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As filed with the Securities and Exchange Commission on June 3, 1996
REGISTRATION STATEMENT NO. 33-76186-LA
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2 ON FORM S-3 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ELECTRONIC DESIGNS, INC.
(Exact name of Registrant in its charter)
(formerly Crystallume)
DELAWARE 3674 04-3298416
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
ONE RESEARCH DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-5151
(Address and telephone number of principal executive offices and principal
place of business)
DONALD F. MCGUINNESS
CHIEF EXECUTIVE OFFICER
ELECTRONIC DESIGNS, INC.
ONE RESEARCH DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-5151
(Name, address, and telephone number of agent for service)
Copy to:
THOMAS P. STORER, P.C.
GOODWIN, PROCTER & HOAR LLP
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109
(617) 570-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
after the effective date of this Registration Statement until the earlier of the
sale of all the shares being registered hereunder or March 22, 1997.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE (1)
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PROPOSED MAXIMUM AMOUNT OF
Title of AGGREGATE REGISTRATION
Securities to be Registered AMOUNT TO BE REGISTERED PRICE TO PUBLIC OFFERING PRICE FEE (2)
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Common Stock, par value $.01 per share 1,000,000(3) $6.00 $6,000,000 $2,379
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Common Stock, par value $.01 per share 100,000(4) $6.48 $ 648,000 $ 223
Redeemable Warrant 100,000(4) $0.12 $ 12,000 $ 4
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Common Stock, par value $.01 per share 100,000(5) $6.00 $ 600,000 $ 207
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Total Registration Fee $2,813
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<FN>
(1) This table lists securities which continue to be offered under the Registration Statement as amended. 1,000,000
shares of Common Stock and 1,000,000 Redeemable Warrants originally registered have been sold under the Registration
Statement. 150,000 shares of Common Stock and 150,000 Redeemable Warrants originally registered for sale pursuant to
the over-allotment option in the Initial Offering (described below) were not issued, and are de-registered hereby.
(2) Securities and Exchange Commission Registration Fee previously paid by Registrant at time of March 22, 1994 initial
public offering (the "Initial Offering").
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(3) Issuable upon exercise of the Redeemable Warrants issued in the Initial
Offering.
(4) Issuable upon exercise of the Representative's Warrants (as defined herein)
granted to Dickinson & Co., the representative of the underwriters, in
connection with the Initial Offering. See "Plan Of Distribution" and
"Description of Securities to be Registered - Other Warrants."
(5) Issuable upon exercise of Redeemable Warrants issuable upon exercise of the
Representative's Warrants granted to Dickinson & Co., the representative of
the underwriters, in connection with the Initial Offering.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF PART I OF FORM S-3
LOCATION OR
ITEM NUMBERS AND CAPTIONS HEADING IN PROSPECTUS
------------------------- ---------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus...................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors.................. Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Not Applicable
6. Dilution........................................... Not Applicable
7. Selling Security-Holders........................... Not Applicable
8. Plan of Distribution............................... Plan of Distribution; Outside Front Cover Page of
Prospectus
9. Description of Securities to be Registered......... Description of Securities to be Registered
10. Interests of Named Experts and Counsel............. Not Applicable
11. Material Changes................................... The Company; Risk Factors
12. Incorporation of Certain Information
by Reference....................................... Incorporation of Certain Documents by
Reference
13. Disclosure of Commission Position on
Indemnification For Securities Act
Violations......................................... Not Applicable
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell nor the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 3, 1996
PROSPECTUS
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ELECTRONIC DESIGNS, INC.
1,000,000 SHARES
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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All of the shares of common stock, par value $.01 per share (the
"Common Stock"), of Electronic Designs, Inc., a Delaware corporation (the
"Company"), offered under this Prospectus are issuable from time to time upon
the exercise of the 1,000,000 redeemable warrants (the "Redeemable Warrants") of
the Company, such Redeemable Warrants having been previously issued in
connection with the Company's March 22, 1994 initial public offering (the
"Initial Offering").
The shares of Common Stock purchasable hereunder upon exercise of the
Redeemable Warrants (sometimes referred to as the "Warrant Shares") are being
offered on a continuous basis pursuant to Rule 415 of the Securities Act of
1933, as amended, during the period of time that the Registration Statement to
which this Prospectus relates is kept effective, but not later than March 22,
1997. Each Redeemable Warrant entitles the holder to purchase one share of
Common Stock at $6.00 and expires March 22, 1997. Outstanding Redeemable
Warrants may be redeemed by the Company, under certain conditions, upon 30 days'
written notice, at $0.10 per Redeemable Warrant. See "Plan of Distribution" and
"Description of Securities to be Registered."
The Common Stock and the Redeemable Warrants of the Company are
currently traded on the Nasdaq Small-Cap Market under the symbols "EDIX" and
"EDIXW," respectively. The Company is the successor, by reincorporation and
change of name, to Crystallume, a California corporation, whose common stock and
redeemable warrants were formerly quoted on the OTC Bulletin Board under the
symbols "CRYS" and "CRYSW," respectively.
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY (1)
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Common Stock, par value $.01 per share 6.00 NONE $ 6.00
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Total 6,000,000 NONE $6,000,000
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<FN>
(1) The Company will pay all expenses in connection with the issuance and
distribution of the Warrant Shares being offered hereby. The costs and
expenses in connection with this offering, including all costs and expenses
related to the offering made pursuant to the original Registration
Statement on Form SB-2 (and as amended), are estimated at $455,000. Such
expenses are estimated (except for the Securities And Exchange Commission
Registration Fee and NASD Filing Fee) and itemized as follows: (a)
Securities and Exchange Commission Registration Fee: $4,994; (b) NASD
Filing Fee: $1,949; (c) accounting fees and expenses: $76,000; (d) legal
fees and expenses: $175,000; (e) printing fees: $75,000; (f) Blue Sky fees
and expenses: $40,000; (g) other filing and listing fees: $20,000; and (h)
miscellaneous: $62,057.
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THE DATE OF THIS PROSPECTUS IS JUNE -, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; the Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and the New York Regional Office, 7 World Trade Center,
New York, New York 10048 at prescribed rates. The Company's Common Stock and
Redeemable Warrants are currently traded on the Nasdaq Small-Cap Market under
the symbols "EDIX" and "EDIXW," respectively. The Company's reports, proxy
statements and other information filed prior to July 1995 and after March 6,
1996 may be inspected at the offices of the Nasdaq Small-Cap Market, 1735 K
Street, N.W., Washington, D.C. See "The Company."
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the Warrant Shares. For further information with respect to the Company and
the Warrant Shares, reference is made to the Registration Statement and exhibits
thereto. Statements contained in this prospectus (the "Prospectus") as to the
contents of any contract or other documents are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission are incorporated herein by reference:
(a) Annual Report on Form 10-KSB and all related amendments for the
year ended September 30, 1995;
(b) Quarterly Report on Form 10-QSB and all related amendments for
the quarters ended December 31, 1995 and March 31, 1996;
(c) Reports on Form 8-K filed on October 25, 1995, November 2, 1995,
December 4, 1995, December 20, 1995 (Form 8-K/A), January 4,
1996, March 11, 1996, March 28, 1996 (Form 8-K/A-2) and May 23,
1996; and
(d) The description of the Common Stock of the Company included in
the Company's Registration Statement on Form 8-A, as amended,
dated March 9, 1994.
In addition, all documents subsequently filed with the Commission by the
Company pursuant to Sections 13(a) and 13(c), Section 14 and Section 15(d) of
the Exchange Act prior to the filing of a post-effective amendment hereto that
indicates that all securities offered hereunder have been sold or that
deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference in this registration statement and to be a part hereof
from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in any applicable Prospectus Supplement or in any other document subsequently
filed with the Commission which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Copies of all documents which are incorporated by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such document) will be provided without charge to
each person, including any beneficial owner, to whom this Prospectus is
delivered, upon
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written or oral request. Requests should be directed to Electronic Designs,
Inc., One Research Drive, Westborough, Massachusetts 01581, Attention: Chief
Executive Officer (telephone number (508) 366-5151).
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the notes thereto, appearing elsewhere or incorporated by
reference in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless otherwise
indicated, all references in this Prospectus to the Company shall mean
Electronic Designs, Inc. and its subsidiaries on a consolidated basis.
THE COMPANY
Electronic Designs, Inc. (the "Company"), a Delaware corporation
incorporated in January, 1996, has two divisions which engage in two potentially
complementary lines of business: (1) the Electronic Designs, Inc. ("EDI")
division which is responsible for the Company's core business of designing,
manufacturing and selling semiconductor memory circuits and flat panel display
products, and (2) the much smaller Crystallume division which is largely a
research and development enterprise aimed at developing and marketing industrial
applications for diamond films and coatings.
The Company previously operated as a California corporation under the
name Crystallume. On October 10, 1995, Crystallume acquired Electronic Designs,
Inc., a privately held Massachusetts corporation ("EDI-MA"), in a purchase
transaction (the "Acquisition") for approximately $13,000,000, less certain
costs incurred by EDI-MA in connection with the transaction, for cash and short
term notes of approximately $11,600,000 and the issuance of 314,826 fully vested
options to purchase Company Common Stock at an exercise price of $0.22 per share
in exchange for EDI-MA options which were outstanding on the date of the
Acquisition. As a result of the Acquisition, EDI-MA became a wholly-owned
subsidiary of Crystallume and is now a wholly-owned subsidiary of the Company.
The former management of EDI-MA has assumed principal responsibility for the
management of the Company. Since the Acquisition, the Company has operated
EDI-MA in a manner such that there have not been any material changes in the
operations of the EDI division resulting from the Acquisition. On March 6, 1996,
the shareholders of Crystallume approved the reincorporation of Crystallume in
Delaware and a change of name to Electronic Designs, Inc. through the merger of
Crystallume with and into the Company (the "Merger"), a wholly-owned subsidiary
of Crystallume.
The EDI division supplies memory circuits in monolithic and modular form
and active matrix liquid crystal displays ("AMLCDs") to the commercial,
industrial and military markets in the U.S. and abroad. EDI's products are used
in commercial and military computing, avionics, aircraft control, defense,
telecommunications and data communications systems worldwide.
Since its inception in 1984 as a California corporation, the Crystallume
division has worked to develop industrial products incorporating diamond films
and coatings to take advantage of diamond's extreme hardness, unsurpassed
thermal conductivity and other unique properties. The diamond used by
Crystallume is created through chemical vapor deposition ("CVD"), which converts
methane gas into diamond.
Although the Company currently intends to continue its research and
development efforts in connection with, as well as its sale of existing products
from, its diamond operations, the Company, as a result of the Acquisition, has
focused its primary efforts on the design, manufacture and sale of semiconductor
and display products. The Company believes that Crystallume's diamond research
and technology experience may, in certain respects, complement the design,
manufacturing and marketing success EDI has enjoyed. For instance, the Company
believes that the speed and reliability of semiconductor devices might be
improved through the use of diamond technology to enhance the thermal
dissipation of EDI's electronic packaging components, and possibly to design
future generations of flat panel displays. The Company, however, has yet to
incorporate its diamond technology into EDI's products, and there can be no
assurance that such products, if developed, would be technically or commercially
viable.
The Company's principal executive offices are located at One Research
Drive, Westborough, Massachusetts 01581 and its telephone number is (508)
366-5151. The Company's shares of Common Stock and Redeemable Warrants are
currently traded on the Nasdaq Small-Cap Market under the symbols, "EDIX"
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and "EDIXW," respectively. The corresponding securities of Crystallume prior to
the reincorporation and name change described above were quoted on the OTC
Bulletin Board under the symbols "CRYS" and CRYSW," respectively.
The Company completed its initial public offering of shares of Common
Stock (the "Offering") in March, 1994. The net proceeds from the Offering were
used primarily for expanding production capacity, research and development,
marketing and sales activities and for general working capital purposes.
RISK FACTORS
An investment in the shares of Common Stock involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to any investment in the Company.
SECURITIES TO BE OFFERED
This Prospectus relates to the offer and sale from time to time of up to
1,000,000 Warrant Shares by the Company upon the exercise of the Redeemable
Warrants by the holders thereof. The Company is filing the Registration
Statement, of which this Prospectus is a part, as an amendment to the
Registration Statement on Form SB-2 (No. 33-76186-LA), previously filed with the
Commission (ruled effective March 22, 1994), as amended by Post-Effective
Amendment No. 1 (ruled effective December 8, 1994), in order to bring current
such Registration Statement covering such Warrant Shares. See "Plan of
Distribution" and "Description of Securities to be Registered - Redeemable
Warrants."
Said Registration Statement also relates to the resale of up to 100,000
shares of Common Stock and up to 100,000 Redeemable Warrants which may be issued
pursuant to the exercise of warrants that were issued to Dickinson & Co., as
representative of the underwriters, in connection with the Initial Offering (the
"Representative's Warrants"), and the resale of up to 100,000 additional shares
of Common Stock which may be issued pursuant to the exercise of such Redeemable
Warrants issuable upon exercise of the Representative's Warrants. Such
securities are not offered under this Prospectus. See "Plan of Distribution" and
Description of Securities to be Registered - Other Warrants."
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RISK FACTORS
Investment in the Warrant Shares offered hereby involves a high degree
of risk, including, but not limited to, the risk factors referred to below. Each
prospective investor should consider carefully the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
POTENTIAL DOWNTURN OF SEMICONDUCTOR MARKET ASSOCIATED WITH THE HISTORICAL
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY AND RECENT DEVELOPMENTS IN THE
SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical. While the market for
memory integrated circuits ("IC's") has grown rather steadily from 1992 through
1995, this market has historically exhibited considerable volatility,
particularly in the commercial segment which was responsible for a majority of
the Company's business in fiscal 1995. No assurances can be given that such
volatility, with occasional periods of flat or declining demand, will not recur.
Certain recent developments and trends, including price erosion in semiconductor
memories and the decline of the book to bill ratio to below parity for the first
time since the first quarter of calendar year 1992, have created considerable
uncertainty with respect to anticipated demand for ICs in the near future. These
developments have resulted in declines in the average selling prices of some of
the Company's commercial memory module products and increased availability of
most memory devices which the Company purchases for incorporation in its
products. The decline in the average selling prices of the Company's products
have generally been offset by declines in the Company's raw material costs and
have not had a significant effect on the Company's gross profit. The increased
availability of memory devices has allowed the Company to increase its unit
volumes and shorten its lead times to its customers. The Company believes that,
in the near term, it will continue to be able to offset future declines in
selling prices with decreases in costs of raw materials and increases in its
volumes to maintain its current revenue levels. However, in the event of
prolonged or sudden declines in selling prices and increases in product
availability, there can be no assurance that the Company will continue to be
able to offset declines in selling prices with decreases in its product costs or
increase its unit volumes, that new competitors will not enter the Company's
markets, or that existing competitors, particularly those who manufacture their
own semiconductor devices, will not cause the selling prices of some of the
Company's products to decline to a level at which the Company cannot
economically compete. See "Sensitivity of Operating Results to Uncontrollable
Factors." Any such market developments could have a material adverse effect on
the Company's semiconductor packaging business.
ABSENCE OF CONTRACTUALLY ASSURED SOURCES OF SUPPLY/GENERAL LIMITATIONS ON
AVAILABILITY OF SUPPLY
The most significant raw materials that the Company purchases in its
memory and flat panel display operations are memory devices in wafer, die and
component forms and active matrix liquid crystal displays ("AMLCD") panels. To
address its memory product needs, the Company has developed and maintains
relationships with the leading semiconductor fabricators in the United States
and the Far East, including Micron Semiconductor, Inc., Mitsubishi Electronics
America, Inc., Samsung Semiconductor, Inc. and subsidiaries of Sharp
Corporation.
In a time of strong demand for memory ICs and other products, sources of
supply of wafers, die and other components may be constrained and subject to
shortages, and a semiconductor packager's ability to compete is heavily
dependent on its ability to maintain access to steady sources of supply. While
the Company has no specific long-term contractual arrangements with its vendors,
the Company believes that it has good relationships with these vendors and that
it is an important part of their marketing and distribution programs, and as
such is an important customer to each. No assurances, however, can be given that
the Company's existing access to these sources of supply may not be impaired in
particular cases. Any such impairment would have a material adverse effect on
the Company.
Although the Company has yet to experience any reduction or substantial
delays in its ability to acquire memory devices from its existing sources of
supply, affirmative responses to requests for increased supplies have been
limited since 1994, thereby limiting the Company's ability to meet certain order
requirements in response to increased demand. Any reduction or substantial delay
in the Company's ability to acquire memory devices from its existing sources of
supply would have a material adverse effect on the Company.
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SIGNIFICANT LEVERAGE
Cash related to the Acquisition was obtained from a $3,381,000 private
placement of securities, $900,000 of bridge loans from significant shareholders
and $10,000,000 worth of loans from Silicon Valley Bank (the "Bank") pursuant to
a Loan and Security Agreement (the "Loan Agreement"). The bridge loans were
repaid upon the closing of the Acquisition with the issuance of Common Stock in
exchange for cancellation of the indebtedness.
Under the terms of the Loan Agreement, the Company was allowed to borrow
on October 10, 1995, (i) $5,500,000 in the form of a term loan and (ii) up to
$6,500,000 under a revolving credit facility; however, aggregate borrowing was
limited to $10,000,000. The $12,000,000 credit facility included $1,000,000 of
letters of credit, which were subsequently increased to $5,000,000 and do not
count against the aggregate borrowing limit of $10,000,000. The terms of the
Loan Agreement require that the Company meet strict financial covenants and make
significant payments of principal and interest during fiscal 1996. In the event
of a default on the terms of either of these loans, the interest rate payable
will increase by 5%.
The term facility matures on September 30, 1997. Monthly interest
payments are payable under the term facility at a rate equal to 11.125% (Prime
Rate plus 2.875%). This reflects an April 1, 1996 rate reduction from the Prime
Rate plus 3% which was triggered since an Event of Default had not occurred.
With respect to principal payments under the term facility, $500,000 was payable
on or before December 31, 1995 or the first business day thereafter, and
quarterly installments of $750,000 each are due on the last day of each quarter
or the first business day thereafter until maturity, with a final principal
payment in the amount of $500,000 due on September 30, 1997. The December 31,
1995 loan payment was timely made on January 1, 1996 with cash available at the
acquisition date, and the March 31, 1996 loan payment was timely made on April
1, 1996 with cash from operations.
Borrowings under the revolving credit facility are limited to a
borrowing base less outstanding letters of credit which are capped at $5,000,000
and constitute an advance under the revolving facility. The revolving facility
matures on September 30, 1996. Monthly interest payments are payable under the
revolving credit facility at a rate equal to 8.75% (Prime Rate plus .5%). This
reflects an April 1, 1996 rate reduction from the Prime Rate plus 1% which was
triggered since an Event of Default had not occurred. The borrowing base is
currently calculated on a formula which includes domestic and foreign
receivables and certain inventories.
As of March 31, 1996, the Company had borrowed an aggregate amount of
$7,500,000 against the $10,000,000 borrowing limit and had $1,000,000 of letters
of credit outstanding. The formula borrowing base under the revolving credit
facility was $6,607,000 compared with borrowings of $2,500,000 and letters of
credit of $1,000,000 under the facility. Consequently, the Company had
approximately $2,500,000 of unused borrowing capacity available under the
revolving facility, which was constrained by the aggregate borrowing limit below
the amount otherwise available under the borrowing base formula. The Bank has
indicated that, if the revolving facility is renewed on September 30, 1996, the
borrowing base formula may be modified to exclude foreign receivables and
inventories. As of March 31, 1996, approximately 43% of the Company's
receivables were from foreign sources; had the borrowing base formula excluded
foreign receivables and inventories as of March 31, 1996, borrowings under the
revolving facility would have been limited to approximately $2,100,000. If the
Bank were to modify the borrowing base formula to exclude foreign receivables
and inventories, the Company's short term ability to fund operations, including
its ability to purchase products and pay its bills, may be impacted in a
significantly adverse manner. Subsequent to December 31, 1995, the Bank waived
compliance with financial covenants relating to profitability and debt coverage.
The Company believes that is in compliance with all material covenants as of
March 31, 1996.
During the first six months of fiscal 1996, the Company had negative
cash flow from operations and largely used cash balances on hand at the
beginning of the fiscal year and which EDI-MA had at the time of the
Acquisition, in addition to cash from operations, to meet its debt payments. In
the second quarter of fiscal 1996, the Company generated sufficient cash from
operations to meet its debt payments. The Company's negative cash flow during
the first two quarters of fiscal 1996 was partially caused by pre-structuring
losses associated with the Company's diamond operations and certain charges in
connection with the Acquisition and restructuring that are not expected to recur
in the future. On this basis, the Company anticipates that cash from operations
will be sufficient to meet its future debt payments. While the Company does not
foresee having to
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borrow additional funds, it may need to seek additional financing if its
operations fail to generate sufficient cash flow. In the event the Company
requires additional financing, there is no assurance that such additional
financing could be obtained on acceptable terms, if at all.
NEED FOR ADDITIONAL CAPITAL AND FINANCING
The Company has ongoing needs to make regular investments in
manufacturing and test equipment and other items to maintain and, where
necessary, expand manufacturing capacity and to meet other product development
and operating requirements. The Company anticipates that its capital
expenditures in 1996 will increase as the Company focuses its efforts on
semiconductor memory and flat panel display products. Specifically, the Company
anticipates that it will incur substantial capital expenditures to increase its
test and manufacturing capacity relating to its efforts to design, prototype and
produce new products in the memory and display operations. The Company currently
has an outstanding purchase order of approximately $200,000 for assembly
equipment. The Company does not have any other planned significant commitments
with respect to capital expenditures in the coming year, and intends to review
its capital expenditure requirements on an ongoing basis in light of available
resources. The Company may seek lease financing to finance a portion of these
capital expenditures. While the Company does not anticipate significant capital
expenditures for diamond operations in 1996, the Company and EDI-MA had combined
capital expenditures of approximately $950,000 in fiscal 1995, and it is
expected that capital expenditures may exceed that amount in fiscal 1996. The
precise amount of capital expenditures will depend on market conditions,
including the cost of products and equipment, and the Company's ability to
obtain lease financing. In addition, the Company anticipates an increase in net
working capital requirements to cover increases in accounts receivable and
inventory levels resulting from recent increases in sales. The expansion in net
working capital is expected to track the Company's growth rate.
The Company anticipates that the combination of proceeds from the
December, 1995 completion of its private placement of shares of Common Stock,
continued positive cash flow from operations as it experienced during the second
quarter of fiscal 1996, and funds from its current revolving credit facility
will be sufficient to meet its anticipated working capital requirements and
planned capital expenditures for at least the next 12 months. If cash from
operations does not meet expectations or the Bank modifies the Company's
borrowing base formula to exclude foreign receivables and inventories (See
"Significant Leverage"), the Company may not be able to fully fund its
anticipated working capital requirements and planned capital expenditures; in
such circumstances the Company may be required to raise additional capital
through the sale of additional equity or other securities or seek alternative
methods of financing. There can be no assurance that such additional financing,
if required, can be obtained on acceptable terms, if at all.
SENSITIVITY OF OPERATING RESULTS TO UNCONTROLLABLE FACTORS
In connection with the Company's semiconductor memory and flat panel
display operations, a wide array of factors could cause the Company's results of
operations and gross margins to fluctuate in the future from period to period.
The primary factors that might affect the Company's results of operations
include the cyclicality of the semiconductor market (See "Potential Downturn of
Semiconductor Market Associated with the Historical Cyclicality of the
Semiconductor Industry and Recent Developments in the Semiconductor Industry");
any loss of a principal customer or any short term loss of a customer due to
product inventory accumulation by the customer; any inability to procure
required components; any adverse changes in the mix of products sold by the
Company; and the recent softening of the semiconductor market which could cause
a decline in selling unit prices, diminished inventory value, and less demand
for commercial memory products as customers restrict inventory levels. See
"Potential Downturn of Semiconductor Market Associated with the Historical
Cyclicality of the Semiconductor Industry and Recent Developments in the
Semiconductor Industry." Other factors which may affect the Company's results of
operations in the future include risk of technological changes such as memory
modules being replaced with monolithic products in the commercial market;
manufacturing inefficiencies associated with the start up of new product
introductions; the timing of new product announcements and releases by the
Company or its competitors; the timing of significant orders; the ability to
produce products in volume and meet customer requirements; pricing actions by
competitors or suppliers; patterns of spending by customers; delays,
cancellations or reschedulings of orders, particularly commercial orders, due to
customer financial difficulties or other events; inventory obsolescence;
unexpected product returns (See "No Assurance of Product Quality, Performance
and Reliability"); the timing of expenditures in anticipation of increased
sales; and regulatory changes and expenses associated with acquisitions.
Moreover,
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reduction in value of the Company's inventories due to unexpected price
declines, as is presently occurring with the softening of the semiconductor
industry, could adversely affect the Company's results of operations. To date,
such declines in inventory valuation have not had a material adverse effect on
the Company's financial condition or results of operations; however, to the
extent the Company holds inventory not supported by firm order based backlog,
the Company may need to set aside appropriate reserves, thereby having such
adverse effect. In 1992, EDI-MA was required to write off a significant amount
of inventory as a result of obsolescence. Although none of these factors, with
the exception of inventory obsolescence, have had a material adverse effect on
EDI-MA's or the Company's results of operations to date, there can be no
assurance that such factors will not have a material adverse effect on the
Company's future results of operations.
The Company's gross margins may vary in the future as a result of
declining selling prices. The selling prices of the Company's existing products
are generally expected to decline over time. In particular, sales of the
Company's commercial memory products toward the end of a product's life cycle
are typically characterized by steep declines in sales and pricing, the precise
timing of which may be difficult to predict. The Company could experience
unexpected reductions in sales of products as customers anticipate new product
purchases. See "Risks of Technological Changes and Development of New Products."
Although none of these factors are presently materially affecting the Company,
these factors could give rise to obsolete or excess inventory, returns of
products by distributors, or substantial price protection credits or discounts.
To the extent that the Company is unsuccessful in managing product transitions,
its business, financial condition and results of operations could be materially
adversely affected.
The Company's ability to maintain or increase net revenue will be highly
dependent upon its ability to increase unit sales volumes of existing products
and to introduce and sell new products in quantities sufficient to compensate
for the anticipated declines in selling prices. Declining selling prices may
also materially adversely affect the Company's gross margins unless the Company
is able to correspondingly reduce its cost per unit to offset the declines
and/or introduce and make volume sales of new products with higher margins.
There can be no assurance that the Company will be able to increase unit sales
volumes, introduce and sell new products or reduce its cost per unit. Although
declining selling prices have not previously had a material adverse effect on
the Company's results of operations, there can be no assurance that declining
selling prices will not have a material adverse effect on future results of
operations.
In addition, future operating results may be impacted by general
economic conditions and various competitive factors, including price-based
competition and competition from other parties employing competing technologies.
The Company's operating results could also be affected in any given period by
business interruptions or costs associated with an earthquake, fire, theft or
other similar events outside the control of the Company, which events may not be
fully covered by applicable insurance coverages.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in a particular period if the Company's net sales for a
period are not met because a substantial component of the operating expenses are
fixed costs. Accordingly, there can be no assurance that the Company will be
able to be profitable or that it will not sustain losses in future periods. Due
to the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such an event, the price of the Company's Common Stock may be
materially adversely affected.
RISK OF MANAGING GROWTH AND EXPANSION OF OPERATIONS
Each division of the Company has significantly expanded its operations
over the last three fiscal years. In 1993-94, in preparation for Crystallume's
March, 1994 initial public offering (the "Offering"), Crystallume geared up its
production, thereby generating net operating losses. After the Offering,
Crystallume continued to expand and generate further net operating losses. See
"History of Operating Losses/Continuing Net Losses." Similarly, EDI-MA, while
generating profits, experienced substantial growth during fiscal 1994 and 1995.
The growth of operations of Crystallume and EDI-MA, along with the effects of
the Acquisition, has placed, and may continue to place, a significant strain on
the Company's limited personnel and management, manufacturing and other
resources. The Company's prior management team has now been substantially
replaced by EDI-MA's management team. See "Recent Management Turnover."
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In addition, while the Company continues to have the assets and facility
base generated by the expansion of Crystallume's operations in 1993-95, as a
result of a restructuring in December, 1995, in which the Company consolidated
its administrative and financial functions at its executive offices in
Westborough, Massachusetts, reduced expenditures on direct marketing of its
diamond products, and terminated certain executive officers (the
"Restructuring"), the Company does not have the corresponding management and
administrative structure that was initially developed to manage such assets and
facilities. See "Restructuring of Diamond Operations/Possibility of Strain on
Administrative and Management Resources." Management's ability to manage the
Company's combined operations may also be adversely affected by management's
adjustment to operating a public company as EDI-MA was a privately held company.
See "Management's Inexperience Operating a Public Company." Although the Company
considers its existing management and administrative structure to be sufficient
to handle the Company's present operations and possible growth in the immediate
future, there can be no assurance that significant problems will not arise in
managing the Company's combined operations.
The Company's ability to manage the Company's combined operations may
depend upon an expansion of its accounting and other internal management systems
and the implementation of a variety of procedures and controls. There can be no
assurance that significant problems in these areas will not occur. Any failure
to expand these systems and implement such procedures and controls in an
efficient manner could have a material adverse effect on the Company's business,
financial condition and results of operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased and the Company anticipates that this trend will
continue. With respect to the operations of the Company for the first half of
fiscal 1996, as reflected in the notes to the Company's unaudited consolidated
financial statements submitted in its Form 10-QSB for the second quarter of
fiscal 1996, pro forma combined operating expenses (after adjusting for the
Restructuring) increased by approximately 11% from the same period in fiscal
1995 while pro forma combined sales increased by approximately 86% from the same
period in fiscal 1995. In particular, to continue to provide customer service
and quality products and to meet additional demands of its customers, the
Company will be required to continue to increase staffing and other expenses,
including expenditures on capital equipment and sales and marketing. Should the
Company increase its expenditures in anticipation of a future level of sales
that does not materialize, the Company's business, financial condition and
results of operations would be materially adversely affected.
RISKS OF TECHNOLOGICAL CHANGE AND DEVELOPMENT OF NEW PRODUCTS
The Company's future results of operations will depend upon its ability
to improve and market its existing products and to successfully develop,
manufacture and market new products. The majority of the funds the Company
invests in research and development is allocated to display products and diamond
products. There can be no assurance that the Company will be able to continue to
improve and market its existing products or develop and market new products, or
that technological developments will not cause the Company's products or
technology to become obsolete or noncompetitive.
The semiconductor packaging industry is characterized by rapid
technological change and is highly competitive with respect to timely product
innovation. Memory products typically have a product life of only three to five
years. The Company's product line includes more than 100 different memory
products. The Company's current memory products represent stages of the life
cycle, and the Company introduces new products each year in response to the
evolving market. In fiscal 1995, EDI-MA introduced over 20 new memory products.
Although the majority of the Company's revenue and profit are derived
from its memory product business, the Company allocates a disproportionate
amount of its research and development budget to display and diamond products.
This allocation reflects the relative mature state of the memory product
business. This research and development strategy could potentially have a
materially adverse effect on the Company's future performance.
The Company's competitors in the flat panel display business are
investing substantial resources in the development and manufacture of flat panel
displays using a number of alternative technologies. In the event these efforts
result in the development of products that offer significant advantages over the
Company's
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products, and the Company is unable to improve its technology or develop or
acquire alternative technology that is more competitive, the Company's business
and results of operations will be adversely affected. The Company's success and
growth in future periods may also depend in part upon the Company's ability to
successfully develop and market full color displays as well as other technology
to improve display performance (i.e., brightness, contrast and viewing angle).
There can be no assurance that the Company will be able to improve its
technology or develop and market full color displays or other products intended
to keep the Company competitive.
Since the diamond products division is largely engaged in research and
development at this time, the achievement of the diamond division's business
objectives depends not only on the successful introduction of the division's
initial products in volume into the marketplace but more significantly on the
division's contributions to the Company's development of new commercial
products. There can be no assurance that the diamond division's research and
development efforts will result in any viable commercial products.
The Company's next major diamond related project is to work to
introduce packaged semiconductor products incorporating diamond as a heat
spreader to enable electronic devices to operate at higher power or lower
temperatures. The higher the thermal conductivity of the heat spreader, the
lower the resulting chip temperature. Substituting diamond for existing heat
spreading materials is expected to result in significantly better heat removal
and greatly improved semiconductor performance and reliability in heat sensitive
operations. The Company has supplied limited quantities of heat spreaders
meeting these requirements for use in laser diodes that are in turn used
primarily in communication systems. The Company, however, has not allocated a
material portion of its research and development budget to developing diamond as
a heat spreader. There can be no assurance that heat spreaders or any of the
Company's new products will be successfully developed or that such products will
achieve market acceptance.
The Company believes that its future successes depend on its ability to
rapidly achieve market acceptance of new products and new programs and
thereafter to develop new products or product enhancements to keep up with
technological advances and to meet customer needs. The Company has experienced,
and may in the future experience, delays from time to time in development and
introduction of new products. There can be no assurance that the Company will be
successful in developing and introducing new products in a timely manner, that
new products will gain market acceptance, that the new process technologies can
be successfully implemented, or that the Company will have adequate financial or
technical resources for future product development and promotion.
DEPENDENCE ON DEFENSE INDUSTRIES
With respect to memory and flat panel display products, contracts with
defense related companies and revenues generated therefrom in the aggregate
account for a material portion of the Company's overall revenues. The defense
contracts tend to require memory products to be manufactured as compliant to
military specifications. Military capital expenditure levels have been declining
for several years and depend on factors that are outside the Company's control,
and the defense industry has been moving toward the purchase of commercial
off-the-shelf ("COTS") products rather than those manufactured as compliant to
specified military standards. The Company's sales to the military industry,
while relatively constant over the past three fiscal years, have steadily
diminished as a percentage of overall sales as the Company's sales of commercial
products have significantly increased. In fiscal 1994, military related sales
accounted for over 50% of the Company's overall sales, whereas military related
sales accounted for less than 50% of the Company's sales in fiscal 1995. (The
Company measures military related sales in terms of the sales of specific
products which are typically used in military applications. This may include
some sales to commercial customers, while some sales of "commercial" products
may go to military customers.) Although, to date, these changes have not had a
materially adverse effect on the Company's results due to increased demand
resulting from upgrading of existing military systems and the slow rate of
adoption of the COTS program, continued reductions in military spending could
adversely affect the Company's sales and profits.
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DIFFICULTY IN INTEGRATING OPERATIONS ARISING FROM THE ACQUISITION
Although the Company's semiconductor memory and display product division
has been profitable since the Acquisition, no assurance can be given that this
division will continue to be profitable. The Acquisition involves numerous
risks, including possible difficulties in the assimilation of the operations,
technologies and products of the two divisions; possible unexpected liabilities;
possible unforeseen operating difficulties; possible diversion of management's
attention from other business concerns; possible risks of entering markets in
which the Company has no or limited direct prior experience; and possible
requirement to raise additional funds through dilutive issuances of equity
securities. There can be no assurance that the anticipated benefits of the
Acquisition will be realized.
RECENT MANAGEMENT TURNOVER
As part of the October, 1995 Acquisition and related Restructuring,
there was substantial turnover in the management of the Company as the upper
level management team of EDI-MA assumed control over most of the operations of
the Company, with Donald F. McGuinness as Chairman, President and Chief
Executive Officer and Frank D. Edwards as Senior Vice President of Finance,
Chief Financial Officer and Secretary. With the exception of John Herb, Vice
President and General Manager for diamond products, none of the former senior
executive officers of Crystallume remain with the Company. No assurance can be
given that the current management team, with its limited experience in diamond
technology, will be able to achieve successful results from the diamond research
and development activities of the Crystallume division.
MANAGEMENT'S INEXPERIENCE OPERATING A PUBLIC COMPANY
As a result of the Acquisition, the management team of EDI-MA, a
privately held company, assumed control over the operations of the Company.
While it is not unusual for a young public company to have management without
experience operating a public company, it is possible that the required learning
and additional responsibilities inherent in managing a public company could
cause management to be unable to dedicate as much time and resources as might be
required to address the challenges facing the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in part upon the continued
contributions of its key technical and senior management personnel, many of whom
would be difficult to replace. As a result of the Acquisition and related
Restructuring, most of Crystallume's management personnel resigned or were
terminated and have been replaced by EDI-MA's management team. The management
team of the EDI division's operations, has remained stable. Since EDI is the
dominant component of the Company's business, the recent turnover in management
of the Company's diamond operations is not expected to have a material adverse
effect on the Company. It is possible, however, that the Company's recent shift
in business focus from diamond operations to the semiconductor and display
products business could result in employees leaving the Company's diamond
operations. Although it is not expected that any such future departure of
employees from the Company's diamond operations would adversely affect the
Company, there can be no assurance that the departure of key scientists or other
personnel would not adversely affect the Company.
Other than Donald F. McGuinness, Chairman, President and Chief Executive
Officer of the Company, no employees have an employment or non-competition
agreement. The Company's future operating results also depend in part upon its
ability to attract and retain qualified management, manufacturing and quality
assurance, engineering, marketing, sales and support personnel, and the Company
is actively recruiting such personnel in certain of these functions. However,
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel now or
in the future. There may be only a limited number of persons with the requisite
skills to serve in these positions, and it may be increasingly difficult for the
Company to hire such persons over time. The loss of any key employee, the
failure of any key employee to perform in his or her current position, the
Company's inability to attract and retain skilled employees as needed or the
inability of the officers and key employees of the Company to expand, train and
manage the Company's employee base could materially adversely affect the
Company's business, financial condition and results of operations.
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SIGNIFICANT CUSTOMER CONCENTRATION
A relatively small number of customers accounted for a significant
percentage of the Company's net sales in the first half of fiscal 1996. In that
period, EDI's ten largest customers have accounted for approximately 50% of the
Company's net sales, but no single customer has accounted for over 10% of the
Company's net sales. The Company expects that sales to relatively few customers
will continue to account for a significant percentage of its net sales in the
foreseeable future and believes that its financial results will depend in
significant part upon the success of its customers' products. The loss of a
major customer or any reduction in orders by any such customer could have a
material adverse effect on the Company's business, financial condition and
results of operations.
VARIABLE ORDER FLOW
The Company generally has no firm long-term volume commitments for
product sales from its customers and generally enters into individual purchase
orders with its customers. The Company has experienced cancellations of orders
and fluctuations in order levels from period to period and expects it will
continue to experience such order cancellations and fluctuations in the future.
In addition, customer purchase orders may be canceled and order volume levels
can be changed, canceled or delayed with limited or no penalties. The
replacement of reduced, canceled or delayed purchase orders with new business
cannot be assured. Moreover, the Company's business, financial condition and
results of operations will depend in significant part upon its ability to obtain
orders from new customers, as well as the financial condition and success of its
customers, its customers' products and the general economy.
COMPETITION
The Company's principal competitors in the commercial static random
access memory ("SRAM") module market are Integrated Device Technology, Inc.
("IDT") and Cypress Semiconductor, Inc. ("Cypress"). These companies are both
public, larger than the Company, have substantially greater financial,
technical, marketing, distribution and other resources, and have a much greater
presence in the overall SRAM market. They both manufacture memory products in
monolithic form and supply modules which incorporate these devices in products
that compete with the Company's products. The Company, on the other hand,
purchases its memory devices from third parties and competes based on the value
that it adds to the memory devices. In addition, the Company competes with a
number of smaller and larger semiconductor companies who manufacture memory
modules. The Company competes in this market on the basis of many factors,
including access to advanced semiconductor products at competitive prices,
successful and timely product introduction, design capability, lead times,
quality, product specification, pricing and customer service. There is the risk
that slower demand for semiconductor devices will cause the Company's larger
competitors to compete more aggressively in the SRAM module market to sell the
memory devices they manufacture.
The Company's principal competitors in the military memory market are
Austin Semiconductor, Inc. ("Austin"), Dense-Pac Microsystems, Inc., and White
Technology, a division of Bowmar, Inc. The Company believes that each of these
companies is smaller than itself and focuses on the same customers, although
Austin is a division of a private company that is substantially larger than the
Company. The Company may also compete from time to time in this market with IDT
and Cypress, particularly in lower density technology. The Company competes in
this market on the basis of many factors, including its quality system which
allows it to comply with U.S. and foreign military standards, longer term access
to advanced semiconductor products in die and wafer form, successful and timely
product introduction, inclusion of its products on standard military drawings,
design capability, lead times, product specification, pricing and customer
service.
The principal bases of competition among non-PC flat panel display
suppliers are display performance (e.g., brightness, color capabilities,
contrast and viewing angle), size and weight, design flexibility, power usage,
durability and ruggedness. The primary competition for the Company's flat panel
displays currently is encountered from cathode ray tube displays ("CRTs"), which
currently dominate the information display market but are large, heavy, fragile
and require substantial amounts of power to operate. In the industrial,
military, and avionics markets, the Company's products also compete with other
flat panel displays including gas plasma and electroluminescent displays. Two
other competitive pressures the Company faces are its customers' ability to make
the display products on their own and new and existing companies following the
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Company's strategy of purchasing and enhancing flat panel displays manufactured
by third parties. Because of display performance and the significant investments
previously and currently being made by a number of Japanese and Korean
companies, the Company believes that flat panel displays will displace CRTs as
the leader in the avionics display market and eventually in all display markets
as the demand grows for high performance, flat, lightweight and power efficient
displays capable of delivering high volumes of information.
The diamond industry is undergoing rapid development and technological
change. CVD diamond coating technology is being vigorously pursued by several
large, well capitalized companies in the United States, Europe and Japan. The
Company's products must also compete with products made with other diamond
processes and with alternative materials. The Company faces growing competition
from developers of diamond-like substitutes. In the future, new technologies and
materials may be developed that will provide further competition.
There can be no assurance that the Company will be able to compete
successfully in the future against existing or potential competitors or that the
Company's operating results will not be adversely affected by increased price
competition.
DEPENDENCE ON INTERNATIONAL SALES AND PURCHASES
International sales, primarily in the Company's semiconductor and flat
panel display operations, accounted for more than 30% of net sales in the first
half of fiscal 1996. The Company anticipates that international sales will
continue to account for a substantial portion of net sales. In addition, the
majority of the Company's semiconductor components and ceramic packages (used in
connection with the Company's products for military applications) are acquired
from foreign manufacturers worldwide, particularly countries located in
Southeast Asia. See "Absence of Contractually Assured Sources of Supply/General
Limitations on Availability of Supply." As a result, a significant portion of
the Company's sales and the Company's purchases are subject to certain risks,
including trade disputes; changes in regulatory requirements; tariffs and other
barriers; the possibility of quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of the Company's products being
implemented by the United States; and timing and availability of export
licenses. Foreign suppliers of semiconductor related materials are regularly
threatened with, or involved with, pending trade disputes and sanctions which,
if realized, could materially adversely effect the Company by closing off
critical sources of supply for the raw materials used to produce its products.
Other international risks that may impact the Company's sales and
purchases include: political and economic instability; difficulties in accounts
receivable collections; natural disasters; difficulties in staffing and managing
foreign subsidiary and branch operations; difficulties in managing distributors;
difficulties in obtaining governmental approvals for telecommunications and
other products; potentially adverse tax consequences; and the burden of
complying with a wide variety of complex treaties and foreign laws, and
accepting customer purchase orders governed by foreign laws which may differ
significantly from United States laws and limit the Company's ability to enforce
its rights under such agreements and to collect damages, if awarded.
The Company is also subject to the risks associated with the imposition
of legislation and regulations relating to the import or export of high
technology products. Specifically, the Company could be adversely affected if
the United States should under any circumstances choose to impose sanctions or
tariffs on Japanese or South Korean companies, given the large quantity of the
Company's products acquired from Japanese and South Korean suppliers.
Foreign exchange risk also exists as fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive to
customers in a particular country, or cause raw materials and manufacturing
services acquired from foreign sources to become more expensive to the Company,
leading to a reduction in sales or profitability in that country. Although the
Company's sales and purchases are denominated primarily in United States
dollars, future international activity may result in foreign currency
denominated sales and purchases.
While none of the factors described in this risk factor have yet to have
a material adverse effect on the Company's business, financial condition and
results of operations, there can be no assurance that any of these
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factors will not have a future material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY
The Company, in both its memory and diamond activities, relies upon
trade secrets and other non-patent proprietary information. In addition, all of
the Company's employees are generally required to enter into agreements
providing for confidentiality and the assignment of rights to inventions made by
them during their employment, and the Company routinely enters into
nondisclosure agreements that are intended to maintain the secrecy of its
confidential information delivered to third parties for research and other
purposes. The Company recently settled litigation with a company formed by
certain former employees of the Crystallume division involving, among other
things, their commercial use of information related to diamond technology which
is claimed by the Company to constitute its trade secrets. There can be no
assurance that other disputes will not arise as to ownership of portions of the
Company's technology or that the Company's confidentiality, assignment and
nondisclosure agreements will provide the necessary protection.
With respect to memory and display products, the Company does not rely
on patents, and has no patents on memory or display products. In its diamond
activities, the Company has been granted 16 U.S. patents and three European
patents, has 15 additional patents pending in the U.S. and has six foreign
patents pending. Of these, the Company has received notice of allowance with
respect to four of the U.S. patent applications. The issued patents and patent
applications primarily relate to CVD diamond products and materials and methods
of manufacturing CVD diamond. In addition to the Company's owned patents, the
Company is the exclusive licensee of technology and patents arising from
research sponsored by the National Center for Manufacturing Sciences ("NCMS"), a
large consortium of North American manufacturers, regarding processes for
improving the adhesion of CVD diamond to tungsten carbide. The Company has a
worldwide, royalty-free right to use the adhesion technology for all
applications, except that it is obligated to pay NCMS a royalty equal to 2% of
its sales of cutting tool inserts (up to a maximum of $1,400,000 of royalties).
The Company is designated the exclusive agent for licensing use of the
technology for diamond coated inserts and is obligated to grant licenses, if
requested, to NCMS members. The prescribed license fee is $100,000 plus a 4%
royalty and is to be shared equally between the Company and NCMS. To date, no
such licenses have been granted. The Company may share technology rights with
other strategic partners in the future.
HISTORY OF OPERATING LOSSES/CONTINUING NET LOSSES
Since the Company's inception as Crystallume, the Company's business
relating to diamond research and development has incurred net operating losses
each year and as of September 30, 1995 had an accumulated deficit of
$20,668,000, and after the Acquisition and as of March 31, 1996, the Company had
an accumulated deficit of $20,432,000. The Company, from its diamond operations,
incurred net losses of $4,158,000, $4,034,000 and $3,242,000 for the fiscal
years ended September 30, 1995, 1994 and 1993, respectively. See "Limitation in
the Use of Net Operating Loss and Research and Development Tax Credits."
RESTRUCTURING OF DIAMOND OPERATIONS/POSSIBILITY OF STRAIN ON ADMINISTRATIVE AND
MANAGEMENT RESOURCES
In connection with the Acquisition and related reorientation of the
business to focus primarily on memory and flat panel display products and as a
result of the financial burdens imposed by the diamond operations, the Company
decided to restructure its business (the "Restructuring"). The Restructuring
involved consolidating the Company's administrative and financial functions at
its executive offices in Westborough, Massachusetts, reducing its occupied space
in the Santa Clara facility, and terminating certain executive officers. These
changes resulted in the Company incurring a charge to earnings of $590,000 for
the quarter ending December 31, 1995. Relatedly, the Company reduced
expenditures for direct marketing of its diamond products. Despite this
Restructuring, the Company will continue its diamond research and development
operations and to sell products, primarily its diamond cutting tool inserts,
although such operations are not currently profitable and may continue to incur
losses. While the Restructuring was designed to improve the Company's allocation
of its financial, administrative and management resources, it is possible that
the administrative and management personnel at the Company's headquarters in
Westborough, Massachusetts, may be overly burdened.
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NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers, particularly in connection with
the Company's memory and flat panel display operations, will continue to
establish demanding specifications for quality, performance, reliability and
delivery. In the past, the Company, specifically EDI-MA, experienced quality
problems resulting in product returns and cancellations. In the past, the
Company has promptly resolved the problems, and the resulting returns did not
materially adversely impact the Company's results of operations or financial
condition in such cases. There can be no assurance that any such problems would
not occur in the future with respect to the quality, performance, reliability
and delivery of the Company's products, and there can be no assurance that any
such problems would not have a material adverse effect on the Company's
business, results of operations or financial condition. If such problems occur,
the Company could experience increased costs; delays in, cancellations of or
rescheduling of, orders or shipments; delays in collecting accounts receivable;
and increases in product returns and discounts, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
RELIANCE ON GOVERNMENT RESEARCH CONTRACTS
Until the recent Acquisition, the Company has been primarily engaged in
research and development activities directed toward its core CVD diamond
technology and toward extending the technology to new product development. Most
of the Company's revenues have historically come from research and development
contracts, primarily with agencies of the United States government. As the
primary part of its strategy for financing research and development relating to
diamond technology, the Company has entered into research contracts with various
departments and agencies of the U.S. government, particularly through the Small
Business Innovative Research ("SBIR") program, on a wide variety of subjects
relating to its core CVD diamond technology. For fiscal 1993, 1994 and 1995,
government research contracts accounted for 67%, 94% and 88%, respectively, of
the diamond business' total revenues. Additional research and development
funding has been provided through collaborative development agreements with
other companies and NCMS.
As of March 31, 1996, the Company was engaged in 10 diamond technology
research projects with the federal government. These projects involve
firm-fixed-price or cost-plus-fixed-fee contracts under which the Company is
obligated to provide technical reports and in certain instances, sample
materials. Approximately $1,800,000 remained as backlog under open research
contracts as of March 31, 1996. Inasmuch as these contracts have been fully
funded, the Company believes that they will not be affected by any future
reduction in government spending. However, the period over which funds are
disbursed may be extended as a result of certain current federal budget
proposals. The Company also anticipates that it will generate revenues from
future government research contracts, and any reduction in future government
funding (as a result of cutbacks in defense spending or otherwise) could
adversely affect the Company's planned research and development. In addition,
the Company intends to apply for additional contracts in the normal course of
business, and there can be no assurance that these applications will be granted.
For fiscal 1993, 1994 and 1995, research and development expenses related to
these contracts amounted to $2,705,000, $2,580,000, and $2,919,000,
respectively.
The Company's research relationships, including cooperative research and
development projects with other companies, are important to its business. There
is no assurance that its existing or any future collaborative arrangements will
result in successful programs to develop and market its products.
MARKET ACCEPTANCE OF DIAMOND PRODUCTS
Although the primary objective of the diamond division is now to conduct
research and development efforts using diamond technology to enhance the
Company's electronic products and to design new products, the Company is
currently attempting to sell its diamond tool insert products through
independent sales representatives and existing tool suppliers. The Company has
limited marketing experience and resources to undertake extensive independent
marketing activities. The Company currently has established distribution
arrangements with its independent sales representatives and tool suppliers, and
Mitsubishi Materials, U.S. has agreed to market and distribute the Company's
diamond tool inserts in North America on a non-exclusive basis under
Mitsubishi's Fabmet tradename. The Company's initial sales of these products
have not met original expectations, due, among other things, to lengthy customer
product evaluation cycles; the wide range of cutting
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tools in use, each of which may require a different insert and a separate
customer evaluation; and general difficulty in displacing established diamond
enhanced insert technologies.
To achieve a successful introduction of the diamond tool inserts into
the marketplace, the Company must overcome technological, engineering, marketing
and manufacturing challenges associated with establishing the production of
commercial quantities of high quality, reliable products at acceptable costs on
a timely basis. The Company does not project significant sales of these diamond
coated tool products.
LIMITED PRODUCTION CAPACITY FOR DIAMOND PRODUCTS
Until recently, the Company had sold its diamond tool insert products
primarily for use in development, demonstration and testing of prototypes. In
the third quarter of fiscal 1995, the Company achieved commercial production of
diamond tool inserts and sold these products in limited quantities. The Company
has shipped its backlog of existing orders to customers, and production capacity
is not currently a concern given the limited order flow. In the event of
heightened demand, however, there can be no assurances that the Company would
have sufficient production capacity.
ENVIRONMENTAL RISKS
The Company's operations and manufacturing processes are subject to
certain federal, state, local and foreign environmental protection laws and
regulations. Moreover, environmental laws and regulations may become more
stringent over time. There can be no assurance that the Company's failure to
comply with either present or future regulations would not result in significant
compliance expenses, production suspensions or delay, restrictions on expansion
at its present or future locations, the acquisition of costly equipment or other
liabilities.
LIMITATION ON THE USE OF NET OPERATING LOSS AND RESEARCH AND DEVELOPMENT TAX
CREDITS.
Ownership changes, as defined in the Internal Revenue Code of 1986 (the
"Code"), have limited the amount of net operating loss and research and
development tax credit carryforwards that can be utilized annually to offset
future taxable income or tax liabilities. As of October 10, 1995, the annual
limitation amount as defined in the Code was approximately $700,000. Net
operating loss carryforwards of the Company of approximately $13,500,000 are
subject to this limitation and, as a result, at least, but not limited to,
$3,000,000 of these carryforwards will expire unutilized. Subsequent changes in
ownership could further affect the limitation in future years.
SHARES ELIGIBLE FOR FUTURE SALE
Sale of a substantial number of shares of the Common Stock in the public
market could adversely affect the market price of the Common Stock. Of the
5,556,172 shares of Common Stock outstanding as of April 19, 1996, approximately
(i) 1,833,294 are freely tradeable, (ii) 2,280,188 are registered for resale
under a separate registration statement (No. 333-3328), filed by the Company,
and (iii) 1,437,060 have been held for at least two years and are currently
eligible for resale from time to time, subject to Rule 144 restrictions.
Additionally, under registration statement No. 333-3328, the Company has
registered 1,495,200 shares of Common Stock issuable upon conversion of 3,738
shares of the Company's 12% Series A Convertible Preferred Stock, par value $.01
per share (the "Series A Preferred Stock") (each share of the Series A Preferred
Stock convertible into 400 shares of the Company's Common Stock), the sale of
which shares of Common Stock, if and when sold by such holders thereof, could
have a material adverse effect upon the market price of the Common Stock.
See "Description of Securities to be Registered--Preferred Stock."
The Company also has a current registration statement under the
Securities Act covering 2,603,705 shares of its Common Stock (i) issued or
issuable to certain eligible employees pursuant to the Company's Employee Stock
Purchase Plan, (ii) issued or issuable upon the exercise of outstanding stock
options granted to employees, directors, officers and consultants of EDI-MA as
part of the Acquisition, and (iii) issued or issuable upon the exercise of
outstanding stock options granted or to be granted to employees, officers,
directors, consultants and independent contractors of the Company. The sale of
such shares, if and when sold, could have a material adverse effect upon the
market price of the Common Stock of the Company. In addition,
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the Company has a separate registration statement covering 551,359 shares of its
Common Stock issued or issuable upon the exercise of outstanding stock options
granted or to be granted to employees, officers, directors, consultants and
independent contractors of the Company.
As of April 19, 1996, the holders of approximately 1,392,054 additional
shares of Common Stock and the holders of outstanding warrants to purchase
998,393 shares of Common Stock, have the right, under certain conditions, to
participate in future Company registrations and under certain conditions to
cause the Company to register certain shares of Common Stock owned by them. See
"Description of Securities to be Registered -- Registration Rights."
In general, under Rule 144, as currently in effect, holders of shares of
Common Stock of the Company which are not freely tradeable and have been held
for at least two years will be able to sell, without registration and in
addition to any shares that are sold pursuant to a registration statement,
within any three-month period, a number of shares of Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of Common Stock or the
average weekly trading volume of Common Stock on all exchanges and reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
restrictions including, but not limited to, the manner of sale, notice
requirements and the availability of current public information about the
Company.
The effect, if any, that future market sales of the Common Stock sold
from time to time pursuant to Rule 144 or the availability of the Warrant Shares
for sale will have on the market price of the Common Stock cannot be predicted.
Nevertheless, sales (or the perception that such sales could occur) of
substantial amounts of Warrant Shares in the public market and/or sales of
substantial amounts of the Common Stock pursuant to Rule 144 might adversely
affect prevailing market prices for the Common Stock of the Company.
CONCENTRATION OF SHARE OWNERSHIP
Based on the number of shares outstanding as of April 19, 1996, the
executive officers, directors and principal shareholders of the Company (those
that hold 5% or more of the Company's voting capital stock) and their affiliates
own or control, in the aggregate, approximately 50% of the outstanding voting
shares of the Company capital stock, not counting shares purchasable under
outstanding options or warrants but including shares of Series A Preferred Stock
which vote on an as-converted basis. Based on the number of shares outstanding
as of April 19, 1996, assuming all options, warrants and convertible securities
held by each of the executive officers, directors and principal shareholders of
the Company (but not those held by any other person) that are exercisable or
convertible within 60 days have been exercised or converted, the executive
officers, directors and principal shareholders own or control approximately 70%
of the outstanding shares of the Company. As a result, the executive officers,
directors and principal shareholders of the Company may be able to control the
Company and direct its affairs and business.
RISKS OF DILUTION
The issuance of additional shares of the Company's Common Stock pursuant
to the exercise of outstanding options, Redeemable Warrants, other warrants and
the Series A Preferred Stock could result in dilution to the shareholders. The
exercise prices on the options have ranged from $.22 to $5.13 per share, the
Redeemable Warrants are exercisable at $6.00 per share, the Company's other
warrants are exercisable at prices ranging from $2.00 per share to $12.66 per
share, and each share of Series A Preferred Stock is convertible at any time, at
the option of the stockholder, for 400 shares of Common Stock (subject to
dilution adjustments). If all of the outstanding options, Redeemable Warrants,
other warrants and the Series A Preferred Stock were exercised and/or converted,
the outstanding capital stock of the Company would be increased by approximately
1,900,000 shares, 1,100,000 shares, 1,100,000 shares and 1,500,000 shares,
respectively.
POSSIBLE VOLATILITY OF STOCK
The Company believes that, in the future, the price of its Common Stock
could fluctuate as a result of any number of factors, including announcements of
new products by the Company or its competitors, quarterly fluctuations in the
Company's financial results and general conditions in the semiconductor, flat
panel display
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or CVD diamond technology industries. In recent years, the stock markets have
been highly volatile, and the market prices of securities issued by many
companies, especially technology related companies, have fluctuated widely for
reasons unrelated to their operating performance.
RISKS ASSOCIATED WITH UNCLASSIFIED PREFERRED STOCK
The Company's Board of Directors (the "Board") has the authority to
authorize and issue shares of the preferred stock (the "Preferred Stock") and to
determine the terms of such stock, without further action by the shareholders.
The issuance of such stock could adversely affect the voting power or other
rights of the holders of Common Stock. For example, the terms could conceivably
prohibit the Company's consummation of any merger, reorganization or other
extraordinary corporate transaction absent approval of the outstanding shares of
Preferred Stock. The Company has no current plan to issue any shares of
Preferred Stock other than the Series A Preferred Stock.
ABSENCE OF DIVIDENDS
The Company has never paid a dividend on its Common Stock and/or its
Preferred Stock (including its Series A Preferred Stock). The Company intends to
retain any earnings for use in its business and has no intention of declaring or
paying cash dividends on its Common Stock and/or its Preferred Stock (including
its Series A Preferred Stock) in the foreseeable future.
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THE COMPANY
Electronic Designs, Inc. (the "Company"), a Delaware corporation
incorporated in January, 1996, has two divisions which engage in two potentially
complementary lines of business: (1) the Electronic Designs, Inc. ("EDI")
division which is responsible for the Company's core business of designing,
manufacturing and selling semiconductor memory circuits and flat panel display
products, and (2) the much smaller Crystallume division which is largely a
research and development enterprise aimed at developing and marketing industrial
applications for diamond films and coatings.
The Company previously operated as a California corporation under the
name Crystallume. On October 10, 1995, Crystallume acquired Electronic Designs,
Inc., a privately held Massachusetts corporation ("EDI-MA"), in a purchase
transaction (the "Acquisition") for approximately $13,000,000, less certain
costs incurred by EDI-MA in connection with the transaction, for cash and short
term notes of approximately $11,600,000 and the issuance of 314,826 fully vested
options to purchase Company Common Stock at an exercise price of $0.22 per share
in exchange for EDI-MA options which were outstanding on the date of the
Acquisition. As a result of the Acquisition, EDI-MA became a wholly-owned
subsidiary of Crystallume and is now a wholly-owned subsidiary of the Company.
The former management of EDI-MA has assumed principal responsibility for the
management of the Company. Since the Acquisition, the Company has operated
EDI-MA in a manner such that there have not been any material changes in the
operations of the EDI division resulting from the Acquisition. On March 6, 1996,
the shareholders of Crystallume approved the reincorporation of Crystallume in
Delaware and a change of name to Electronic Designs, Inc. through the merger of
Crystallume with and into the Company (the "Merger"), a wholly-owned subsidiary
of Crystallume.
The EDI division supplies memory circuits in monolithic and modular form
and active matrix liquid crystal displays ("AMLCDs") to the commercial,
industrial and military markets in the U.S. and abroad. EDI's products are used
in commercial and military computing, avionics, aircraft control, defense,
telecommunications and data communications systems worldwide.
Since its inception in 1984 as a California corporation, the Crystallume
division has worked to develop industrial products incorporating diamond films
and coatings to take advantage of diamond's extreme hardness, unsurpassed
thermal conductivity and other unique properties. The diamond used by
Crystallume is created through chemical vapor deposition ("CVD"), which converts
methane gas into diamond.
Although the Company currently intends to continue its research and
development efforts in connection with, as well as its sale of existing products
from, its diamond operations, the Company, as a result of the Acquisition, has
focused its primary efforts on the design, manufacture and sale of semiconductor
and display products. The Company believes that Crystallume's diamond research
and technology experience may, in certain respects, complement the design,
manufacturing and marketing success EDI has enjoyed. For instance, the Company
believes that the speed and reliability of semiconductor devices might be
improved through the use of diamond technology to enhance the thermal
dissipation of EDI's electronic packaging components, and possibly to design
future generations of flat panel displays. The Company, however, has yet to
incorporate its diamond technology into EDI's products, and there can be no
assurance that such products, if developed, would be technically or commercially
viable.
The Company's principal executive offices are located at One Research
Drive, Westborough, Massachusetts 01581 and its telephone number is (508)
366-5151. The Company's shares of Common Stock and Redeemable Warrants are
currently traded on the Nasdaq Small-Cap Market under the symbols, "EDIX" and
"EDIXW," respectively. The corresponding securities of Crystallume prior to the
reincorporation and name change described above were quoted on the OTC Bulletin
Board under the symbols "CRYS" and "CRYSW," respectively.
The Company completed its initial public offering of shares of Common
Stock (the "Offering") in March, 1994. The net proceeds from the Offering were
used primarily for expanding production capacity, research and development,
marketing and sales activities and for general working capital purposes.
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PLAN OF DISTRIBUTION
All of the shares of Common Stock offered hereby are issuable upon the
exercise of the 1,000,000 Redeemable Warrants of the Company. Such shares are
being offered on a continuous basis pursuant to Rule 415 of the Securities Act
of 1933, as amended, during the period of time that the Registration Statement
to which this Prospectus relates is kept effective, but no later than March 22,
1997. Each Redeemable Warrant entitles the holder to purchase one share of
Common Stock for $6.00 and expires March 22, 1997. Outstanding Redeemable
Warrants may be redeemed by the Company, under certain conditions, upon 30 days'
written notice, at $0.10 per Redeemable Warrant. See "Description of Securities
to be Registered."
The Company has also issued to Dickinson & Co., the representative of
the underwriters for the Company's Initial Offering, warrants (the
"Representative's Warrants") to purchase up to 100,000 shares of Common Stock
and 100,000 Redeemable Warrants, at an exercise price equal to 120% of the
Initial Offering price, or $6.48 per share for the Common Stock and $0.12 per
warrant for the Redeemable Warrants. The Representative's Warrants are
exercisable at any time and from time to time during the four-year period
commencing March 22, 1995. The Representative's Warrants are freely transferable
subject to the terms of the agreement governing such Representative's Warrants
and subject to applicable federal and state securities laws. During the term of
the Representative's Warrants, each holder of the Representative's Warrants is
given the opportunity to profit from the rise in the market price of the
Company's Common Stock or Redeemable Warrants. The Company may find it more
difficult to raise additional equity while the Representative's Warrants are
outstanding. At any time when Dickinson & Co. might be expected to exercise the
Representative's Warrants, the Company would probably be able to obtain
additional equity capital on terms more favorable than those provided in the
Representative's Warrants. Any profit realized on the sale of the Common Stock
or Redeemable Warrants issuable upon exercise of the Representative's Warrants
may be deemed additional underwriting compensation.
USE OF PROCEEDS
The Company does not anticipate that any substantial amount of proceeds
will be received in the near future from the exercise of the Redeemable
Warrants. The Company expects to use any net proceeds from the exercise of
Redeemable Warrants over the period ending on March 22, 1997, the last day of
the term of the Redeemable Warrants, for working capital and general corporate
purposes. Pending the use of the net proceeds of this offering, the Company will
invest the net proceeds in short-term, investment grade, interest-bearing
securities.
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DESCRIPTION OF SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, par value $.01 per share, and 8,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock").
COMMON STOCK
As of April 19, 1996, there were 5,556,172 shares of Common Stock issued
and outstanding held of record by 196 shareholders. Holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Shareholder approval of most actions requires the approval of a
majority of the shares present, whether in person or by proxy, assuming a quorum
is present. Shareholder approval of the election of directors requires a
plurality of the votes of the shares present, whether in person or by proxy,
assuming a quorum is present. A quorum is the representation at a meeting in
person or by proxy of holders of more than 50% of the outstanding shares
entitled to vote. Delaware law permits supermajority voting, and at least 66 2/3
of the total votes eligible to vote is required for approval of certain
corporate matters, including removal of directors and certain amendments to the
Certificate of Incorporation (the "Certificate") and By-Laws of the Company.
Subject to the preferences of any outstanding Preferred Stock, holders
of Common Stock are entitled to receive such dividends as may be declared from
time to time by the Board out of funds legally available therefor. In the event
of liquidation, dissolution, or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment in
full of all creditors of the Company and the liquidation preferences of any
outstanding Preferred Stock. The shares of Common Stock have no preemptive
rights or other rights to subscribe for additional securities and are not
subject to rights of redemption. All of the outstanding shares of Common Stock
are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue up to 8,000,000 shares of Preferred
Stock, with such designations, rights, and preferences as may be determined from
time to time by the Board in accordance with the Company's Certificate and
Delaware law. Accordingly, the Board is empowered, without shareholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of issuance, the Preferred Stock could
be used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. See "Risk Factors--Risks
Associated with Unclassified Preferred Stock."
Of the 8,000,000 authorized shares of Preferred Stock, 4,126 shares have
been designated as the Series A Preferred Stock. As of April 19, 1996, there
were 3,738 shares of the Series A Preferred Stock issued and outstanding which
have the dividend, liquidation, conversion, voting and other rights as set forth
below and in more detail in the Certificate.
Dividends. The holders of the outstanding Series A Preferred Stock are
entitled to receive, when, as and if declared by the Board, out of any funds and
assets legally available (the "Available Funds and Assets") semi-annual
cumulative dividends in the amount of $120 per annum. Such cumulative and
accrued dividends on the Series A Preferred Stock are paid prior and in
preference to the payment of any dividend on the Common Stock (other than a
stock dividend declared and paid on the Common Stock that is payable in shares
of Common Stock). No dividends (other than a stock dividend declared and paid on
the Common Stock that is payable in shares of Common Stock) are permitted under
the Certificate to be paid or declared on any Common Stock unless the full
amount of any accrued and unpaid cumulative dividends accrued on the Series A
Preferred Stock is paid or declared in full and a sum sufficient for the payment
thereof is reserved and set apart.
Voting. Each holder of shares of Series A Preferred Stock is entitled to
the number of votes equal to the number of whole shares of Common Stock into
which such shares of Series A Preferred Stock may be converted. Because each
holder of Series A Preferred Stock is entitled to vote on an "as if converted
basis," the number of votes to which each holder is entitled may be subject to
adjustment upon the occurrence of certain events like stock splits, reverse
stock splits and the like. As of the date of this Prospectus, based upon the
initial conversion price for the Series A Preferred Stock ($2.50) (the
"Conversion Price") and the original issue price
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of each share of Series A Preferred Stock ($1,000.00) (the "Original Issue
Price"), each holder of a share of Series A Preferred Stock is entitled to 400
votes per share.
In general and except in a few specific circumstances, the holders of
Series A Preferred Stock are entitled to vote, together with the holders of the
Common Stock, with respect to any question upon which the holders of Common
Stock have the right to vote, except as may be otherwise provided by applicable
law.
Conversion. At any time, at the option of the holder of each share of
the Series A Preferred Stock, each share of the Series A Preferred Stock is
convertible into the number of shares of Common Stock which results from
dividing the Original Issue Price by the Conversion Price which is subject to
adjustment from time to time for any stock splits, reverse stock splits and the
like. As of the date of this Prospectus, each share of Series A Preferred Stock
is convertible into 400 shares of Common Stock. If the Company shall have
accrued but unpaid dividends with respect to any Series A Preferred Stock upon
its conversion, then all such accruals and unpaid dividends on converted shares,
unless delayed for payment by the Board, shall be canceled.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holder of each
share of Series A Preferred Stock then outstanding is entitled to be paid out of
the Available Funds and Assets of the Company and prior and in preference to any
payment or distribution on shares of Common Stock, an amount per share equal to
the Original Issue Price of the Series A Preferred Stock plus an amount equal to
all declared and unpaid dividends thereon. In addition, if there are any
Available Funds and Assets remaining after the payment or distribution (or the
setting aside for payment or distribution) to the holders of the Series A
Preferred Stock as described above, each share of the Series A Preferred Stock,
along with each holder of the shares of Common Stock of the Company, is entitled
to receive a pro-rata portion of the remaining Available Funds and Assets
according to the number of shares of Common Stock held by such holders (where
for this purpose, holders of shares of Series A Preferred Stock are deemed to
hold (in lieu of their Series A Preferred Stock) the greatest whole number of
shares of Common Stock then issuable upon conversion in full of such shares of
the Series A Preferred Stock).
Redemption. At any time after the date that is 6 calendar months after
the date on which the Company issued its first share of the Series A Preferred
Stock (the "Original Issue Date") and provided that the closing price of the
Common Stock on the Nasdaq Stock Market has been at least $4.00 per share or
more (appropriately adjusted for any stock dividends, stock splits,
recapitalization or the like) for twenty consecutive trading days, the Company
may, at the option of the Board, at any time and from time to time redeem the
Series A Preferred Stock in whole or in part. The redemption price is equal to
$1,100 (which is 110% of the initial offering price of each share) per share
plus the amount of all declared and unpaid dividends thereon. Such redemption
price is payable to each holder of the Series A Preferred Stock in cash or by
delivery of a 18-month promissory note of the Company to each such holder,
bearing simple interest at 12% per annum, in lieu of cash at redemption.
REDEEMABLE WARRANTS
The Redeemable Warrants were issued pursuant to a warrant agreement
between the Company and American Stock Transfer & Trust Company, as Warrant
Agent, and are in registrable form. They are traded on the Nasdaq Small Cap
Market under the symbol "EDIXW" (such Redeemable Warrants were formerly quoted
on the OTC Bulletin Board under the symbol "CRYSW" before the Company
reincorporated from California to Delaware and changed its name from
Crystallume to Electronic Designs, Inc. in March 1996. See "Prospectus
Summary--The Company"). Each Redeemable Warrant is exercisable immediately and
entitles the registered holder to purchase one share of Common Stock at a price
of $6.00 per share. Unless exercised or redeemed, the Redeemable Warrants
automatically expire in March 1997. The Company has the right to extend the
expiration date of the Redeemable Warrants.
If the closing bid price of the Company's Common Stock on Nasdaq (or, if
the Common Stock is not then traded on Nasdaq, on the principal exchange or
other trading mechanism on which the Common Stock is traded) is at least $9.00
per share for 20 consecutive trading days, the Company may, upon 30 days'
written notice, redeem all (but not less than all) of the then outstanding
Redeemable Warrants at a redemption price of $0.10 per Redeemable Warrant. To be
effective, the notice of redemption must be given within 10 business days after
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the end of any such trading period and must state the then effective exercise
price of the Redeemable Warrants. The Company may revoke any such notice before
the expiration of the notice period.
The holders of the Redeemable Warrants have no right to vote on matters
submitted to the shareholders of the Company, to receive dividends or to share
in the assets of the Company in the event of liquidation, dissolution or the
winding up of the Company's affairs.
The Company commits to use all reasonable efforts to keep this
Prospectus and the registration statement incorporating it current (or to cause
another registration statement and prospectus to become effective) so that they
cover any issuance of the Warrant Shares by the Company. However, there can be
no assurance that the Company will be able to do so, or that any registration
required for the exercise of the Redeemable Warrants in the state in which a
Redeemable Warrant holder resides will be in effect at the time desired. The
Redeemable Warrants will not be exercisable if a current registration statement
and prospectus covering such exercise and any registration required by
applicable state law are not then in effect.
OTHER WARRANTS
In connection with the Company's Initial Offering, the Company issued
the Representative's Warrants to Dickinson & Co., the representative of the
underwriters of the Initial Offering. The Representative's Warrants issued to
Dickinson & Co. have an exercise price of $6.48 per share for the Common Stock
and $0.12 per warrant for the Redeemable Warrants. These Representative's
Warrants are exercisable at any time from time to time from March 22, 1995 to
March 22, 1999. During this term, the holder of these Representative's Warrants
will have the opportunity to benefit from the rise in the market price of the
Company's Common Stock or Redeemable Warrants. The Company may find it difficult
to raise additional equity while the Representative's Warrants issued to
Dickinson & Co. are outstanding.
REGISTRATION RIGHTS
Certain holders of approximately 1,392,054 shares of Common Stock and
the holders of warrants exercisable for approximately 998,393 additional shares
of Common Stock (collectively, the "Holders") have certain rights to participate
in future registrations of securities by the Company and/or under certain
conditions to cause the Company to register those shares under the Securities
Act. Under the terms of the Registration Rights Agreement among the Company and
the Holders, if the Company proposes to register any of its Common Stock under
the Securities Act within five years of its Initial Offering which occurred in
March, 1994, each Holder will be entitled to include such Holder's shares in
such registration (but, specifically excluding this registration of the Warrant
Shares pursuant to this Registration Statement of which this Prospectus is a
part), subject to certain exceptions and limitations. The Holders have these
piggyback rights to be included in up to four Company registrations. See "Risk
Factors--Shares Eligible For Future Sale."
In addition, certain Holders of at least 30% of the securities with
certain demand registration rights have the right to require the Company to
register their shares, at the Company's expense, in up to two separate
registrations. The Company will not be required to register, pursuant to these
demand registration rights, fewer than 27% of the shares held by such Holders.
Because the Company is currently eligible to use Form S-3 under the
Securities Act for sales by its shareholders, certain Holders may also require
the Company, on not more than two occasions every 12 months, to register all or
a portion of their shares on Form S-3, subject to certain limitations.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The Transfer Agent, Warrant Agent and Registrar for the Company's Common
Stock and some of the Warrants is American Stock Transfer & Trust Company, New
York, New York.
25
29
EXPERTS
The audited financial statements of Crystallume for the year ended
September 30, 1995 and the audited consolidated balance sheet of Crystallume as
of October 10, 1995 incorporated in this Prospectus by reference to the Annual
Report on Form 10-KSB/A-2 of Crystallume for the year ended September 30, 1995
and the audited historical consolidated financial statements of Electronic
Designs, Inc. for the years ended December 31, 1994 and 1993 incorporated in
this Prospectus by reference to the Form 8-K/A-2 of Crystallume, dated October
10, 1995, which was filed on March 28, 1996, have been so incorporated in
reliance on the reports of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The audited financial statements incorporated by reference in this
Prospectus, to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for
the Company by Fenwick & West, Palo Alto, California.
26
30
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Selling Shareholders. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the shares of Common Stock in any jurisdiction where, or to any person
to whom, it is unlawful to make such offer or solicitation. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has not been any change in the facts set forth
in this Prospectus or in the affairs of the Company since the date hereof.
---------------------------
SUMMARY TABLE OF CONTENTS
PAGE
----
Available Information ................................................ 3
Incorporation of Certain Documents by Reference ...................... 3
Prospectus Summary ................................................... 5
Risk Factors ......................................................... 7
The Company .......................................................... 21
Plan of Distribution ................................................. 22
Use of Proceeds ...................................................... 22
Description of Securities to be Registered ........................... 23
Experts .............................................................. 26
Legal Matters ........................................................ 26
---------------------------
================================================================================
1,000,000
SHARES
ELECTRONIC DESIGNS, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------------
PROSPECTUS
---------------------------
JUNE __, 1996
================================================================================
31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses of the Company in
connection with the offering, including all expenses relating to the offering
made in the original Registration Statement on Form SB-2 (and as amended).
EXPENSE AMOUNT
------- ------
Securities and Exchange Commission Registration Fee ........... $ 4,994
NASD Filing Fee ............................................... 1,949
Accounting Fees and Expenses* ................................. 76,000
Legal Fees and Expenses* ...................................... 175,000
Printing and Engraving Expenses* .............................. 75,000
Blue Sky Fees and Expenses* ................................... 40,000
Other Filing and Listing Fees* ................................ 20,000
Miscellaneous* ................................................ 62,057
--------
Total* ............................................... $455,000
<FN>
*Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with Section 145 of the Delaware General Corporation Law
("DGCL") Article IX of the Company's Certificate of Incorporation (the
"Certificate") provides that no Director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain unlawful dividend payments, stock
redemptions, or repurchases and (iv) for any transaction from which the director
derives an improper personal benefit. The effect of this provision is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, the Certificate provides that if the
DGCL is amended to authorize the further limitation of the liability of a
director, then the liability of the directors shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
The Company's By-Laws authorize the Company to indemnify officers and
directors to the fullest extent authorized by the DGCL against any and all
expenses incurred by such officer or director in connection with any action,
suit or proceeding, civil or criminal, administrative or investigative, brought
or threatened in or before any court, tribunal, administrative or legislative
body or agency; however, indemnification shall not be provided to an officer or
director with respect to a matter for which such person shall be determined not
to have acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the Company, and, with respect to
any criminal proceeding, not to have had reasonable cause to believe his or her
conduct was lawful.
The Company currently maintains liability insurance coverage for its
directors and officers.
II-1
32
To the extent that the indemnification provisions described above may be
related to liabilities arising under the Securities Act, the Commission takes
the position that such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. Various state securities
administrators take a similar position.
II-2
33
ITEM 16. EXHIBITS.
--------
5.1 *Opinion of Fenwick & West as to the legality of the securities and interests being registered.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 *Consent of Fenwick & West. Reference is made to Exhibit 5.1.
24.1 Powers of Attorney. (See Page II-5).
<FN>
*Incorporated by reference to Registrant's Registration Statement on Form SB-2, File No. 33-76186-LA
(effective March 22, 1994).
ITEM 17. UNDERTAKINGS.
------------
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made pursuant to this Registration Statement, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information
in this Registration Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in this Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Company's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
II-3
34
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Westborough, Commonwealth of Massachusetts on
June 3, 1996.
ELECTRONIC DESIGNS, INC.
By: /s/ Donald F. McGuinness
---------------------------------
Donald F. McGuinness
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Electronic Designs, Inc., hereby severally constitute Donald F.
McGuinness and Frank D. Edwards, and each of them singly, our true and lawful
attorneys with full power to them, and each of them singly, to sign for us and
in our names in the capacities indicated below, the Post-Effective Amendment No.
2 to Registration Statement No. 33-76186-LA filed herewith and any and all
subsequent amendments to said Registration Statement, and generally to do all
such things in our names and in our capacities as officers and directors to
enable Electronic Designs, Inc. to comply with the provisions of the Securities
Act of 1933, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Registration Statement and any
and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
/s/ Donald F. McGuinness Chairman of the Board of Directors, President June 3, 1996
- ------------------------------------ and Chief Executive Officer
Donald F. McGuinness (Principal Executive Officer)
/s/ Frank D. Edwards Senior Vice President of Finance, Chief June 3, 1996
- ------------------------------------ Financial Officer, Treasurer, Secretary
Frank D. Edwards and Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ Thomas A. Schultz Director June 3, 1996
- ------------------------------------
Thomas A. Schultz
/s/ Norman T. Hall Director June 3, 1996
- ------------------------------------
Norman T. Hall
/s/ Thomas J. Toy Director June 3, 1996
- ------------------------------------
Thomas J. Toy
II-5