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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to___________________
Commission File Number 0-20701
COMPOSITECH LTD.
(Exact Name of Registrant as specified in its charter)
Delaware 11-2710467
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Ricefield Lane, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-5200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes _x_ No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of May 12, 1997:
Common Stock $.01 par value 6,138,939
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Class Number of shares
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<PAGE>
COMPOSITECH LTD.
Index
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996..........2
Statements of Operations (unaudited) for the three-month periods
ended March 31, 1997 and 1996................................................3
Statements of Cash Flows (unaudited) for the three-month periods
ended March 31, 1997 and 1996................................................4
Notes to Financial Statements (unaudited)......................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................6
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K...............................................9
Signature...............................................................................9
</TABLE>
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,287,866 $ 673,084
Short-term investments $ 2,384,700
Inventories 261,392 217,974
Accounts receivable trade - net 24,478 66,293
Prepaid expenses and other 69,348 66,880
------------ ------------
Total current assets 1,643,084 3,408,931
Property and equipment at cost - net 4,627,711 3,866,140
Advance payments on construction-in-progress 27,200 114,712
Other assets and deferred charges 58,720 58,087
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Total assets $ 6,356,715 $ 7,447,870
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 565,966 $ 691,763
Deferred salaries - $ 539,904 to officers/stockholders 715,725 715,728
Accrued interest - stockholders 99,332 61,816
Other accrued liabilities 232,188 227,889
Current maturities of long-term debt - stockholders 1,595,000 100,000
------------ ------------
Total current liabilities 3,208,211 1,797,196
Long-term debt - stockholders 1,495,000
Capital lease obligations 84,560 19,336
Other liabilities 37,500 37,500
Commitments
Stockholders' equity :
Undesignated preferred stock; authorized 4,000,000 shares,
none issued and outstanding
Series A convertible preferred stock, par value $3.00 per share; authorized shares - 714,161,
issued and outstanding shares - 644,161 (1997) and 684,161 (1996) 1,932,483 2,052,483
Common stock, par value $.01 per share; authorized shares - 25,000,000,
issued and outstanding shares - 6,138,939 (1997) and 6,118,939 (1996) 61,389 61,189
Additional paid-in capital 22,678,733 22,558,933
Deficit (21,646,161) (20,573,767)
------------ ------------
Total stockholders' equity 3,026,444 4,098,838
------------ ------------
Total liabilities and stockholders' equity $ 6,356,715 $ 7,447,870
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
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1997 1996
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<S> <C> <C>
Revenues:
Sales $ 151,999 $ 39,985
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Total revenues 151,999 39,985
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Costs and expenses:
Manufacturing expenses 765,723 682,158
Selling, general and administrative 422,491 267,968
Research and development 23,008 24,625
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Total operating expenses 1,211,222 974,751
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(Loss) from operations (1,059,223) (934,766)
Other income (expenses):
Interest income 25,588 8,660
Interest and amortization of debt expense
(net of interest capitalized of $4,000 (1997) and $4,000 (1996)) (40,977) (217,694)
Other 2,218 7,117
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(13,171) (201,917)
( Loss ) before provision for income taxes (1,072,394) (1,136,683)
Provision for income taxes
----------- -----------
Net (loss) ($1,072,394) ($1,136,683)
=========== ===========
Net (loss) per share ($ 0.16) ($ 0.28)
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Shares used in computing net (loss) per share 6,865,221 4,008,363
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</TABLE>
See accompanying notes.
3
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
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1997 1996
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<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ($1,072,394) ($1,136,683)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 62,565 63,921
Write off and amortization of debt financing costs 75,974
Changes in operating assets and liabilities:
Inventories (49,418) (16,698)
Accounts receivable - trade 41,815 22,849
Prepaid expenses and other (2,468) (2,404)
Other assets (633) 2,087
Accounts payable (125,800) 165,906
Deferred salaries 36,997
Accrued interest 37,516 137,402
Other accrued liabilities (21,813) (67,163)
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Net cash and cash equivalents used in operating activities (1,130,630) (717,812)
Cash Flows from Investing Activities
Purchase of property and equipment - net (726,800) (82,133)
Advance payments on construction-in-progress 87,512
Short term investments - maturities 2,384,700
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Net cash and cash equivalents (used in) provided by investing activities 1,745,412 (82,133)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 408,152
Net proceeds from notes payable 149,067
Payment received on notes receivable 750,000
Payment of notes payable (20,000)
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Net cash and cash equivalents provided by financing activities 1,287,219
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Increase in cash and cash equivalents 2,261,289 487,274
Cash and cash equivalents at beginning of period 673,084 925,848
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Cash and cash equivalents at end of period $ 1,287,866 $ 1,413,122
=========== ===========
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $ 91,336
=========== ===========
Cash paid for:
Interest $ 4,201 $ 4,318
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</TABLE>
See accompanying notes.
4
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
(Unaudited)
March 31, 1997
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Annual Report on
Form 10-KSB for the year ended December 31, 1996 of Compositech Ltd. (the
"Company"). In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
Through December 31, 1996, the Company's activities had been accounted for
as those of a "Development Stage Enterprise". Based on the level of production
and sales anticipated for 1997, the Company has concluded that it is no longer
in the development stage as of January 1, 1997.
The Company requires additional funding from financing or other sources to
cover operating expenses and planned expenditures for additional production
equipment until sufficient revenues are generated to cover such expenses.
Management is in the process of arranging additional financing anticipated to
net $4.6 million for the foregoing purposes. The foregoing conditions raise
substantial doubt about the Company's ability to continue as a going concern
should the financing not be obtained. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In February 1997, the Financial Accounting Standards Board issued Statement
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on the calculation
of primary and fully diluted earnings per share as of March 31, 1997 and March
31, 1996 is not material.
Current maturities of long-term debt-stockholders include $1,495,000 due to
officers or directors maturing March 31, 1998, as amended.
5
<PAGE>
Note 2 - Stock Options and Series A Convertible Preferred Stock Conversions
On January 31, 1997, the Company granted to selected officers and key
employees options to purchase 78,500 shares of common stock at $5.75 per share,
the market value at the date of grant. The Company also granted to its outside
directors options to purchase 45,000 shares of common stock at $5.75 per share,
the market value at the date of the grant, subject to approval by stockholders
of amendments to the Company's Amended and Restated Stock Award Plan.
In March 1997, 40,000 shares of the Series A convertible preferred stock
were converted at the existing conversion rate into 20,000 shares of common
stock, resulting in a decrease in Series A convertible preferred stock of
$120,000, an increase in common stock of $200 and an increase in additional
paid-in capital of $119,800.
Note 3 - Net Loss Per Share
Net loss per share is based on the weighted average number of shares of
common stock outstanding assuming the conversion of the Series A convertible
preferred stock into common stock. However, in accordance with Staff Accounting
Bulletin Number 83 ("SAB No. 83") of the Securities and Exchange Commission, the
common stock equivalents of 404,205 shares that were issued during the 12 months
preceding the Company's initial public offering ("IPO"), which closed on July 9,
1996, at prices below the IPO price have been included in the Company's loss per
share computation using the treasury stock method and the IPO price, and treated
as if they had been issued at the Company's inception even though they were
antidilutive in the period with losses.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the discussions below and in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
Overview
The Company was founded in 1984 to develop copper-clad fiberglass epoxy
laminates used to manufacture printed circuit boards required by the electronics
industry. As part of its development program, the Company developed processes
and machinery to manufacture its unique laminates, designed and assembled
prototype equipment to produce 24" x 24" laminates, designed and assembled an
initial production module to produce 36" x 48" laminates, designed, assembled
and is completing the start up of additional production modules necessary to
achieve commercial levels of production.
6
<PAGE>
During 1996 and continuing through the first quarter of 1997, the Company
has been producing and selling its laminates in limited quantities for
qualification and use in production by its customers. The quantities produced
have been limited because of working capital, limited amounts of equipment and
production constraints. Through December 31, 1996, the Company had been in the
development stage because it had not generated significant revenues from its
planned principal operations. Revenues have been limited over the last several
months because production yields were affected by contamination caused by
installing new equipment and training new personnel while continuing production,
and by defective incoming copper foil. With the new production equipment in
place, the upgrading and training of manufacturing personnel, with improvements
being instituted in production and incoming copper inspection and improvements
in quality being instituted by copper foil vendors, significant revenues from
the sales of laminates are anticipated to occur in 1997. Thus, the Company has
concluded that it is no longer in the development stage.
Results of Operations
Sales of laminates increased to $151,199 for the three months ended March
31, 1997 from $39,985 for the three months ended March 31, 1996. The increase
resulted from additional orders of laminates by customers but was limited by
production constraints referred to above.
Research and development expenses were approximately the same in each
period.
Manufacturing expenses increased to $765,723 for the three month period
ended March 31, 1997 from $682,158 for the three months ended March 31, 1996,
reflecting the higher levels of production during 1997 and the addition of
manufacturing personnel to meet anticipated increases in production levels.
Selling, general and administrative expenses increased to $422,491 for the
three months ended March 31, 1997 from $267,968 for the three months ended March
31, 1996. Legal and other expenses related to being a public company in the 1997
quarter increased by approximately $38,000. Patent expenses increased by
approximately $7,000 due principally to increased activity in the further
development of the Company's international patent estate. Other increases were
approximately $77,000 in personnel costs and $15,000 in insurance as the Company
increased administrative staffing and commercial activities.
Interest and amortization of debt expense decreased to $40,977 for the
three months ended March 31, 1997 from $217,694 for the three months ended March
31, 1996. The decrease in 1997 was due to the repayment of a large portion of
the Company's debt with the proceeds of the Company's IPO in July 1996.
The foregoing resulted in the Company having a net loss of $1,072,394 for
the three months ended March 31, 1997 compared with $1,136,683 for the three
months ended March 31, 1996. Increases in sales revenue and decreases in
interest expense were nearly offset by increases in manufacturing, selling,
general and administrative expenses.
Liquidity and Capital Resources
Prior to its IPO, the Company had financed its operations through private
placements of debt and equity securities and from income from a patent immunity
agreement. Some of this financing had come from officers and directors of the
Company.
7
<PAGE>
At March 31, 1997, the Company had cash and cash equivalents of $1,287,866.
In addition, in order to provide funds for the purchase of additional production
equipment and additional working capital, the Company is negotiating a private
placement of convertible debentures which would net approximately $4.6 million.
The Company plans to use a substantial portion of such funds for equipment and
the balance for working capital and operations (which require approximately
$350,000 a month based on anticipated production rates). As the Company
increases its production rates, it will have increased operating cash
requirements through at least the third quarter of 1997, before the effects of
expanded production capacity can be realized. Significant revenues from the sale
of laminates are anticipated to commence in 1997. Thus the Company expects to
achieve a positive cash flow during 1997. Such expectation is based on important
assumptions regarding a number of factors and future events, some of which are
beyond the Company's control including risks and uncertainties described in
reports and other documents filed by the Company from time to time with the
Securities and Exchange Commission. There can be no assurance that management
has identified and made appropriate assumptions regarding all factors that may
affect the Company's business in the future. Beyond 1997, the Company plans to
obtain additional financing for further expansion from the exercise of warrants
issued as part of the IPO and other prior financings or commercial financing
sources.
The Company has had limited revenues from the sale of laminates, has
incurred significant losses and has had substantial negative cash flow since its
inception. The Company expects significant operating losses and negative cash
flow to continue through the first half of 1997. The Company is expanding its
production capacity and plans to realize significant revenues in 1997. There can
be no assurance that the Company will successfully complete expansion of its
production equipment, achieve broad commercial acceptance of its product or
generate sufficient revenues to achieve profitable operations.
On March 29, 1996, the Company signed a Memorandum of Understanding with
three Quebec institutional investors, providing for the initiation of certain
studies and procedures which may lead to an investment in the Company for the
purpose of forming a joint venture for the establishment of a plant in the
greater Montreal area to manufacture Compositech's laminates. On February 6,
1997, the parties agreed in principle to an investment in the Company and to
form the joint venture. The project has received financing commitments and
agreements are in the drafting stage.
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
Net cash and cash equivalents used in operating activities increased to
$1,130,630 for the three months ended March 31, 1997 from $717,812 for the three
months ended March 31, 1996. The principal reason for the difference was the
reduction in accounts payable for the three months ended March 31, 1997,
reflecting the payment for capital expenditures invoiced in the previous fiscal
quarter, as compared to an increase in accounts payable during the first quarter
of 1996. Net cash and cash equivalents used in investing activities,
representing capital expenditures for equipment and advance payments for
equipment increased to $639,288 for the three months ended March 31, 1997 from
$82,133 for the three months ended March 31, 1996. The increase resulted from
design, engineering and construction of additional production modules as part of
the expansion program and the upgrading of existing equipment. Maturities of
short term U.S. Government securities during the three months ended March 31,
1997 accounted for $2,384,700 of funds provided by investing activities.
8
<PAGE>
There were no cash flows from financing activities in the three months
ended March 31, 1997, as compared to $1,287,219 for the three months ended March
31, 1996. The principal financing activities in the three months ended March
31,1996 period were the receipt of net proceeds from the issuance of common
stock in private placements of $408,152, net proceeds from notes payable of
$149,067 and the collection of $750,000 of notes receivable received in
connection with the 10% Secured Note financing in 1995.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
All other items required in Part II have been filed previously or are not
applicable for the quarter ended March 31, 1997.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPOSITECH LTD.
Dated: May 15, 1997 /s/ Samuel S. Gross
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Executive Vice President and Treasurer
(Principal Accounting Officer and officer
duly authorized to sign this report on
behalf of the registrant)
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-QSB for the quarter ended March 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,287,866
<SECURITIES> 0
<RECEIVABLES> 24,478
<ALLOWANCES> 0
<INVENTORY> 261,392
<CURRENT-ASSETS> 1,643,084
<PP&E> 5,718,922
<DEPRECIATION> 1,091,211
<TOTAL-ASSETS> 6,356,715
<CURRENT-LIABILITIES> 3,208,211<F1>
<BONDS> 0
0
1,932,483
<COMMON> 61,389
<OTHER-SE> 22,678,733
<TOTAL-LIABILITY-AND-EQUITY> 6,356,715
<SALES> 151,999
<TOTAL-REVENUES> 151,999
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,211,222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,977
<INCOME-PRETAX> (1,072,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,072,394)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
<FN>
<F1> Current liabilities include current maturities of long-term
debt-stockholders of which $1,495,000 due March 31,1998, as amended, is due to
officers or directors.
</FN>
</TABLE>
