above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. Revenues were $18,673,000 for the nine months ended September
30, 1999, compared to $18,785,000 for the nine months ended September 30, 1998,
a modest decrease of .6%. The decrease was primarily due to a change over of
equipment in our U.S. facility in the third quarter. All the equipment is now
fully installed and we are actively working through the back orders created by
the shutdown. A new metallizer has been delivered and we expect production
output during the second half of November. Once the new machine is fully
operational, a plan to optimise the output of our existing metallizers will be
implemented.
COST OF REVENUES. Cost of revenues decreased .7% to $15,018,000 (81.5%
of product sales) for the nine months ended September 30, 1999, compared to
$15,125,000 (82.7% of product sales) for the nine months ended September 30,
1998 on a sales decrease of .6%. Higher costs associated with the equipment
relocation at the U.S. operation were offset by reductions in raw material
costs.
GROSS PROFIT. Gross profit decreased .1% to $3,655,000 (19.8% of
product sales) for the nine months ended September 30, 1999, compared to
$3,660,000 (20.0% of product sales) for the nine months ended September 30,
1998. In addition to the reasons described in "Revenue" section above, the
reduction in license sales from 1998 was a key factor to lower gross profit in
1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 13.7% to $2,716,000 (14.7% of product sales)
for the nine months ended September 30, 1999, compared to $2,388,000 (13.1% of
product sales) for the nine months ended September 30, 1998. Selling, General
and Administrative expenses have increased due to operating expenses
attributable to newly acquired subsidiaries in Malaysia (acquired 10/98) and a
joint venture with Microtech A/S (beginning this year). Additionally, the
payment of bank waiver fees associated with noncompliance of bank covenants at
year end 1998 contributed to increased expenses in 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
37.9% to $244,000 for the nine months ended September 30, 1999, compared to
$177,000 for the nine months ended September 30, 1998. Development expenses in
1999 have increased primarily due to increased demand by prospective customers
for product samples from the Taunton facility. We remain optimistic that this
investment will result in increased future revenue.
AMORTIZATION. Amortization expenses decreased 25.1% to $161,000 during
the nine months ended September 30, 1999, compared to $215,000 for the nine
months ended September 30, 1998. The change was primarily due to the
12
<PAGE>
impairment of the license with Fort James in the fourth quarter of 1998 that
resulted in the elimination of amortization for that long-lived asset.
OPERATING INCOME (LOSS). The Company generated operating income of
$534,000 for the nine months ended September 30, 1999, compared to operating
income of $880,000 for the nine months ended September 30, 1998. Equipment
relocation at the Taunton facility resulted in a back order condition and lower
output that translated into lower revenue and lower profit. This was partially
offset by the elimination of amortization expense associated with the Fort James
license.
NET INTEREST EXPENSE. Net interest expense increased 13.4% to $642,000
for the nine months ended September 30, 1999, compared to $566,000 for the nine
months ended September 30, 1998. The increase was due to increases in debt
balances due to financial institutions and a higher prime lending rate.
OTHER INCOME (EXPENSE). Other income totaled $7,000 during the nine
months ended September 30, 1999, compared to other expense of $36,000 for the
nine months ended September 30, 1998. Product quality insurance settlement and
the associated cancellation of accounts payable by a related party doing
business with DNA Asia were partially offset by foreign currency transaction
expense.
INCOME TAXES. The Company had a tax benefit of $6,000 for the nine
months ended September 30, 1999, compared to $231,000 for the nine months ended
September 30, 1998. Changes in tax deductions and lower profit results in Spain
for the first nine months of 1999 were key factors for the decrease.
MINORITY INTEREST. Minority interest was $53,000 for the nine months
ending September 30, 1999 compared to $150,000 for the nine months ending
September 30, 1998.
NET INCOME (LOSS). The Company generated a net loss of $148,000 during
the nine months ended September 30, 1999, as compared to a net loss of $103,000
for the nine months ended September 30, 1998 as a result of the factors
described in the "Operating Income / Loss" and "Net Interest Expense" sections
above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of approximately $1,654,000 at September
30, 1999, compared to working capital of $505,000 at December 31, 1998. The
increase in working capital primarily reflects the reclassification of the Nunez
note of $990,000 as long term debt, partially offset by reclassifying a portion
of the M&E loan (as described below) to current liabilities.
Cash used in operating activities was $486,000 for the nine months ended
September 30, 1999, compared to cash provided by operating activities of
$149,000 during the nine months ended September 30, 1998. Cash used in operating
activities for the nine months ended September 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 $1,186,000 in cash during the nine month period ended
September 30, 1999 to purchase property and equipment in order to add
manufacturing capacity and increase the efficiency of existing equipment at the
Taunton and Madrid production facilities. During the third quarter, amounts
outstanding under the M&E loan increased by $667,000 to a total due to date of
$1,147,000. At present, the remaining commitment for a new metallizer is
approximately $250,000. The current status of the new metallizer is described
below.
13
<PAGE>
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 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%. Amounts outstanding under the Line of Credit was
increased from $1,335,704 as of June 30, 1999 to $1,625,704 as of September 30,
1999. 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
September 30, 1999, the Company has paid down $562,500 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 unforeseen delays caused by the supplier of the
machinery. The machine was delivered October 25, 1999 and we expect production
by mid November to contribute to fourth quarter revenues. We believe this new
production equipment has the working capacity to produce annually in excess of
$5,000,000 in incremental revenue. The Revolving Credit and Loan Agreement with
our principal lender was modified September 2, 1999 to include a temporary over
advance amount of $500,000 on our Revolving Line of Credit that is payable over
18 months beginning January 2000 and modification of the repayment start date of
the M&E Loan from October 1999 to April 1, 2000. The Line of Credit remains at a
maximum of $2,000,000. The Company has drawn down $1,146,731 of the M&E Loan as
of September 30, 1999. Another modification of the revised Loan Agreement was
financial covenants pertaining to the fixed loan agreements and the revolving
line of credit agreement. Management plans to closely monitor its cash
requirements during this period of new equipment start-up and anticipates
tighter than normal cash flow conditions until revenues from the new machine are
generated.
At year-end 1998, our primary lending institution agreed to waive
certain events of default relating to financial covenants until January 1, 2000
at a cost of $25,000.
Management believes that the Company's cash and 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.
14
<PAGE>
INFLATION
- ---------
During 1998 and the nine months of 1999, the Company did not experience
any inflation for raw materials and unit selling prices.
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 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 mid December 1999. No other
Information Technology projects have been deferred as a result of the Year 2000
project. 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, management is currently developing strategies and
alternatives.
On October 18th, 1999 the Company hired Kathleen Spellman as Director of
Information Technology. Ms. Spellman has been involved in several successful Y2K
Compliance Projects in previous positions. Ms. Spellman will take the Company's
Y2K project through completion. The upgrading process of hardware and operating
platforms has already begun. Contingency plans are being put into place that are
focused on insuring that our key production equipment (metallizers) are
operational on January 1. The imbedded microprocessors in our three older
metallizers are being tested for Y2K on November 23, 1999. Our contingency plan
includes potentially rolling back the date on these older machines since the
actual date is not critical to our operation. The Company believes that all
equipment will meet standards and or be operational by mid December 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.
15
<PAGE>
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 expected production and revenues from new machinery, (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, (ix) the
Company's expected revenues from increased research and development expenditures
(x) the Company's ability to incorporate e-commerce in our business. 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 2. Changes in Securities
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
issued 598,198 shares of its Common Stock to DNA Export, S.A. As a result of
this transaction, Mr. Boxall, the owner of DNA Export, S.A. beneficially owns a
total of 923,348 shares of the Company's Common Stock which represents
approximately 19% of the Company's Common Stock and continues to own the
remaining 19% of DNA-ADTECH. This transaction was consummated on September 20,
1999 and was exempt from registration pursuant to Regulation D of the Securities
Act of 1933, as amended.
16
<PAGE>
Item 4. Submission of Matters to a vote of security holders
The Company held its Annual Meeting of Stockholders on August 11, 1999,
and the following matters were voted on at that meeting:
1. The election of Glenn J. Walters and Alexander P. Boxall as Class
III Directors, to serve for a three year term of office expiring in 2002 and
until their successors are duly elected and qualified. The following chart shows
the number of votes cast for or against the election of Messrs. Walters and
Boxall, as well as the number of abstentions and broker non-votes.
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
Mr. Walters 3,377,126 85,950 N/A N/A
Mr. Boxall 3,382,151 80,925 N/A N/A
2. The proposal to approve an exchange agreement, dated March 23, 1999
by and among the Company, DNA Export, S.A. and Alexander P. Boxall. The
following chart shows the number of votes cast for or against the proposal, as
well as the number of abstentions and broker non-votes.
For Against Abstain Broker NonVotes
--- ------- ------- ---------------
1,563,635 122,325 15,670 1,761,446
3. The proposal to ratify the appointment of BDO Seidman, LLP as
independent accountants for the Company for the fiscal year ending December 31,
1999. The following chart shows the number of votes cast for or against the
proposal, as well as the number of abstentions and broker non-votes.
For Against Abstain Broker NonVotes
--- ------- ------- ---------------
3,390,326 57,650 15,100 0
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 September 30,1999.
17
<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
November 15, 1999 /s/ Glenn J. Walters
- ------------------ -------------------------------------
Glenn J. Walters
Chief Executive Officer
And Treasurer
November 15, 1999 /s/ Joseph P. Keller .
- ------------------ --------------------------------------
Joseph P. Keller
Controller (principal financial and
accounting officer)
18
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
27.1 Financial Data Schedule
19
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANYS
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ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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